GLOBALIZATION AND THE US MANUFACTURING SECTOR Open Classroom Series

GLOBALIZATION AND THE US MANUFACTURING SECTOR

Open Classroom Series

SHOULD THE UNITED STATES

HAVE A POLICY OF SUPPORTING

A DOMESTIC MANUFACTURING

INDUSTRY?

QUIZ: WHAT COUNTRY HAS THE LARGEST MANUFACTURING ECONOMY IN THE WORLD?

The United States

…for now

http://www.ihsglobalinsight.com/Perspective/PerspectiveDetail9537.htmCopyright ©2009 IHS Global Insight

“By day the Ostia road was crowded with carts and muleteers, carrying to the great city the silks and spices of the East, the marble of Asia Minor, the timber of Atlas, the grain of Africa and Egypt; and the carts brought nothing out but loads of dung. That was their return cargo.”-- the economy of ancient Rome as chronicled by

Winwood Reade’s in his 1872 volume The Martyrdom of Man

Richard McCormack, “The Plight of American Manufacturing.” The American Prospect, January 2010.

Today, America’s biggest export via ocean container is waste paper.

IMPORTS TO THE U.S. BY RETAILER

Containers of sophisticated manufactured products from overseas factories. Wal-Mart 720,000 Target 435,000 Home Depot 365,200 Sears 248,600


U.S. SHARE OF GLOBAL MARKET

Printed Circuit Boards 8%Solar Photovoltaics 5.6%Wind-energy equipment 18.6%Cell Phones 4.5%Semiconductors

17%Autos 12%Machine Tools 5.1%


Reviving American ManufacturingSpecial Issue by The American Prospect

The Plight of American ManufacturingBy Richard McCormack

Something has gone radically wrong with the American economy. A once robust system of “traditional engineering” – the invention, design, and manufacture of products – has been replaced by financial engineering.

Without a vibrant manufacturing sector, Wall Street created money it did not have and Americans spend money they did not have.

STEEL PRODUCTION


How many hours of labor does it take to produce a ton of steel? … in the United States? … in China?

AMERICAN COMPANIES HAVE DIFFICULTY COMPETING AGAINST FOREIGN COUNTRIES THAT

Undervalue their currency Pay healthcare for their workers Provide subsidies for energy, land, buildings,

and equipmentGrant tax holidays and rebates Provide zero-interest financing Pay their workers poverty wagesDon’t enforce safety or environmental

regulations


PERHAPS THAT DOESN’T MATTER

Perhaps it’s just natural that lower-end manufacturing jobs will inevitably continue to shift to other parts of the world with lower labor costs.

The United States will just focus on the highest portion of the value chain – research, design, innovation, high-end manufacturing, etc.

. . . NOT SO FAST

CONNECTION BETWEEN MANUFACTURING AND RESEARCH AND DEVELOPMENT

“That American technological supremacy has declined alongside its manufacturing supremacy should come as no surprise.

“The proximity of research, development, and manufacturing is very important to leading-edge manufacturers.”

Report from President George W. Bush’s Council of Advisers on Science and Technology, 2004.

“The shift of manufacturing to lower-cost regions is beginning to pull high-end design and R&D capabilities out of the United States.”


SHIFT OF R&D TO OTHER NATIONS Georgia Tech’s biennial “High-Tech Indicators” From 2005 to 2007, China increased 9 points

moving ahead of the U.S. for the first time. America’s technological standing peaked in 1999

at 95.4; declining to 76.1 by 2007. China is now at 82.8. South Korea, Singapore, Taiwan, Brazil, and India

all increasing their technological capacity.


FEDERAL POLICY ON R&DThe U.S. research and development tax

credit is now lower than those of 17 other nations.

“Decoupled from domestic manufacturing, the tax credit no longer pays for itself as it once did.”


The United States is the only nation among the G-20 not to have a significant “buy domestic” procurement program, yet no single economic stimulus initiative would do more to resuscitate U.S. employment and reduce our massive trade deficit.

In May, China, the largest exporter of goods to the U.S., confirmed its policy of 100% of domestic procurement.

Leo Hindery et. als, “FDR Had It Right.” The American Prospect, January 2010.

17

“Playing Ourselves for Fools”The trading system America sold the world is killing U.S. industry. Here’s a better way.

