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The Korea Free Trade Agreement (KORUS) was first signed on June 30, 2007, with a renegotiated version signed in early December 4, 2010.  However, the agreement has not yet been ratified by the United States Congress or the National Assembly of South Korea and thus has not become in force.

After being stalled for more than four years, the treaty is once again being considered in Congress, and supporters had hoped it would be ratified shortly after many of the objections has been addressed in the renegotiated version.

The original negotiations were conducted under the trade promotion authority (TPA), also called fast-track trade authority, which Congress granted the President under the Bipartisan Trade Promotion Act of 2002. (P.L. 107-210).  The authority allowed the President to enter into trade agreements that receive expedited congressional consideration with no amendments and limited debate.  The fast-track trade authority under TPA expired on July 1, 2007 and has not been renewed.

The December 2010 deal represented a compromise between the two sides.  Significant concessions were granted to the U.S. on trade in automobiles: tariff reductions for Korean automobiles were delayed for five years, and U.S. autos were granted broader access to the Korean market. At the same time, the negotiators agreed to set aside disagreements over U.S. beef exports for the time being.

The agreement would eventually eliminate tariffs between the two countries. Because those levies are typically higher on the South Korean side, administration officials estimate the deal could mean more than $10 billion annually in increased U.S. exports to Seoul and tens of thousands of new U.S. jobs. South Koreans say they would benefit from lower prices — some tariffs on food imports from the U.S. are as high as 40 percent — and a more efficient flow of investment in and out of their country.

The deal was supported by Ford Motor Company, as well as the United Auto Workers, both of which had previously opposed the agreement.  With widespread support from both Democrats and Republicans in Congress, the Obama administration expected approval in both houses to be easy.

However, on Thursday, June 30, 2011, several Senate Republicans boycotted a preliminary hearing on free trade agreements with South Korea, Colombia and Panama by staging a simultaneous press conference and bringing the stop-and-go process to yet another halt.

While Republican senators stood before television cameras to declare that they would not allow a hearing on legislation that much of their own base strongly supports, Democratic senators filled half a hearing room to declare their support for trade deals opposed by much of their party’s political base.

Senator Orrin Hatch, the ranking Republican on the Finance Committee, said Republicans were responding to a decision by the White House to include in the free trade legislation the expansion of a benefits program for workers who lose jobs to foreign competition, known as Trade Adjustment Assistance (TAA).  During the portion of the press conference I heard, Republicans stated that part of the funds to provide TAA would come from a $400 million cut to Medicare funding for “imaging” for seniors such as MRIs, Cat scans, etc., and they objected to taking this funding from Medicare to partially fund TAA.

Senate Republicans had not been included in a deal with House Republicans and Senate Democrats over the terms of the benefits program.  An expansion of TAA passed by Democrats in 2009 expired at the beginning of this year, and the deal would reinstate about 60 percent of the lapsed financing ($964 million) for an additional two years.  Democrats had demanded the deal as a condition of their support for the trade agreements.  House Republicans had agreed after several weeks of negotiations.

It seems to me that the fight over Trade-Adjustment Assistance is a tacit admission by both sides that this treaty will put more American on the unemployment rolls; i.e., Republicans would not oppose it unless they felt displaced workers would use it and Democrats would not support it unless they felt displaced workers would use it.   Historically, trade agreements do displace workers, and the effects of other trade agreements have shown that more American jobs are lost than gained.

Just before the Senate Finance Committee convened Thursday afternoon to consider the legislation, the Republican members invoked Senate rules to prevent the meeting.  After all the Democrats spoke, they got up and left.  Senator Orrin Hatch said, “We made it clear time and time and time again that we would not stomach attaching a big government spending program onto these agreements.  “The president knew where we stood, and he decided to ignore those who don’t agree with him.”

The Obama administration planned to submit that deal as part of KORUS to give Democrats the assurance that it will rise or fall with the agreement.  House Republicans say they will hold separate votes on the trade pact and the benefits program.  Because Senate Republicans lack the power to set the terms of debate, they said that their actions were an assertion of the rights of the minority party to be heard and respected.  Republicans cannot prevent the legislation from leaving the committee, but they can delay it.

This delay is a good time to reconsider whether KORUS and the other pending trade agreements with Panama and Chile should be ratified by Congress.   The fundamental dispute is over free trade itself. Presidents Bill Clinton and George W. Bush aggressively promoted it, while President Obama promised more protection for American workers in future agreements when he was a candidate.

The appeal of free trade has waned amid large U.S. trade deficits and concerns that more American manufacturing jobs will disappear overseas at a time when unemployment remains stuck above nine percent

The mistake many people make is lumping free trade, free enterprise, and free markets together, whereas each has its own specific meaning. In simple terms, free trade allows faster and more business between two countries/regions by agreeing to lift tariffs, quotas, special fees and taxes, and other barriers to trade between the two entities.  Free enterprise is the freedom a company has to select the headquarters and manufacturing locations to make its product as inexpensively as it can, regardless of where that might be, in order to enjoy continued profitability and remain viable.  Of course, a company is subject to the laws of the country in which they are located.  A free market is a one in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts, relying on supply and demand.

The underlying economic theory of free trade agreements is that of “comparative advantage,” which originated in an 1817 book entitled “On the Principles of Political Economy and Taxation” by British political economist David Ricardo.  He postulated that in a free marketplace, each country/area will ultimately specialize in that activity where it has comparative advantage; i.e., natural resources, skilled artisans, agriculture-friendly weather, etc.  The result should be that all parties to the agreement should increase their income.  Unfortunately there are winners and losers if the “comparative advantage” of one country is unequal to the other.

Advocates of free trade argue that it is essential to our country’s growth and point out that the North American Free Trade Act (NAFTA) and other trade agreements have created more than 20 million jobs around the world since their passage.

