Reasons for Optimism

There are two interlinked stories here. One is about the rise of economic dynamism in smaller U.S. cities like Duluth, Sioux Falls, and Akron. The other is about the fall of globalization.

Perhaps calling it “the fall of globalization” is a little dramatic, but global trade in goods is definitely down. Growth in the global trade of goods was slower last year than at any time since 2009, and 2016 isn’t expected to improve much. That would make the recent five years as poor a period for global trade as any since the 1970s.

The poor economic cycle and uncertainty since the financial crisis almost certainly have played a part here. Savings is up and business investment is down, while China’s efforts to transition from export-driven manufacturing to consumption haven’t helped. However, there’s more questioning these days as to whether something more structural and enduring isn’t going on. Perhaps the era of big container ships from China, so ascendant through the mid-2000s, is indeed fading.

One key factor is that the world of production is changing because cheap emerging markets labor is no longer the competitive advantage it once was. Until the mid-2000s, low overseas labor costs and internet connectivity made offshoring to far-flung places sensible.  Now automation and the rise of manufacturing technologies like 3D printing are making the cost of labor less relevant.

Antoine van Agtmael, the person who first coined the term “emerging markets” way back when, recently has shifted his attention to the rust belt of America in his new book, The Smartest Places on Earth (written with Fred Bakker). The idea is that old U.S. industrial centers once left for dead have remade themselves into innovation hubs.  What matters now is not so much cheap production costs, but smart production methods.

And that brings us directly to the second story on this page: the rise of manufacturing and new business activity in unexpected pockets of the U.S.  James Fallows of The Atlantic took a three-year journey across America to see dozens of smaller cities up close, and his conclusion was that instead of “stagnation and strain,” the dominant tale was of “revival and reinvention.” Fallows describes his meetings with a wide swath of entrepreneurs and first-rate talent in places like Duluth, Minnesota, Bend, Oregon, Greenville, South Carolina, and the Golden Triangle area of Mississippi.

The most often cited star seems to be Akron, Ohio. Once one of the largest tire-making centers in the U.S., it has transformed itself into a high-tech polymer center with over 1,000 companies employing more than the old tire industry did. The University of Akron’s Polymer Training Center has 120 academics and 700 graduate students working on innovations in synthetic materials. And that model of a local university supporting new industrial activity can be seen elsewhere: North Carolina’s state university has a Nonwovens Institute doing advanced research on textiles resistant to heat and chemicals. GE located a jet engine parts factory in Batesville, Mississippi because of work being done at Mississippi State University.

There are several things happening here, as summarized by a recent Economist article: One is that old industrial centers are learning new skills that are highly relevant.  A second is that old industrial towns are finding their cheap real estate to be a huge advantage.  Factories from bygone eras are being refurbished into what Fallows calls “an environment that the hippest firm in San Francisco or Brooklyn would envy.” Finally, there are more startups that manufacture – not just provide services or create software. With 3D printing and cheap computing power, smaller firms can thrive next to larger ones. And the largest companies also are making changes: GE expects to make 100,000 parts via 3D printing by 2020. That means those parts won’t have to come from an overseas container ship. 

The Fallows article is well worth a read. One of its most interesting messages is that even though people are pessimistic about the national dialogue, they are surprisingly optimistic about their own cities and towns moving in the right direction. He writes: “Many people are discouraged by what they hear and read about America, but the closer they are to the action at home, the better they like what they see.”