By Robert Kuttner

“After WWII, the U.S. was so far ahead that it didn’t matter if military allies like Germany or France, Korea or Japan, practiced a somewhat different form of capitalism, namely state-led economic development, or that contrary to the dogmas of laissez-faire, state-led development actually worked.”

Quiz

In the United States, what do many people call “state-led economic development?”

SOCIALISM

State-led Development in the U.S.

“We had our own vast, unacknowledged system of industrial planning and research and development.”

THE PENTAGONU.S. industry was enjoying huge spillovers from

technology created by military agencies such as the Defense Advanced Research Project Agency, and from research spending of the National Science Foundation and National Institutes of Health.

Robert Kuttner, “Playing Ourselves for Fools.” The American Prospect, January 2010.

Remember the concept of “mercantilism?”

Laissez-faire vs. Mercantilism

“The role model for newly emergent nations is not the laissez-faire model that the United States is promoting to the world but the frankly mercantilist forms of capitalism such as those of Korea and Brazil.”

– Robert Kuttner


U.S. Failure to Recognize and Deal with Mercantilist Policies of Other Nations

“Trade talks failed to sufficiently clarify which policies of industrial aid, applied R&D assistance, wage subsidies, regional policies, domestic content requirements, and other forms of mercantilism are legitimate tools of economic development and which ones are predatory.”

– Robert Kuttner


Concessions by U.S. Companies

In exchange for access, U.S. companies – Accepted deals to shift their research, technology and

production offshore, sometimes in exchange for explicit subsidies for land, factories, and research and development, and the implicit subsidy of low-cost labor and weak environmental and safety regulations.

Sometimes – “if you want to sell here, you must manufacture here.”

Or, “you can manufacture here but only for re-export to your own domestic market and not for local sale.”


Quiz: Chinese Tires

In September 2009, President Obama imposed tariffs on imports of tires made in China. Which of the following companies and organizations supported the President’s actions?a. Bridgestoneb. Cooperc. Firestoned. B.F. Goodriche. Goodyearf. Micheling. Pirellih. U.S. Rubber Companyi. U.S. Tire Industry Association

U.S. companies and political support for an industrial policy

“The ranks of companies that behave like patriots have dwindled.

“Most big multinationals are now too cozy with foreign mercantilists to put up much of a fuss.

“It has fallen to smaller companies, trade unions, and a few larger firms still committed to manufacturing domestically, such as Corning and U.S. Steel, to fight to continue production within the U.S.”


“Losing Our Future”If we don’t develop a national industrial policy for clean-energy production, the strategies of other nations will displace American companies and jobs.BY JOAN FITZGERALD

Total global investment in wind and solar technologies could be worth as much as $3.6 trillion by 2030. (U.S. Energy Information Administration)

70-75% of jobs in wind and solar energy are in manufacturing The U.S. is headed down a path that will render us consumers

of renewable energy – but not leading innovators of manufacturers.

We already have an annual trade deficit of over $6 billion in renewable energy, while nations like China, Germany and Japan are widening the lead.

Joan Fitzgerald, “Losing Our Future.” The American Prospect, January 2010.

RENEWABLE ENERGY & MANUFACTURING POLICY

Other countries have deliberate policies to link innovation in renewable energy to manufacturing advantage. Commercializing products resulting from

subsidized research and development Subsidizing education of skilled workers Using domestic green-energy requirements

to help launch export champions


GERMANYSince the 1970s –• Federal investment in research and development• Direct subsidies• Tax allowances• Loans for renewable energy1991 – “Feed-in tariff” requires utilities to purchase all the

renewable energy that is produced, at prices set by the government

Policies seek to keep high-end manufacturing in Germany

Although Germany is neither windy nor sunny, it is among the world’s leading exporters of wind and solar technology

Employment in renewable energy is at 273,700 with expectations to grow to 400,000 by 2020.


China

As with manufacturing in general, China’s approach to the manufacturing segment of renewable technologies includes: Massive subsidies Pricing below cost to capture market share Closed supply chains Requirements that foreign companies produce for

export but not for China Coercive technology transfer


China

China’s goal is to become a leading manufacturer of solar and wind equipment.