Opponents to free trade argue that the U.S. has lost over six million jobs to offshore countries since 1994 when NAFTA was passed.  Furthermore, they make the point that American jobs are not being supported when we buy products that have been made offshore, and that the U.S. should not encourage and even facilitate its corporations to ship jobs out of the country.  They believe that manufacturing is the foundation of the U.S. economy and that American jobs must be protected from being outsourced to other countries.

The reality is that we don’t really have free trade – we have negotiated trade agreements in which the United States has gotten “the short end of the stick” in most cases.  Instead of free trade, I would say that we have “dumb” or “stupid” trade instead of free trade.  What we need is “smart” trade.

For example, over 150 countries have a value added tax (VAT), and the United States doesn’t have a VAT.  A VAT is a tax on consumption – as opposed to income, wealth, property or wages.   It is s a tax only on the “value added” to a product, material or service, from an accounting view, at every stage of its manufacture or distribution.  VATs are “border adjustable” and average about 17%.  This means that virtually all foreign countries tax our exports with their 17% VATs, when our goods cross into their country.   While those countries tax their domestic production as well, they rebate their VAT when their companies export.  This means that American imports to our trading partners are charged a VAT while we don’t charge a similar VAT on imports of their products to our country.   Thus, American companies are victims of unfair competition when trying to penetrate foreign markets.

VATs are the biggest trade problem for the U.S. globally.  Trade agreements do not address VATs when tariffs are lowered. The WTO allows VATs.  During the last 40 years, the U.S. has lowered tariffs, and other countries lowered tariffs.  However, other countries implemented and raised their VATs.  The net result is that other countries replaced tariffs with VATs, but the U.S. did not.  No trade barrier costs us more money.  Our exports are double taxed – once in the U.S. and once upon arrival at a foreign country’s shores.  Foreign sales to us are partially tax free.

In addition, U.S. opponents of the agreement argue it doesn’t do enough to benefit American industry while it gives South Korean businesses greater rights in the United States.  The organizations taking the lead in opposing KORUS are:  Coalition for a Prosperous America (CPA), Alliance for American Manufacturing, Economy in Crisis, and the    U. S. Business & Industry Council.

What’s missing in the list of organizations that oppose trade agreements is one that truly represents American workers, who will suffer the most from the effects of KORUS just as they have from past agreements.  Today, union membership only represents 12 percent of the private sector workforce, which means that 88 percent of private sector workers have no organization to voice their opinions on trade issues.  Many small businesses and industries that have been harmed by past trade agreements were never unionized, such as high technology companies making computers, electronics equipment, medical devices, and biotech products.  Thus, a supermajority of American workers have no way to voice their opinion collectively.

While all of the above organizations have similar reasons for opposing KORUS, CPA’s reasons include:

1. Trade deficits:  The trade agreement would cause worsening trade deficits.  Trade deficits depress GDP growth and increase unemployment because U.S. facilities are offshored or because components and subassemblies are procured offshore.  Any foreign market share achieved is overwhelmed by domestic market share ceded.
2. Job loss:  The trade agreement would cause job losses.  Government data shows no support for a net job gain argument.  Third party studies are in accord with the historical data that net job losses will result from this trade agreement.
3. Non-tariff barriers:  The trade agreement fails to address foreign non-tariff barrier tactics by trade rivals.  These non-tariff barriers eviscerate hoped-for U.S. net export gains from tariff reductions.  Currency manipulation, border adjustable taxes, state subsidies are prime examples.  South Korea is a known currency manipulator.  South Korea has a 10% value added tax that is charged to virtually all imports and can increase that import charge without restriction.  Like China, South Korea practices a form of state managed capitalism.  South Korea is not a “free trading nation,” and this agreement does not change that fact.  Any concessions by South Korea are easy to negate through its pre-existing non-tariff tactics.
4. Sovereignty Loss:  The U.S. will be handicapped in domestic trade law enforcement.  South Korea would have special rights in our trade law systems.  The U.S. will be prevented from enacting tough financial industry reform, despite the need shown in the Great Recession, under these agreements.  Further, hundreds foreign companies will be given special standing to challenge U.S. laws that are claimed to interfere with those companies’ investment expectations, in unaccountable foreign tribunals.
5. Gateway from China/Transshipment through Korea:  The South Korea trade agreement allows Chinese companies to produce 65% of a products’ value, with 35% Korean content, and still qualify for low tariff rates.  China is Korea’s largest trading partner and has proven particularly aggressive in routing its products through third countries to either avoid antidumping duties or to achieve lower tariff rates.  The volume of future Chinese transshipments should not be underestimated.
6. Food and product safety:  The U.S. border control, food safety and product safety agencies will be hampered in verifying that imported food and other products are safe.  The inspections of imported products are nearly non-existent.  Yet U.S. companies must fully comply with food and product safety rules.

On the other hand, the organizations and companies comprising the U.S.-Korea FTA Business Coalition that strongly supports Congressional approval of the U.S.-Korea Free Trade Agreement includes but is not limited to:  American Insurance Association, Boeing Company, Caterpillar, Inc., Chevron, Citigroup, Inc., Entertainment Industry Coalition for Free Trade, General Electric, Goldman Sachs, FedEx Express, Johnson & Johnson, Motion Picture Association of America, National Association of Manufacturers, National Cattlemen’s Beef Association, National Pork Producers Council, MetLife, Microsoft Corporation, Pfizer, Inc., QUALCOMM, Inc., Securities Industry & Financial Markets Association, SPI: The Plastics Industry Trade Association, Telecommunications Industry Association, Time Warner, U.S. Chamber of Commerce, U.S. Council for International Business, and UPS.

Notice that virtually all of the above private companies have a global presence so that I refer to them as multinational globalist companies.  While they may still be headquartered in the United States, they have worldwide locations and may even have re-incorporated in tax haven countries.  They no longer have an inherent loyalty to the United States as American companies; instead, their loyalty is to the bottom line of their profitability.

