The Fight for a U.S. Industrial Policy

What should a U.S. manufacturing policy entail? Does the United States even need one?

The idea of a federal industrial policy is nothing new. In the 1984 election it was hot topic, particularly among Democratic presidential candidates. Back then, increased competition from Japan and Europe were chief concerns, and proponents of industrial policy suggested the United States follow models adopted by competing nations that foster a collaborative environment between government and private industry.

Fast forward to 2010, and calls for industrial policy are once again working their way into editorial pages and lobbying efforts by both labor groups and corporate interests. Naturally, their rallying cries are quite different.

Unions are adamant that addressing trade inequities with China should be priority No. 1 in any manufacturing policy discussion. At the same time, many business groups say a free-market approach that includes reducing corporate taxes and opening up new energy sources, such as offshore oil drilling and nuclear power, are the ideal ways to revitalize U.S. manufacturing.

Talk of industrial policy gained traction in September when President Obama appointed Ron Bloom to the newly created senior adviser for manufacturing policy position. Bloom, who has also served as senior adviser to the administration's auto task force, was commissioned to work with federal departments and agencies to develop new manufacturing initiatives.

Taxed to Death

Since then, various interest groups and politicians have stepped up their efforts to establish a new manufacturing framework. On Feb. 3, U.S. Sen. Sherrod Brown (D-Ohio) pushed Obama on the need for a national industrial policy that includes incentives for clean-energy manufacturing, a defense against unfair trade, research and development tax credits and job-training strategies for displaced workers.

Weeks earlier the National Association of Manufacturers released a report it sponsored that concludes cutting corporate tax rates along with other measures that reduce financial burdens could create more than 11 million jobs. Some key recommendations from the report conducted by the Milken Institute include reducing the U.S. corporate income tax to match the average of other industrial countries, increasing the R&D credit by 25% and making it permanent, and modernizing federal export control laws.

The current corporate tax rate makes the United States inherently noncompetitive with China and other emerging markets because only Japan's is higher, says David Littman, senior economist with the Mackinac Center for Public Policy, a free-market think tank based in Michigan. He says "so-called industrial policy" championed by labor advocates that would address currency manipulation and unfair subsidies in China will only backfire.

"Industrial policies mean some group of special interests are going to take from some and redistribute it," he says. "Nobody comes out ahead except special interests. The best and most moral answer is the competitive marketplace."

Littman says he agrees that China hasn't traded fairly but thinks a punitive approach will only result in retaliation, as seen recently when China proposed antidumping duties of between 43% and 106% on imports of U.S. poultry ostensibly in response to tariffs placed by the Obama administration on Chinese tire imports. China will eventually dump its unfair trading policies once the United States becomes more competitive by cutting corporate taxes and reducing energy regulations, allowing for access to nuclear power and more domestic oil, Littman says.

Battling China

But using tax breaks to spur industrial growth is likely wishful thinking, according to Alan Tonelson, research fellow at the U.S. Business and Industry Council (USBIC), a trade group representing small and midsize manufacturers. He says it's unlikely that corporations would use tax breaks to jump-start U.S.-based manufacturing.

"Large companies have proven themselves to be good at tax avoidance," Tonelson says. "And I have full faith in their ability to hire state-of-the-art accounting talent to run rings around what Washington can come up with."

The USBIC has been critical of the Obama administration's slow movement toward enacting a bill that would enable industries harmed by foreign governments' currency manipulation to file trade complaints with the U.S. International Trade Commission. The USBIC also has asked Obama to consider imposing immediate tariffs on all imports from countries that manipulate their currencies, along with a border-adjustable tax equal to the United States' trading partners' value-added-tax export rebates.

"In our view, we think the U.S. needs a proactive, tariff-centered policy to deny these arbitrage-happy multinational U.S. companies the option of supplying the U.S. market from overseas," Tonelson says. "These tariffs will have to be quite steep to offset lavish foreign subsidies."

The steel industry has called for tougher measures against China, with Nucor Corp. CEO Dan DiMicco as one of the more outspoken critics. He has called for more protections against unfair trade policies and energy independence through more domestic oil drilling and nuclear power. Many smaller manufacturers also want trade remedies, as evidenced by the 1,900 small and midsized companies that are USBIC members.

Government Keep Out

That doesn't mean all U.S. manufacturers support government intervention.

"We'd like the government to back out of our business," says Linda Wyant, vice president of Safranek Enterprises Inc., a small woodworking equipment manufacturer in Atascadero, Calif.

Government regulations have cost the company time, money and employees, Wyant says.

She estimates that she spends about 16 hours a month submitting government paperwork and that the company had to cut its staff in half from 12 people to six.

"Nine chances out of 10 the ones making the policies don't understand enough about all the industries they're going to affect, or they choose not to listen to all the advisers they have out there," she says.

Likewise, Greg Chastain, an executive with a small Midwest manufacturer, says the only policies he supports are those that allow free markets to function.

"The government should not be putting itself into a position to pick winners and losers in business the way it's doing right now, giving one company money and not another," says Chastain, who preferred to keep his company anonymous. "And if taxes are too high everybody should have their taxes reduced and not just one preferred group."

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