11.3: Secondary Sector

Secondary Sector

Under ideal circumstances, the presence of an extractive industry helps attract lucrative manufacturing jobs in the secondary sector of the economy. Secondary sector industries take materials extracted by workers in the primary sector (iron ore, crude oil, corn, fresh fish, etc.) and manufacture them into useful products (iron pipes, gasoline, cornmeal, fish sticks, etc.) Generally, the transformation of natural resources into a finished product is called “manufacturing”, but secondary industries also include things we might not consider “manufacturing”, like oil refining and food processing.

Like extractive industries, manufacturing has great benefits and dire consequences if industrialists and local politicians manage the industries poorly. Because manufacturers convert items with little use value (like logs) into something with greater use value (like a dining room table), manufacturing activity often generates large unit profits or value added per unit. Sometimes, if labor conditions are right, a substantial portion of the profits generated by added value during the manufacturing process returns to workers in the form of high wages. For much of the 20th century, good-paying manufacturing jobs permitted millions of American workers to enjoy a very high quality of life, even though they did not require extensive education or training. Many of those jobs have disappeared; lost to international competition, stockholder greed, and pro-business (anti-union) government policies.

Factors of Production

Land, labor, and capital traditionally constitute the main costs of building and running any business. This is especially evident for manufacturers. Together, these costs are known as the factors of production. The cost of each factor is critical to the profitability of businesses, and therefore critical in the decision-making processes that create landscapes of business and industry. The process of picking a location for a factory is known as industrial site location analysis, and it is a very lucrative career path for economic geographers. New factories can cost over a billion dollars, so it’s important not to put them in a location that undermines profitability!

Industrialists would like to hire high skilled workers that work for free, but workers need to be paid, and that pay includes wages and often includes the cost of fringe benefits like health care, retirement, etc. When workers require little training or skill to master the tasks necessary to produce a product, it is known as low-skill manufacturing. Companies need mostly low-skill laborers generally seek locations with a low cost of living because workers in such locations accept lower wages. If the cost of labor contributes a significant portion of the overall cost of producing a good, and there are no significant restrictions on the movement of that industry, those industries tend to move often in search of cheaper labor. Industries that move easily, without negative consequences to their profitability are called footloose industries. The textile industry is a good example of a footloose industry. Some industries require highly skilled workers, which raises the cost of labor and reduces the number of possible locations where such industries are located. High skill labor, like computer programming, often spurs local inflation in wages, housing costs, etc. California’s Silicon Valley is an excellent example of this process.

Figure 12-4: Lowell, MA - Textile Mill. Built upon the availability of reliable water power, transport advantages and cheap labor, New England was the first industrial heart of the United States. Wikimedia

Textile Manufacturing

In many parts of the world, the manufacture of clothing (textiles), is an important first step in the process of industrialization. Most of the first textile factories in the US were built in New England in order to take advantage of the power generated by numerous waterfalls along the region’s fall line. Gravity powered water wheels provided power to factories built next to numerous mill ponds. These factories employed inexpensive female labor (mill girls) drawn from regional farming communities. Textiling endured in New England for several generations, coming eventually to rely on cheap immigrant labor after native born workers fled textile factory jobs for better-paying jobs in other industries. Eventually, waterpower gave way to electrical power, freeing factory owners to move away from fall line cities. By the 1900s, factory owners in New England began moving factories to southern cities like Charlotte, North Carolina where land and labor were cheaper. Southern factories also were closer to cotton farms in nearby states, reducing transport costs for raw materials. Unfortunately for textile workers in the southern US, the labor and transport advantages that lured factories to the South, also led them away.

Free Trade and Protectionism

With the passage of the North American Free Trade Agreement(NAFTA) in 1994 an estimated 300,000 jobs in the textile/apparel industry were lost, many to Latin America and Asia where wages are much lower. Other low-skill industries moved to Mexico, China and elsewhere greater profits were available for factory owners and shareholders. The cost-benefit analyses that are generated by free trade agreements, like NAFTA, generally focus on calculating the costs associated with job loss among low-skill workers against the reduction in costs for imported goods to consumers. In the case of NAFTA, there were also a few instances of job creation in the US, even in some manufacturing sectors. NAFTA brought some manufacturing jobs from Mexico to the US. For example, Cummins, a manufacturer of diesel engines for large trucks in Mexico prior to NAFTA. After the free trade agreement eliminated the Mexican import tariffs on American-made engines, Cummins closed their factory in Mexico and production relocated to Jamestown, New York.

Figure Niagara Falls, Canada. This tractor-trailer rig parked in Canada at the US border, was leased by NAFTA trucking company from McAllen, TX on the US-Mexico border. Ironically, it is powered by a Cummins diesel engine, which could have been manufactured in Mexico prior to NAFTA (trade agreement) but after NAFTA was surely built in the United States.

The principle of comparative advantage is the key factor driving the location and re location of industrial operations. Essentially, the logic behind the principle of comparative advantage forces countries engaged in free trade to specialize in the production of goods they produce most efficiently. In other words, under comparative advantage, locations focus on producing things they make cheapest, fastest and best. Locations should not try to build or grow things that they cannot build/grow efficiently. Instead, they should import those things from locations that specialize in that crop or product. Industrial systems benefit because inefficient industries are abandoned in favor of ones that are more efficient. Efficiency is profitable and consumers benefit because they can buy higher quality goods for less money. This is small comfort to workers who lose jobs to lower wage, or more efficient rivals elsewhere.

YouTube Video: Banana (Free Trade Parody Song) by Remy Credit: Ari & Ella

Containerization

Although wage competition and the declining quality of some American-made goods damaged America’s manufacturing sector during the 1970s and 1980s, one of the most important, yet least discussed, factors in the downfall of US manufacturing was the widespread adoption of the humble intermodal container. Invented in the 1950s, these simple metal boxes revolutionized the shipping industry and affected competition in the manufacturing sector. These containers were designed to be easily filled with cargo, stacked quickly upon one another (almost like Legos) thereby reducing the cost of shipping. Containers are also intermodal, which means that trucks, trains, barges, and ships can all transport goods in the same steel boxes. Eventually, multiple shipping companies adopted a standardized size and design allowing competing companies to mix and match cargo on a single transport carrier. The effect on the cost and speed of delivery was profound. In the 1950s, even small cargo ships took many hours to be unloaded by a large team of dockworkers (stevedores). The process was slow, inefficient and very costly. A train or series of trucks awaiting the cargo from the ship would then have to be reloaded by another team of dockworkers. The process is called breaking bulk. Each break of bulk represents a tax on the cost of each transported product each time it is loaded or unloaded. Breaking bulk, as you remember, was a significant factor in the creation of large cities because of the labor and warehousing needs it created. Today, thanks to containerization, a few people, with the help of large gantry cranes can unload massive container ships, and simultaneously reload containerized cargo onto intermodal trains or a fleet of trucks in a matter of hours. Thousands lost their high paying jobs at the docks thanks to intermodal containers. Hundreds of thousands lost their manufacturing jobs to overseas competition because the cost of transporting goods from places like China or Mexico fell so dramatically that goods coming from foreign factories now have shipping costs similar to goods produced locally.

Figure 12-6: Long Beach, CA - A series of gantry cranes systematically unloads a massive container ship at the busiest port in the US. A small crew can unload 15 times more cargo than WWII era ships, faster and with fewer workers.

Figure 12-7: Newark, NJ - Intermodal containers are stacked high at one of the busiest ports in the United States. Transportation, warehousing and manufacturing are likely at any location with this landscape.