Thus, my answer to the question posed in the title is “No, Congress shouldn’t ratify the Korea Free Trade Agreement.”  If you agree with me in opposing its ratification, make your voice heard before it is too late.  Contact your congressional representative or Senator and express your opinion on the Korea Free Trade Agreement.   If you don’t know who your representative in Congress is, you can find out by typing in your zip code at http://www.congress.org/

The House passed H. R. 1249, The Leahy-Smith America Invents Act, on June 23rd by a 304-to-117 vote, a bipartisan tally with more than two-thirds of lawmakers from each party supporting the bill.  The Senate passed similar legislation in March on a 95-to-5 vote.  The bill would change how the U.S. grants patents and award them to the party which is “first to file” an invention instead of the “first to invent” it.  The bill to reform the U.S. patent system for the first time in nearly 60 years would bring the U.S. in line with other countries who adopted first to file patent systems years ago, a move that will simplify the patent process for companies that file applications in multiple countries.

Congress has been trying to reform U.S. patent rules for more than a decade, but previous efforts to reach a compromise on new rules fell apart because of disagreements by various industries, including pharmaceutical and Silicon Valley companies.  However, many of the most divisive issues have been settled by the courts in recent years, leading to the current legislation.

The banking industry scored a victory when lawmakers included a provision in the bill which would make it easier for banks to get re-examination of patents on financial business processes such as check-scanning, in an effort to avoid paying patent-infringement fees.  The U.S. Chamber of Commerce and the National Retail Federation joined the banking industry to push for the provision, which was opposed by some small inventors.  An amendment sponsored by six lawmakers to strip that provision from the bill failed.  The banking industry measure is also in the Senate version of the bill.

Fifteen amendments were introduced, and only seven were accepted.  Among the amendments rejected were Rep. Sensenbrenner’s Amendment 502 to strike Section 3 of the legislation converting the U. S. patent system from a “first to invent” to a “first to file” system and Amendment 492 by Rep. Conyers (D-MI), which would have inserted language to move the United States to a “first to file” system only upon a Presidential finding that other major patent authorities have adopted a similar one year grace period.

Rep. John Conyers (D., Mich.) said the legislation would “benefit large multinationals at the expense of independent inventors and small businesses” and would “harm jobs, harm innovation and harm our nation.”

Even though the legislation enjoyed broad industry support and was relatively uncontroversial, the House bill ended up filled with some thorny provisions that riled a few industry groups.  Some inventors and small businesses complained that switching to a “first to file” system would give large companies an advantage and hurt individual inventors.  Opponents argued there is no reason to change the U.S. system.

The bill’s supporters say it will improve patent quality by creating a new process for reviewing patents after they have been issued and allow third parties to provide information on other parties’ applications.  To address concerns by university researchers, the bill would also give inventors a grace period to file for patents after publicly disclosing their inventions.  It would also stop the ability of inventors to receive patents on tax strategies.

“This bill is designed to help all inventors,” said Rep. Lamar Smith (R – Texas), who chairs the House Judiciary Committee and helped author the legislation.  The current system “seriously disadvantages small inventors and companies” because it can lead to years of costly legal challenges to their patents, he said.

Representative Mike Michaud (D-ME), who voted in favor of the bill, said, “We need to make it easier for companies to innovate and make things here at home, and this bill does that.   Although I was disappointed that the bill did not improve the funding structure for the Patent and Trademark Office, I am pleased that provisions were added to make it better for U.S. manufacturing.  This bill shows how effective Congress can be when both sides of the aisle work together.  I look forward to working in a bipartisan fashion with my colleagues to further advance U.S. manufacturing and see this bill through the conference process with the Senate.”

Rep. Don Manzullo (R-IL) voted against the bill after his two proposed amendments failed.  One would have totally transformed the bill by simplifying it with a plan focused solely on reducing the huge backlog in patent applications, and the other would have eliminated one section of the bill that gives the Patent & Trademark Office the ability to set its own fees.  Rep. Manzullo stated, “This bill would weaken our strong patent system that has protected American entrepreneurs for centuries from overseas companies trying to pirate their inventions.” Manzullo said. “Any patent reform we undertake should focus on reducing the backlog in patent applications, not dramatically altering the system and giving multinational corporations advantages over American innovators.  The last thing we should be doing right now is giving foreign companies an even greater opportunity to take our ideas and our jobs.”

Manzullo also believes the bill is unconstitutional (earlier this month, the Supreme Court reaffirmed that patent rights belong to the inventor) and unnecessarily adds a new post-grant review provision that will further delay and add further litigation to the patent approval process.

Biotechnology Industry Organization (BIO) President and CEO Jim Greenwood released the following statement:  “BIO will continue to work with House and Senate leaders to ensure that final patent reform legislation addresses any remaining concerns and is enacted into law this year.”

“Small biotechnology companies rely heavily on their patents to attract investment to fund the lengthy and expensive research and development process necessary to bring breakthrough medical therapies and other products to patients and consumers.  Strong intellectual property protection is critical for these companies.

“The Leahy-Smith America Invents Act will bring our patent system into the 21^st century.  The improvements made by the bill will benefit all sectors of the national economy by enhancing patent quality and the efficiency, objectivity, predictability and transparency of the U.S. patent system.”

The most important difference between the two bills is funding for the United States Patent and Trademark Office.  The bill passed by the Senate put an end to the practice of fee diversion, which occurs when the Congress appropriates the USPTO less than they collect in fees.  The excess in the fees collected from users of the USPTO then go to the federal government as general revenues and are used for purposes other than the operation of the United States Patent and Trademark Office.

