The Information Technology& Innovation Foundation (ITIF) released a report, “The Case for a National Manufacturing Strategy,” in April 2011 that makes a strong case for such a strategy. Authors Stephen Ezell and Robert Atkinson focus on three key questions where there has been no consensus to date:
- Does the Untied States need a healthy manufacturing sector?
- How healthy is U. S. manufacturing at the moment and for the foreseeable future?
- Does the United States need a national manufacturing strategy?
They present information on five key reasons why manufacturing is important to the U.S. economy:
- It will be extremely difficult for the United States to balance its trade account without a healthy manufacturing sector.
- Manufacturing is a key driver of overall job growth and an important source of middle-class jobs for individuals at many skill levels.
- Manufacturing is vital to U.S. national security.
- Manufacturing is the principal source of R&D and innovation activity.
- The manufacturing and services sectors are inseparable and complementary.
The authors argue that balancing U. S. trade through a revitalized manufacturing sector is crucial because:
- The trade deficit represents a tax on future generations that compromise their economic well-being.
- The United States is running substantial trade deficits across many categories of manufactured products.
- Services and non-manufactured goods won’t be enough to close the U.S. trade deficit.
- The trade deficit represents a tax on future generations.
They wrote, “The massive bill we run up every year by buying more imports than selling exports will have to be paid eventually when foreign nations demand payment in real goods and services, not in Treasury Bills. In fact, the average annual U.S. trade deficit for each year of the previous decade was $458 billion, or about $20,000 per household over the course of the decade.”
According to data from the U. S. Census Bureau on foreign trade, the United States accumulated a $5.5 trillion trade deficit in goods and services with the rest of the world during the prior decade. The U.S. trade deficit in manufactured products tallied nearly $4.5 trillion from 2000 to 2010, and in seven of those ten years, the U.S. manufactured products trade deficit was greater than $400 billion.
Their data regarding the U.S. share of world exports was even more alarming than I had encountered previously. In contrast to the decline from 25 percent down to 17 percent, they said the U.S. share of world exports has declined from 17 percent to 11 percent since 2000, even as the European Union’s share held steady at 17 percent.
In addition, “from 2005 to 2010, the U.S. share of global high-tech exports dropped from 21 percent to 14 percent, while China’s share grew from 7 percent to 20 percent, as China replaced the United States as the world’s number one high-technology exporter.”
They conclude “without a robust manufacturing sector, it’s simply impossible for almost any nation, unless it’s endowed with oil or other natural resources, to balance its trade—and the United States is no exception.”
They concur with my premise that manufacturing remains a critical source of middle-class jobs and note “U.S. manufacturing jobs increasingly require individuals possessing higher skill levels.” They pointed out that “from 1973 to 2001, the share of production workers with some post-secondary education rose from 8 percent to over 30 percent. Moreover, according to a recent survey of leading manufacturers, 51 percent of the workforce demand in manufacturing is currently for skilled production workers, 46 percent for scientists and engineers, and only 7 percent for unskilled production workers.”
In substantiation of my recent articles on the importance of co-location of manufacturing and R&D, they wrote, “manufacturing, R&D, and innovation go hand-in-hand.” They quote Susan Houseman of the Institute for Employment Research, who said, “The big debate is whether we can continue to be competitive in R&D when we are not making the stuff that we innovate. I think not; the two cannot be separated.”
They concur with my argument that “the process of innovation and industrial loss becomes additive. Once one technological life cycle is lost to foreign competitors, subsequent technology life cycles are likely to be lost as well.” They cite the example of the United States losing leadership in rechargeable battery manufacturing technology years ago, largely because increasing demands in consumer electronics for more and more power in smaller packages drove most innovation in batteries. As a result, GM has had to source the advanced battery for its Chevy Volt from a Korean supplier.
According to Ezell and Atkinson, “there is a deeply symbiotic, interdependent relationship between the health of a nation’s manufacturing and services sectors: the health of one sector greatly shapes the health of the other. In particular, the technology-based services sector depends heavily on manufactured goods.”
They conclude, “the U.S. economy’s ability to remain competitive in services sectors, particularly high-technology ones, requires close interactions with the creators and suppliers of technologically advanced hardware and software. The message is clear: manufacturing and services are not separable—they are joined at the hip. The United States must discard the notion that it can give up its manufacturing industries but retain a robust set of services sectors capable of propelling the economy forward by themselves.”
The authors echo my strong belief that manufacturing is critical to our national security and note, “If we lose our preeminence in manufacturing technology, then we lose our national security. This is because:
1. As the U.S. industrial base moves offshore, so does the defense industrial base.
2. Reliance on foreign manufacturers increases vulnerability to counterfeit goods. “
They quote Joel Yudken, who explained in Manufacturing Insecurity, “Continued migration of manufacturing offshore is both undercutting U.S. technology leadership while enabling foreign countries to catch-up, if not leap-frog, U.S. capabilities in critical technologies important to national security.”
The report shows that the “United States has diminishing or no capability in lithium-ion (Li-ion) battery production, yttrium barium copper oxide high-temperature superconductors, and photovoltaic solar cell encapsulants, among others…. Additional examples of defense-critical technologies where domestic sourcing is endangered include propellant chemicals, space-qualified electronics, power sources for space and military applications (especially batteries and photovoltaics), specialty metals, hard disk drives, and flat panel displays (LCDs).”
Reliance on foreign manufacturers increases U.S. vulnerability to receiving counterfeit goods. According to a study conducted by the Bureau of Industry and Security (BIS), in 2008 there were 9,356 incidents of counterfeit foreign products making their way into the Department of Defense supply line, a 142 percent increase over 2005.
