Should Washington Work to Slow the Loss of Manufacturing From Trade

Should Washington Work to Slow the Loss of Manufacturing From Trade?

Oct. 10, 2014
The bottom line is that it’s time for a more sophisticated and less black and white approach to trade, globalization and manufacturing. Only time will tell if Washington can get there.

In the 2000s U.S. manufacturing output declined by about 11% (when measured properly) while jobs shrank by over one-third.

And despite all the talk of reshoring, at least through 2012, real manufacturing output was still below 2007 levels.

It would be expected that the U.S. would have lost more output and jobs in cost-sensitive industries like textiles. But the U.S. also saw output declines in moderately technology-based industries like fabricated metals and plastics.

And contrary to popular belief much of these declines were due to loss of U.S. competitive advantage in global markets.

Was this loss “natural?” More importantly was it good for the U.S. economy?

Conventional Washington thinking, especially among economists, would answer in the affirmative for both questions. Case in point, former Obama economic tsar Larrry Summers writes that “We are moving towards a knowledge and service economy. You don’t succeed by producing exactly the same thing that other people are producing in the same way just at a lower cost…There is no going back to the past.”

Likewise, Princeton University economist Alan Blinder writes: “The TV manufacturing industry really started here…But as TV sets became ‘just a commodity’ their production moved offshore to locations with much lower wages. And nowadays the number of television sets manufactured in the United States is zero. A failure? No, a success.”

It might be a success that we don’t manufacture cathode ray tube TVs any more (no one does). But clearly it’s not a success that we don’t manufacture advanced LED displays, 3D TVs, and 4K ultra-HD TVs or the array of other advanced technology goods we no longer make, as Harvard’s Willy Shih and Gary Pisano document.

Unfortunately as these comments reflect, the conventional Washington view is that losing manufacturing to foreign competition is usually a good thing because it benefits consumers and enables America to concentrate on its “true” competitive advantage. But this view equates welfare only with consumers benefiting from cheaper goods, and ignores the negative impact from reduced production capabilities.

What are the Root Causes of this Loss?

In addition, assuming that all loss of manufacturing from trade is positive avoids the hard work of understanding the real causes of industrial loss. Lose an industry (or 10)? It’s a success.

No need to worry that high U.S. corporate tax rates caused this because we should have lost the industry anyway, and after all, we don’t even compete with other nations.

No need to worry about unfair, predatory foreign trade practices.

It’s all just free trade and welfare-enhancing Ricardian comparative advantage working its way out.

In fact, America lost manufacturing output because other nations had instituted unfair trade practices, U.S. firms had investment horizons that were too short-term, and the federal government lacked an effective competitiveness policy (e.g., lowering corporate tax rates, boosting public investment in pre-competitive industrial research, etc…)

This is not to say that globalization is inherently harmful for a high-wage nation like the United States. In theory it is not, for it means that low-wage nations specialize in commodity-based production that used to be in high-wage nations, while the latter specialize in higher value-added production and industries, especially knowledge- and technology-intensive industries. But this positive outcome is not preordained.

Some economies, including the United States, have had mixed outcomes—on the one hand losing much production, including high value-added production, while gaining a lesser amount of offsetting high-value added production.  A positive outcome is more likely when global mercantilism is limited and a nation has in place a vibrant national traded sector strategy.

So why should Washington care to slow down loss of manufacturing from trade, at least the kind of loss that is not “natural” and could be avoided without resorting to trade protectionism? There are several reasons.

First, most manufacturing is globally traded. Because these industries face market competition that is global in nature in a way that local-serving industries (e.g., retail or health care) do not, their success is by no means assured.

Loss of traded sector competitiveness is akin to the Federal Reserve Bank raising interest rates or the federal government raising taxes: it serves as a contractionary force slowing growth. And in the long run it means either a lower value of the currency or that the nation accumulates a trade deficit which must be paid off by later generations in the form of reduced consumption.  

Second, for much of manufacturing, especially advanced technology manufacturing, knowledge and production capabilities lost from trade negatively affect other industries as well.  Losing some means losing others. Finally, some manufacturing sectors are vital to national security and there loss hampers our ability to defend our national interests.

This suggests that appropriate policy responses to globalization are not reflexively oppositional as many on the Left see it or reflexively positive as many on the Right see it. Rather policymakers need to differentiate between industries (and segments of industries) that die (e.g., move offshore or lose market share) for “natural” reasons and those that die from “unnatural,” preventable reasons. For the former, the appropriate policy response is to help the workers and affected communities transition to new jobs and industries.

For the latter, we need two broad policy approaches. The first is to more readily combat foreign predation (e.g., mercantilist policies). And in some cases this may involve retaliation against foreign nations that refuse to reduce mercantilist practices. The second is to take steps to make the U.S. economy more globally competitive.

As ITIF detailed in “Fifty Ways to Leave Your Competitiveness Woes Behind: A National Traded Sector Competitiveness Strategy,” these policies include steps like supporting pre-competitive manufacturing research, reducing effective corporate tax rates, boosting workforce training, and expanding the Ex-Im Bank spending authority. 

The bottom line is that it’s time for a more sophisticated and less black and white approach to trade, globalization and manufacturing. Only time will tell if Washington can get there.

About the Author

Robert Atkinson | President, ITIF

The Information Technology and Innovation Foundation (ITIF) is a non-partisan research and educational institute – a think tank – whose mission is to formulate and promote public policies to advance technological innovation and productivity internationally, in Washington, and in the states. Recognizing the vital role of technology in ensuring prosperity, ITIF focuses on innovation, productivity, and digital economy issues.

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