Interest groups are already lining up to continue the fight, and there will probably be many more interest groups that protest the removal of provisions that would end fee diversion once and for all.  The Innovation Alliance, a lobbying group representing some biotech and tech companies including Qualcomm Inc., pulled its support of the legislation prior to passage last week over a disagreement on how patent office operations are funded.

The Innovation Alliance’s Executive Director, Brian Pomper, released the following statement shortly after the America Invents Act passed:  “The Innovation Alliance is disappointed that the House of Representatives has approved legislation that will not end permanently the diversion of user fees from the U.S. Patent and Trademark Office (USPTO).

“Along with many other patent stakeholders across a range of sectors and business models, we believe that the anti-fee diversion provisions approved by an overwhelming vote of 95-5 in the U.S. Senate and a 32-3 vote in the House Judiciary Committee offer the USPTO the reliability and structure it needs to reduce today’s significant backlog of 700,000 patent applications.  Reducing the patent backlog and strengthening the USPTO is essential for driving innovation, job creation, and economic growth. We will continue to work with lawmakers and other stakeholders to ensure that any patent bill that becomes law ends fee diversion permanently.”

Prior to passage in the House, Senator Tom Coburn (R-OK), who was the champion in the Senate of the provisions that would end the practice of fee diversion, issued the following press release:  “For too long tomorrow’s inventions have been stymied by today’s incompetence in government.  It is outrageous for Congress to take fees paid by Americans for a specific service and spend those dollars on other programs.  Since 1992, Congress has pilfered nearly $1 billion in user fees dedicated to the Patent and Trademark Office and spent those dollars elsewhere.  As a result, we have 700,000 patents waiting for a first review that, if approved, could help get our economy moving again,” Dr. Coburn said.

“The Senate voted to end this egregious practice by a margin of 95 to 5 when it passed legislation this March that included an amendment I offered to end fee diversion once and for all.  The House, unfortunately, decided to water down this language and allow the Appropriations Committee to control this account.  Unfortunately, the Appropriations Committee has a poor record of managing such accounts responsibly and honestly in this area and others.  For instance, the Appropriations Committee has stolen billions from the Crime Victims’ Fund and other funds,” Dr. Coburn said.  “There is no reason to believe they won’t continue to do the same with the patent account.”

Now, the fight will go back to the Senate where Senators will be asked to swallow the changes adopted by the House of Representatives, which seems unlikely.  Senator Patrick Leahy (D-VT) and Congressman Lamar Smith (R-TX) will likely want to find compromise language that can pass both the House and the Senate.  A formal Conference on the bill is unlikely, which would mean that the Senate would need to work out language acceptable to the Senate while also being acceptable to the House.

Meanwhile, David Kappos, Under Secretary of Commerce for Intellectual Property and the Director of the United States Patent and Trademark Office, issued the following statement:  “I want to congratulate the House of Representatives for passing the Leahy-Smith America Invents Act today…The effort to reform our nation’s patent laws began a decade ago, and House passage today brings patent reform a significant step closer to becoming law.  This bi-partisan legislation will transform our patent system, enhance our Nation’s competitiveness and promote economic growth and job creation.

We are encouraged by the statements of so many Members of Congress calling for the USPTO to have full access to all of its fee collections.  We are particularly thankful to Chairman Rogers for his commitment to ensure that the USPTO has full access to its fees when fee collections exceed Congress’ annual appropriation for USPTO. Full funding of the USPTO is necessary for the USPTO to successfully implement this legislation and to more effectively perform its core mission.  We are hopeful that this critical legislation can move expeditiously toward final passage and enactment.”

Many are not at all thankful for the role of Congressman Hal Rogers (R-KY) because it was Rogers who protested the end to fee diversion and inserted the language that does not guarantee the USPTO will be able to access 100 percent of the user fees it receives.  Under a compromise, House lawmakers did agree to let the agency keep patent fees but would put any funds excess of its annual budget into a reserve account overseen by Congress.  The provision conflicts with the Senate’s patent bill and the White House expressed concerns about the proposal Tuesday, saying the patent office “must be able to use all the fees it collects to serve the users who pay those fees.”

The House and Senate must now negotiate a final bill before patent reform can be sent to President Obama to be signed into law.  It seems unlikely that the Senate would accept the removal of provisions that will end fee diversion and the across-the-board-prior-user rights also in the House version.  Although the House and Senate bills must now be reconciled, the White House has already signaled its support for the legislation to be signed into law.

Once again, our elected representatives have sold out to the interests of multinational corporations at the expense of inventors and small businesses.

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:

1. Does the Untied States need a healthy manufacturing sector?
2. How healthy is U. S. manufacturing at the moment and for the foreseeable future?
3. 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:

1. It will be extremely difficult for the United States to balance its trade account without a healthy manufacturing sector.
2. Manufacturing is a key driver of overall job growth and an important source of middle-class jobs for individuals at many skill levels.
3. Manufacturing is vital to U.S. national security.
4. Manufacturing is the principal source of R&D and innovation activity.
5. 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:

1. Other countries have strategies to support their manufacturers and by lacking similar strategies we are therefore forcing our manufacturers to compete at a disadvantage.
2. Systemic market failures mean that absent manufacturing policies, U.S. manufacturing will underperform in terms of innovation, productivity, job growth, and trade performance.
3. 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.”

American manufacturers are responsible for more than two-thirds of all private sector R&D, which ultimately benefits other manufacturing and non-manufacturing activities.  More than 90 percent of new patents derive from the manufacturing sector and the closely integrated engineering and technology-intensive services.  The U. S. economy has been the innovator of virtually all major technologies developed since World War II.

Manufacturing R&D is conducted in a wide array of industries and businesses of all sizes.  The heaviest R&D expenditures take place in computers and electronics, transportation equipment, and chemicals (primarily pharmaceuticals.)

