With Auto Aid, U.S. Follows Industrial Policy Strategy

June 8, 2009
Analysts differ on future role of manufacturing.

The rescue of General Motors and Chrysler signals a new focus in Washington on preserving a manufacturing sector seen as critical to the fragile economy, analysts say. While the U.S. remains a world manufacturing power, keeping industries competitive may require following an industrial policy script used in many other countries, notably in Asia.

Despite millions of jobs lost in manufacturing, the industrial sector still represents around 12% of U.S. economic output.

U.S. manufacturers however are facing tougher challenges from other countries including China and emerging economies, highlighting the need for industrial policies used elsewhere, say economists.

The billions provided to GM and Chrysler are seen as an example, with the aid avoiding a calamitous collapse in the industrial sector that could have been even more costly, say some economists.

"A lot of people felt we were one shock away from a 10% drop in GDP which would have been a 1930s-type experience," said Cliff Waldman, economist for the Manufacturers Alliance/MAPI. "We were staring into the abyss," said Waldman, who said a GM collapse could have been "much more costly" that the money pumped into the firm. The U.S. needs manufacturing to maintain leadership in the global economy, said Waldman.

"We can survive but we could not grow and keep our standards of living and our leadership," he said.

Joel Naroff at Naroff Economic Advisors agreed. "To have a balanced economy, you have to make things," he said, arguing that the special aid for the auto sector "is similar to what other countries do. We didn't have to do it in the past because we produced so much more than everyone else, but now it's a globalized competitive world.

Kevin Gallagher of the Global Development And Environment Institute at Tufts University said that although these efforts are now seen as bailouts, "We'll soon call them the new U.S. industrial policy."

"America would do well to learn from Japan, Taiwan, South Korea and now China -- countries where government helped foster industries that became world leaders."

Nariman Behravesh, chief economist at the consultancy IHS Global Insight, said it would be a mistake to view U.S. manufacturing as on the wane. "U.S. manufacturing is still very competitive," said Behravesh.

The research firm shows the U.S. share of global factory output at 22.3% in 2006 and that the U.S. "will maintain its superiority in the size of output, even beyond 2020."

Waldman said there is evidence that the U.S. share is now below 20%, but that American firms are important because they develop many of the cutting-edge technologies and products that spread around the globe. "We are still a major innovative power even if the sector is smaller than it was," he said.

Some analysts say the U.S. should focus on areas in which it holds an edge even if that means moving away from some manufacturing. "America has recently proven itself to be a failure when it comes to sustaining an automobile industry," said Peter Cohan, a management consultant with Peter Cohan & Associates and faculty member at Babson College. Cohen said the U.S. remains unrivaled in areas such as personal technology, led by Apple, and in sectors such as Hollywood films and biotechnology. "What does this tell us? The key to American business success is managing brainpower -- not assembly lines," he said.

Robert Reich, a former U.S. labor secretary and current faculty member at the University of California, argues that America should accept the move away from manufacturing. "It doesn't make sense for America to try to maintain or enlarge manufacturing as a portion of the economy," he said.

Reich says factory employment is likely to follow the path of agriculture, which has seen its share of the labor market shrink from 30% a century ago to less than 5% today, due to technology. "We should stop pining after the days when millions of Americans stood along assembly lines and continuously bolted, fit, soldered or clamped what went by. Those days are over," he said. "GM will disappear, eventually. The bailout is designed to give the economy time to reduce the social costs of the blow."

Copyright Agence France-Presse, 2009

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