The section of the report, “U. S. Manufacturing in Transition and Relative Decline,” shows that manufacturing has lagged and is no longer keeping up with overall U.S. economic growth. From 2000 to 2009, total manufacturing realized a 5 percent increase in real-value-added, even as overall U.S. GDP increased 15 percent, which means that manufacturing is not keeping up with the growth in the rest of the economy.
The report shows that most manufacturing sectors actually shrank in terms of real value-added from 2000 to 2009. In fact, from 2000 to 2009, fifteen of nineteen U.S. manufacturing sectors saw absolute declines in output; they were producing less in 2009 than they were at the start of the decade (categories were listed in the report).
The reality is that U.S. manufacturing declined noticeably over the last decade, not just in the number of jobs. Their data from the Bureau of Economic Analysis shows that from January 2000 to January 2010, manufacturing jobs fell by 6.17 million, or 34 percent. And, from 2000 to 2009, fifteen of the nineteen aggregate-level U.S. manufacturing sectors shrank in terms of change in real value-added. They present convincing evidence that the government’s official calculation that manufacturing accounts for a 11.2 percent share of U.S. GDP is too high because it vastly overstates output from the computer and electronics industry.
In the section “Why the United States Needs a Manufacturing Strategy,” the authors present three primary reasons:
- Other countries have strategies to support their manufacturers and by lacking similar strategies we are therefore forcing our manufacturers to compete at a disadvantage.
- Systemic market failures mean that absent manufacturing policies, U.S. manufacturing will underperform in terms of innovation, productivity, job growth, and trade performance.
- If a country loses complex, high-value-added manufacturing sectors, it’s unlikely to get them back, even if the dollar were to decline dramatically.
They state that “a number of countries—including Brazil, Canada, China, Germany, India, Singapore, South Africa, Russia, and the United Kingdom, among others—have articulated national manufacturing strategies, and the United States needs one as well it if wants to stay competitive with these countries. Among other elements, countries’ manufacturing strategies include measures such as:
- offering competitive tax environments including generous R&D tax credits;
- providing incentive packages, including tax breaks and credits, to attract internationally mobile capital investment;
- increasing government R&D funding;
- supporting programs designed to enhance the productive and innovative capabilities of their small to medium enterprise (SME) and large manufacturers;
- facilitating technology transfer between university and industry;
- producing a highly educated, highly skilled workforce, including by investing directly in workforce manufacturing skills; and
- investing in physical and digital infrastructure such as wired and wireless broadband networks, smart electric grids, and intelligent transportation systems.”
While acknowledging that these types of policies and incentives all represent tough, fair, legitimate competition between nations to win advantage in key manufacturing industries, they note, however, that U.S. manufacturers aren’t just competing against foreign manufacturers; they are increasingly competing against foreign manufacturers backed by the technology, economic, and political systems of their nations. American manufacturing firms operating as independent entities will increasingly find themselves at a disadvantage in international markets against firms from countries backed by effective public-private partnerships.
The authors opine that a number of countries are supporting their manufacturers through unfair, mercantilist strategies that manipulate or violate the mutually established rules of international trade. In contrast to the fair practices described above, these countries’ goals are not to increase the global supply of jobs and innovative activity, but rather to induce their shift from one nation to another. These countries accomplish this goal by using a broad range of unfair mercantilist practices, including:
- Currency manipulation;
- Standards manipulation;
- Intellectual property theft;
- Illegal mandates including the forced transfer of intellectual property or location of manufacturing production as a condition of receiving market access;
- Government procurement practices that exclude foreign competitors; and
- Abuse of regulatory, anti-trust, or competition policies to the disadvantage of foreign competitors.
The authors make it clear that “the loss in U.S. manufacturing jobs has not just been a story of higher productivity leading to fewer jobs—as was the case with the transformation of the U.S. agricultural sector over the last century. It’s been more a story of decline in output due to a loss of international competitiveness,” so it merits a serious policy response.
In the “What Would a National Manufacturing Strategy Do?” section of the report, they state their “goal for a national manufacturing strategy would be to create the most competitive environment for U. S. manufacturing firms, of all sizes, to flourish.” Their call is not to wish for the re-creation of all the lost jobs from factories employing low-skill workers and producing commodity products. It’s “a call to restore U.S. manufacturing to a competitive position in the global economy, even though the industries and jobs will look very different than they did a generation ago.”
They don’t mean “a de facto, heavy-handed industrial policy that ‘picks winners and losers.’” They “mean a process of designing our nation’s tax, regulatory, and innovation policy environments to make the United States the world’s most attractive location for advanced manufacturing (including both domestic and foreign direct investment
They recognize that “most U.S. manufacturers, small or large, cannot thrive solely on their own; they need to operate in an environment grounded in smart economic and innovation-supporting policies with regard to taxes, talent, trade, technological development, and physical and digital infrastructures.”
Ezell and Atkinson recommend adoption of the following actions as part of the national strategy:
- Increase public investment in R&D in general and industrially relevant in particular
- Support public-private partnerships that facilitate the transition of emerging technologies from universities and federal laboratories into commercial products
- Coordinate state, local, and federal programs in technology-based economic development to maximize their combined impact
- Provide export assistance to build upon the National Export Initiative, which seeks to double U. S. exports by 2015.
- Increase export support for U. S. manufacturers through the Export-Import Bank loans
The authors acknowledge that “this will require a new understanding of the importance of U. S. manufacturing on the part of economists and policymakers alike and a deeper understanding of the forces affecting U. S. manufacturing industries.”
In conclusion, they state that “The American public gets it; it’s time that economists and policymakers do so as well.” They recommend, “Congress craft, pass and fully fund and the President sign and implement a comprehensive national manufacturing renewal strategy for the United States.”