The competitive status of U. S. manufacturing is increasingly challenged by the state-of-the-art technologies being developed by established nations such as Japan, Germany, Korea, and Taiwan.  Emerging economies, such as China, are acquiring advanced manufacturing capability through R&D tax incentives, incentives for direct foreign investment, and theft of intellectual property.

According to the 2010 annual survey conducted by the Industrial Research Institute (IRI), 53% of the companies responding said they plan to increase R&D spending in 2011.  The managers expected this increase to be focused on new business projects while support of existing businesses and directed basic research would remain relatively flat.  This is the first increase since 2008 after a 30% drop in R&D spending during 2009-2010.  External collaborations through alliances and joint ventures continue to be an area of increased emphasis according to the managers surveyed.  The most disturbing trend is that about 70% of companies surveyed now have R&D facilities overseas.

However, federally funded R&D has declined over the past two decades, with only a slight increase during the Bush administration from 2002 – 2008.  In 1985, federal R&D funding represented 1.25% of U. S. GDP compared to only .80% of GDP in 2004.  In addition, federal R&D funding has shifted away from technology, engineering, physical sciences, and math and computer science, to life sciences.

America’s manufacturing innovation process leads to investments in equipment and people, to productivity gains, the spreading of beneficial technology to other sectors, and to new and improved products and processes.  It is an intricate process that begins with R&D for new goods and improvements in existing products.  As products are improved in speed, accuracy, ease of use, and quality, new manufacturing processes are utilized to increase productivity.  Education and training of employees is required to reap the benefits of such improvements in manufacturing processes.

Innovation is the hallmark of U. S. manufacturing, and it requires a certain mass of interconnected activities, which like a snowball rolling downhill grows in size as it proceeds towards end users.  Substantial R&D is required to keep the ball rolling to ensure more successes than failures.

Innovation and production are intertwined.  You need to know how to make a product in order to make it better.  “Most innovation does not come from some disembodied laboratory,” said Stephen S. Cohen, co-director of the Berkeley roundtable on the International Economy at the University of California, Berkeley.  “In order to innovate in what you make, you have to be pretty good at making – and we are losing that ability.

In his book Great Again, Hank Nothhaft, recently retired CEO of Tessera Technologies writes that “In our arrogance and our own naiveté, we told ourselves that so long as America did the ‘creative’ work, the inventing, we could let other nations do the ‘grunt’ work – the manufacturing.  We did not yet understand that a nation that no longer makes things will eventually forget how to invent them.”

Manufacturing is an incubator for technology and science, which require proximity to facilities where innovative ideas can be tested and worker feedback can fuel product innovation.  Without this proximity, the science and technology jobs, like customer service jobs, follow the manufacturing jobs overseas.

The ability to fund R&D comes largely from the profits that a company can invest back into its business.  Thus, the available cash flow of manufacturing companies is closely linked to their ability to conduct R&D as well as make capital investments.  The severe recession of 2008-2009 dramatically reduced corporate profits and resulted in a drop in corporate R&D.  In addition, when multinational companies keep their profits in offshore divisions in order to avoid paying  U. S. corporate income taxes, it reduces their funds for conducting R&D in the U. S. and encourages them to conduct R&D overseas.

The process through which R&D promotes economic prosperity is complex and multi-faceted.   First, there are direct benefits to companies from their own R&D investments.  Second, other companies derive benefits from the R&D of the innovating company in a “spillover” effect.  A “spillover” is where R&D performed by one company benefits other companies without direct compensation for the innovation. Third, the feedback from R&D and its spillovers improves other products, processes, and distribution networks.  Fourth, one industry’s investment has a beneficial effect on other industries and the U. S. economy as a whole.  “Spillover” effects are increased through sales transactions and knowledge transfers when the parties involved are interdependent and closer in geographic proximity. (Securing America’s Future:  The Case for a Strong Manufacturing Base, by Joe Popkin and Company, June 2003, prepared for the NAM Council of Manufacturing Associations)

The maintenance of an effective U. S. R&D network is essential for attracting domestic and foreign R&D funds and the subsequent manufacturing that results from the innovation process, which increases U. S. value-added resulting in economic growth.

The problem today is that with the offshoring of so much manufacturing, certain tiers in the high-tech supply chain are disappearing in the U. S.  This is the case for certain electronic components, such as capacitors and resistors.  When a tier in a supply chain has been moved offshore, domestic research and other supporting infrastructure are degraded, which can be a major problem for U. S. manufacturers transitioning to the next product life cycle.

In the past, technology would flow from the new domestic R&D-intensive industries into the remainder of the economy, boosting overall national productivity.  Today, such emerging technologies are flowing at least as rapidly to the innovators’ foreign partners or suppliers.

In a report titled, “Rationales and Mechanisms for Revitalizing U. S. Manufacturing R&D Strategies,” Gregory Tassey, Senior Economist at the National Institute of Standards and Technology, noted that the U. S. R&D intensity is the same as it was in 1960 while other counties have steadily increased their R&D spending relative to GDP.  In addition, U. S. manufacturing firms have dramatically shifted their R&D investment strategies toward an increasingly global scope and toward shorter-term objects rather than radically new technologies with greater long-term potential.  In order to reverse this trend and adopt a technology-based manufacturing strategy, Tassey recommends three major policy objectives:

1. Increase the average R&D intensity of the domestic manufacturing sector by 30% to enable the breadth and depth of innovation to increase across the entire sector.
2. Adjust the composition of national R&D to emphasize more long-term, breakthrough research and increase the amount sufficient to fund a diversified portfolio of emerging technologies commensurate wit the size of the U. S. economy.
3. Improve the efficiency of R&D performance and subsequent technology by increasing the number of science parks and regional technology clusters and the use of research portfolio and stakeholder management techniques in order to facilitate person-to-person knowledge exchange critical to innovation.