Expanding wind-power capacity from 5,600 megawatts in 2008 to 100,000 by 2020

Raised tariffs on imported wind turbines Increased domestic content requirements for wind-farm

developments from 40% in 1996 to 70% since 2004 China has more than 100 solar companies accounting for one-

third of global solar production


STIMULUS WITHOUT AN INDUSTRIAL POLICY

Without a national strategy for linking renewable energy to domestic production, the stimulus package has given 84% of the $1.05 billion in clean-energy grants to foreign wind companies.

$545 million to Iberdrola S.A. (Spain)


TEXAS WIND FARM

$1.5 billion wind farm, applied for federal funds through the stimulus package

Would create 300 jobs in the U.S. and 2,000 jobs in China!


“FDR Had It Right”If the economy is going to come back, we need to buy – and make – American.

By Leo Hindery Jr., Edward G. Rendell, Leo W. Gerard, Donald W. Riegle Jr., and R. Thomas Buffenbarger

“Our greatest primary task is to put people to work. Our international trade relations, though vastly important, are in point of time and necessity secondary to the establishment of a sound national economy.”

-- President Franklin D. Roosevelt in his first inaugural addess

Inevitable shift to an economy without manufacturing?

Even though more than 5.5 million manufacturing jobs have been lost just since 2000, mostly overseas, some believe that the decline in our manufactured goods can be made up by a favorable trade balance in products such as software, legal services, university tuition, and motion pictures.

They couldn’t be more wrong.


Manufacturing as Critical Component of Economy

America cannot prosper over the long-term with less than 12% of GDP from manufacturing.

This sector should generate at least 20% of GDP.

When it does, 12 million more workers will be employed directly, and another 30 million indirectly due to the high multiplier effect of new manufacturing jobs.


Importance of Manufacturing Jobs

Compensation for manufacturing jobs is on average 15% greater than for non-manufacturing jobs.

Manufacturing offers the best opportunities to women and people of color for wage parity.

Manufacturing has by far the largest multiplier effect of all job sectors, creating $1.40 of additional economic activity for each $1 of direct spending, 2.5 other jobs for each job in the sector, and at the upper end, 16 associated jobs for each high-tech manufacturing job.

Service jobs create, on average, 1.6 associated jobs.


“The world’s largest economy can no longer count on consumer spending to drive demand, nor can it rely on Wall Street financial wizardry if it wants its population to continue to enjoy a high standard of living. GE, like many U.S. companies, has turned too many core technological procedures over to outside contractors and foreign operations and has outsourced too much.”

-- Jeffrey Immelt, CEO of General Electric


Support for Manufacturing Among Individual American Citizens

2006 survey by Republican Pollster Frank Luntz for the Public Policy Fund 88% of Americans consider manufacturing extremely

or very important to the American economy, vs.o 70% felt that about serviceso 69% about financeo 69% about information technology

Harold Meyerson, “The Politics of Industrial Renaissance.” The American Prospect, January 2010.

American attitudes about manufacturing

While Americans believe that the U.S. leads the world in services, finance and information, 72% believe that we no longer lead the world in manufacturing.

Asked to choose between leaving manufacturing to other nations while we focus on cultivating our service and professional sectors vs. fostering domestic manufacturing, 81% chose the latter.

OBAMA AND INDUSTRIAL POLICYRon Bloom

Senior Counselor for Manufacturing Policy Financial Whiz Harvard MBA Worked for years in investment-banking before

taking a job with the United Steelworkers to help restructure companies and ensure their survival.

Served on Obama’s Task Force on the Automotive Industry


WHAT DO YOU THINK?Should the United States have

a policy of supporting a healthy domestic manufacturing industry?

Slides Not Used

U.S. pushback against mercantilist policies

President ReaganUnder Presidents George H.W. Bush, Bill Clinton,

and George W. Bush, the U.S. government largely ceased defending U.S. manufacturers against predatory practices of foreign companies and states.

Most American multinational companies, abandoned by their government, have been left to make a separate piece with foreign mercantilist practices.


Military Policy

Purchase of U.S. weapons systems by ally countriesOffset requirements – sometimes 100% or more


“What domestic manufacturers want is for the U.S. government to shift its economic policies away from consumption to incentives that favor investment in new factories, equipment and jobs in the United States.

They want the United States to abandon policies that favor geopolitical global interests that have no regard for the economic health of the United States and its millions of taxpayers and retirees.”


Documents

GLOBALIZATION AND THE US MANUFACTURING SECTOR Open Classroom Series