Examples of policy instruments that could be utilized to achieve these objectives are:

• Promote increased private-sector R&D through a larger and restructured R&D tax credit
• Increase federal R&D spending on technology
• Improve the efficiency of R&D, innovation, and technology utilization
• Establish an innovation policy infrastructure

American consumers have benefited greatly from the large selection and quality of manufactured goods available as a result of the innovative new products resulting from R&D.  U. S. consumers now have a dizzying array of products from which to choose.  Quality improvements in manufactured goods have also reduced the frequency of repair and reduced the cost of operation.

This intricate process generates growth and higher living standards than any other economic sector.  But, it requires a critical mass to generate this wealth.  If the U. S. manufacturing base continues to shrink at its present rate, the critical mass will be lost.  The manufacturing innovation process will shift to other global centers, and a decline in U. S. living standards will be the result.

In an opinion article “How to Make an American Job Before it’s Too Late,” Andy Grove, former Intel CEO and chairman said, “… the imperative for change is real and the choice is simple.  If we want to remain a leading economy, we change on our own, or change will continue to be forced upon us.”  I recommend changing on our own before it’s too late.

Anyone who has shopped at their local grocery store, drug store, or hardware store has seen the variety of “green” products on the market.  Are these “green” products creating new manufacturing jobs?  For the most part, the answer is “no” because they are just more eco-friendly versions of existing products.

Global companies like General Electric, Dupont, Alcoa, and Procter & Gamble are beginning to respond to the simultaneous increases in shipping and environmental costs with “green” policies meant to reduce both fuel consumption and carbon emissions. That pressure is likely to increase as both manufacturers and retailers seek ways to tighten the global supply chain as fuel prices and transportation costs continue to rise.

“Being green is in their best interests not so much in making money as saving money,” said Gary Yohe, an environmental economist at Wesleyan University.  “Green companies are likely to be a permanent trend, as these vulnerabilities continue, but it’s going to take a long time for all this to settle down.” (August 2, 2008, The New York Times)

Pamela Gordon dispels the myth that environmental practices are bad for business in her book “Lean and Green: Profit for Your Workplace and the Environment.”  She presents evidence gathered from organizations around the world that environment protection and a profitable business can go together. Her book outlines four basic steps to creating a lean and green organization and presents stories of how 20 companies have enjoyed greater efficiencies and cost savings by utilizing these steps to pursue environmental leadership.  Many of these companies are leaders in their field – IBM Corporation, Agilent Technologies, ITT Cannon, Intel Corporation, and Apple Computer.  The stories show how companies saved money and increased profitability by utilizing “green” technology and practices.

Since her book was written in 2001, everything related to “green” has become more important because of concerns about “global warning” and acid rain.  “Green” has moved from the fringe to the mainstream of American life.  More and more consumers are choosing to buy “green” products, even when it means paying more for them.  Major corporations are featuring their “green” technology and practices in their advertising campaigns.  Some of the largest and most successful companies are now “greening” how they do business:  Coca-Cola, DuPont, General Electric, Ford, and General Motors.

For example, in August 2008, General Motors announced that it would add a 1.2-megawatt solar power installation to the roof of its transmission assembly plant in White Marsh, Maryland.  The installation generates about 1.4 million kWh of clean renewable solar energy, which is enough to serve the electricity needs of about 145 households.  In addition, the White Marsh plant reached landfill-free status in 2007, because it no longer sends any production waste to local landfills.  All the waste generated at the facility is entirely recycled or reused.

San Diego business consultant and author, Glenn Croston, advises companies small and large on green business strategy and best practices for becoming eco-friendly.  He said, “When people hear the word ‘green,’ they often think this means that something is expensive, hard to do, a luxury, impractical, and only for tree-huggers…In fact, going green often saves money, whether by cutting down on costly gasoline use or by wasting less paper.”  His book, “Greening Your Business on a Budget” presents many low cost ways to go “green.”

At a time when consumer confidence in “made in China” goods is at an all-time low, the opportunity is ripe for American manufacturers to feature how their products are made utilizing “green” manufacturing technologies.  After the debacle of tainted and defective Chinese products, people are willing to pay more for products that are safe and made in an environmentally responsible manner.

Even when businesses are fighting for their survival in the tougher economic times, they are choosing to move forward by going green.  “Indeed, companies would be foolish to abandon their green credentials at the first sign of difficulty,” said Solitaire Townsend, chief executive of Futera Sustainability Communications, which advises companies on their green strategies.  “What is more, companies have much to gain from taking steps to improve their environmental performance. The guiding principles behind behaving in an environmentally sound manner are the same as the principles of thrift and economy.  Using fewer resources is at the core of environmental sustainability, and leads to cost savings. Thrift and being green go hand in hand,” she said.

More than 260,000 workers in California currently work in the green economy, according to the Employment Development Department.  The Redwood empire north of San Francisco leads by percentage with 5.1% of it workforce employed in green jobs, but Southern California leads in actual number of jobs at 106,350 for 1.6% of its workforce.  The border regions of San Diego and Imperial counties have slightly more than 21,000 jobs for 1.8% of their workforce.

Traditional blue-collar occupations, such as carpenters, electricians, and heating and air-conditioning technicians comprise the largest number of workers in the green economy.  Greenjobs.org provides an online database of environment-related job postings, showing a growing demand for workers with “green” skills.

While it good that that “going green” is saving money for manufacturers, benefiting some traditional blue-collar occupations, and providing “green” products for consumers, the question is whether it is creating any new manufacturing jobs.  While campaigning for president, Barrack Obama, proclaimed the goal of creating five million so-called “green collar” jobs   by restoring America’s manufacturing base through clean energy technologies, innovation and less reliance on foreign oil.  He said, “My presidency will mark a new chapter in America’s leadership on climate change that will strengthen our security and create millions of new jobs in the process.”

Three years later, it appears that America is missing the boat in creating green manufacturing jobs. China’s cheap labor, combined with free trade policies that afford companies with international portability, have propelled China to the top of the mountain in terms of clean energy investment.

One example is the manufacture of light bulbs.  In July 2010, General Electric permanently shuttered its last major factory producing incandescent light bulbs.  The closure cost 200 employees their jobs.  These jobs were transferred to China, where the much more energy efficient bulbs known as compact fluorescents, or CFLs, are produced at a much lower cost.  The incandescent light bulb was born in America and now has died in America, taking plenty of well-paying manufacturing jobs with it.

Despite the fact that CFL’s were invented in America in the 1970’s, virtually none are made in America. Because they require much more hand labor than your typical incandescent bulb and labor costs are much higher in the      U. S., many companies set up manufacturing in China to take advantage of its massive low-cost pool of available labor.

The same thing has happened with solar panels.  China tops the world in solar panel manufacturing.  “Five of the top 10 solar panel makers in the world are from China, a trend that took hold last year {2009} according to a report by Massachusetts-based greentech analysts GTM Research.”

“Jenny Chase, a lead solar analyst for the Long-based research firm New Energy Finance, says it’s unrealistic for the United States to count on long-term manufacturing jobs in the solar industry, at least where a global oversupply is pressing solar-panel prices through the floor.”

Plenty of others disagree.  Several thin-film solar startups, such as PrimeStar Solar, Applied Quantum Technology and SoloPower are planning new factories now in the hope of catching a market upturn in the next couple of years.  In April 2011, G.E. announced plans to build the nation’s largest solar panel plant.  “The plant, whose location has not been determined, will employ 400 workers and create 600 related jobs, according to G.E.”  The factory would annually produce solar panels that would generate 400 megawatts of energy, the company said, and would begin manufacturing thin-film, photovoltaic panels made of a material called cadmium telluride in 2013.”

In 2009, China became the world’s leader in private investment in renewable energy, according to a report by the Pew Charitable Trusts. Even in the midst of the worst recession since the Great Depression, China invested $34.6 billion in green technologies.

America, meanwhile, has leaked clean energy investment and jobs like a sieve. According to the report, the U.S. has invested just over half the amount of China in clean energy technologies. For all of 2009, private investment in the U.S. totaled just $18.6 billion, down 48 percent from 2008.

A report by the Investigative Reporting Workshop and ABC News, found that $8 of every $10 spent on wind energy projects through the stimulus package went to a foreign company. Total recovery funds spent on wind energy projects total nearly $2 billion.  The report estimates stimulus funding for wind projects created roughly 6,000 manufacturing jobs overseas and just hundreds in America.  Thus far, the Recovery Act has paid to create 1,807 wind turbines to fuel American homes, businesses, schools and other buildings.  Just 588 of those were manufactured domestically, according to the report.

“The United States’ competitive position is at risk in the emerging clean energy economy,” Phyllis Cuttino, director of the Pew Environment Group’s Global Warming Campaign, said in a statement attached to the group‘s report.

In an opinion article for Industry Week, consultant, John Madigan of Madigan Associates, presents “real solutions” to create the $20-per-hour jobs needed to sustain a strong middle class.  With more than 25 years experience in operations management at Continental Can and Storagetek, among other companies, Madigan said in 2008, “’Green’ manufacturing technology offers more than a way to slow environmental destruction; it could be a powerful antidote for America’s economic crises, mass job losses, and diminished international status.” (Viewpoint, July 2, 2008, www.Industryweek.com)

In the last couple of years, the term “green technology” has evolved into the more encompassing term of “cleantech.”  The new “cleantech” industry could be a powerful antidote for America’s economic crisis and massive job losses in manufacturing.  “Cleantech” manufacturing and the technologies that support it could create the higher paying jobs needed to sustain a strong middle class while helping to solve air, energy, water and food crises.  Next week’s article will take a look at how some “cleantech” companies are creating new manufacturing jobs in the San Diego region.

The average American rarely thinks about manufacturing, and if he or she thinks of it at all, he or she thinks that American manufacturing is dead or dying.”  They may think that we have transformed into the postindustrial society predicted by John Naisbitt in Megatrends, in which the Untied States was supposed to transform from dirty heavy industry into the clean bright world of services and high technology.

Many may wonder why we should expend any effort to save American manufacturing.  What difference would it make to the United States if we lost virtually all of our domestic manufacturing?  Is it too late to save American manufacturing?  Can American manufacturing be saved or even revived into a new period of growth?

The truth is the so-called postindustrial society was a dream that failed to generate any new net jobs either in manufacturing or services.  We’ve learned that it’s even easier to outsource services, such as telemarketing and customer service, computer programming, and software design to India and other offshore countries than it is to outsource manufacturing.

Americans may be surprised to learn that the United States is still the world’s number one manufacturer, accounting for 17 % of global manufacturing output, but down from 25 % in 2007 before the Great Recession.

For over sixty years, American manufacturing has dominated the globe.  It was responsible for turning the tide for the Allies in World War II and defeating Nazi Germany and Japan.  It helped rebuild Germany and Japan after the war and enabled the United States to win the Cold War against the Soviet empire, while meeting the material needs of the American people.

High– paying manufacturing jobs helped spur a robust and growing economy that had little dependence on foreign nations for manufactured goods.  American families and communities depended on a strong manufacturing base to improve our quality of life.

Manufacturing is the foundation of the American economy and was responsible for the rise of the middle class in the 20^th Century, in which the average daily wage rose from $2.50 per day to $96 per day.

American companies like General Motors, Ford, Boeing, IBM, and Levi Strauss became household names.  American manufacturing became synonymous with quality and ingenuity.  Now General Motors is recovering from bankruptcy thanks to American taxpayers through a government bailout.  IBM sold their computer line to Chinese company Lenovo, and Levi jeans are made in China just like every other brand of jeans.

The U. S. manufacturing sector accounted for $1.7 trillion or 11.2% of the country’s Gross Domestic Product (GDP) in 2010, up from $1.58 trillion in 2009.   If this sector were a country, it would be the eighth largest economy in the world.  Manufacturing output of the nation’s factories in the United States today is at the highest level in history and continues to rise.

The five largest manufacturing industries today are: chemicals, food products, computers and electronic products, transportation (automobiles and aircraft), and fabricated metal products.  Automobiles and auto parts dropped from third to fourth between 2002 and 2007, and fabricated metal products slipped from fourth to fifth in the same time period.

Manufacturing is the engine that drives American prosperity.  It is central to our economic security and our national security.  Federal Reserve Chair Ben Bernanke stated on February 28, 2007, “I would say that our economy needs machines and new factories and new buildings and so forth in order for us to have a strong and growing economy.”

However, Franklin Vargo, vice president for international economic affairs of the National Association of Manufacturers, said, “If manufacturing production declines in the United States, at some point we will go below critical mass and then the center of innovation will shift outside the country and that will really begin a decline in our living standards.” ³

In the 1970’s, over 26 % of American workers were in manufacturing, but this number has decreased every year since 1990 until it dropped down to less than 11 % by the end of 2009.  

In 1965, American manufacturing accounted for about 28 % of the U. S. Gross Domestic Product, but it dropped to only 9.5 % in 2009.   According to Forbes magazine, we’ve lost 50,000 manufacturing jobs per month since 2001, adding up to over 5.5 million jobs by the end of 2010.

Manufacturing ensures that the U. S. has a strong industry base to support its national security objectives. American manufacturers supply the military with the essentials needed to defend our country, including tanks, fighter jets, submarines, and other high-tech equipment.

In a keynote address “Lessons for a Rapidly Changing World” at the CA World 2003, Dr. Henry Kissinger, former U. S. Secretary of State, said “The question really is whether America can remain a great power or a dominant power if it becomes primarily a service economy, and I doubt that.  I think that a country has to have a major industrial base in order to play a significant role in the world. “

The reality is that the supply chain of goods upon which our military and defense industry rely is weakening.  The U. S. printed circuit board industry has shrunk by 74 % since 2000, and the communication equipment industry has lost 47 % of its jobs.  The U. S. machine tool industry consumption fell by 78 % in 2008 and another 60 % in 2009.    There is only one steel plant left that can product the high quality steel needed by the U. S. military.  Even more serious is that China is now the #1 supplier of components for defense systems.

The five states with the largest manufacturing workforces are: California, Texas, Ohio, Illinois, and Pennsylvania.   California’s manufacturing workforce of more than 1.5 million is almost the size of the Texas and Illinois manufacturing workforce combined.

Jobs paying $20 per hour that have historically enabled American wage earners to support a middle-class standard of living are leaving the U. S.  Only 16 % of today’s workers earn the $20 per hour baseline wage, down 60 % since 1979.

Manufacturing wages and benefits are approximately 25 – 50% higher than non-manufacturing jobs.   Manufacturing compensation averages more than $65,000, compared to an average of $53,000 in the remainder of the economy.

Another important point is that the decline in the higher manufacturing jobs produces less tax revenue making the Federal budget deficit worse.  This becomes serious when you realize that nearly half of federal revenue comes from income taxes on individuals.  Decent-paying, entry-level jobs offering a future are replaced by menial, dead-end jobs.

There is a multiplier effect of manufacturing jobs that reflects linkages that run deep in the economy.  Manufacturing jobs create three to four supporting jobs, while service jobs create only one to two other jobs.  However, steel product manufacturing creates 10.3 indirect jobs, and automotive manufacturing creates 8.6 indirect jobs.

Automation has helped keep American manufacturers not only competitive but the most productive in the world.  Manufacturing has long led U. S. industries in productivity growth.  Gains in productivity raise a country’s standard of living.  In the past 20 years, productivity -output per hour -) has more than doubled – actually 2.5 times – that of other economic sectors.

American manufacturers are responsible for more than two-thirds of all private sector R&D, which ultimately benefits other manufacturing and non-manufacturing activities.  More than 90 % of new patents derive from the manufacturing sector and the closely integrated engineering and technology-intensive services.

America’s manufacturing innovation process leads to investments in equipment and people, to productivity gains, the spreading of beneficial technology to other sectors, and to new and improved products and processes.  It is an intricate process that begins with R&D for new goods and improvements in existing products.  As products are improved in speed, accuracy, ease of use, and quality, new manufacturing processes are utilized to increase productivity.  Education and training of employees is required to reap the benefits of such improvements in manufacturing processes.  Substantial R&D is required to keep the ball rolling to ensure more successes than failures.  Co-location of R&D and manufacturing is critical because you have to know how to make a product to be able to know how to make it better for the next generation of the product.

Inside the modern U. S. manufacturing facilities, you will see the most productive, highly skilled labor force in the world applying the latest in information, innovation, and technology.  Contrary to popular opinion, the industrial age is not over.  We are on the edge of incredible advances in manufacturing – nanotechnology, lasers, biotechnology, biomimicry, rapid prototyping, and electro forming.

In summary, manufacturing is the foundation of the U. S. national economy and the foundation of the country’s large middle class.  Losing the critical mass of the manufacturing base would result in larger state and federal budget deficits and a decline in U. S. living standards.  This, in turn, would result in the loss of a large portion of our middle class, which depends on manufacturing jobs.  America’s national defense would be in danger, and it would be difficult, if not impossible to maintain the country’s position as the world’s super power.

The next article will look at what trends are occurring now and how various choices that we could make as a nation, company, and/or individual will affect the future of American manufacturing.