What should Trump’s manufacturing strategy look like?
To improve US industries’ ability to compete abroad, the Trump administration will have to do more than promote low-wage domestic manufacturing jobs.
From his involvement in the deal to keep Carrier from moving some of its jobs to Mexico to the warnings he has issued to other companies that are thinking about moving jobs abroad, President Trump has signaled that he is serious about shoring up US manufacturing. His early moves have elicited a range of responses from analysts and commentators, running the gamut from, in effect, “this is totally trivial” to “we shouldn’t care so much about manufacturing, anyway.” But absent from the responses has been practical advice for how the new administration should craft an effective US manufacturing strategy. The Information Technology and Innovation Foundation recently published 10 principles to guide the administration. Here are six that are particularly important:
Focus on all traded sectors
Manufacturing is important, but the administration should focus more broadly on the companies and sectors that compete internationally, selling at least part of their output to customers in other places. Traded sectors include almost all manufacturing; the so-called “content” industries (e.g., music, movies, and video games); natural resources (e.g., farming, fishing, and mining); and some services, such as software, Internet-based services, and engineering services. Because their foreign sales bring money into the economy instead of just passing it around among residents who are already here, these industries have a high “multiplier effect” and play a key role in driving US growth.
Focus on high-value-added industries and jobs
Not all traded sectors provide the same benefit; some create much more value than others. For instance, computer and electronics makers pay their workers median wages of $64,000. Meanwhile, in the apparel, textile, and leather goods industries, wages range from $24,000 to $29,000. So fighting for all industries equally, through steps like steep import tariffs, would actually lower, not raise US living standards overall, because it would spur growth of low-wage jobs along with higher-wage jobs. A better approach is to focus on targeted policies that will increase US living standards by growing middle- and high-wage industries.
Likewise, not all functions within a given industry provide the same benefit. In many industries, most lower-skill assembly work is done in low-cost nations, while higher-wage, more complex R&D, design, assembly, sales, and management remains in the United States. This high-value-added work is the right place to focus instead of trying to bring back millions of low-skill jobs like routine electronics assembly from places like China and Mexico.
Focus on the trade deficit and productivity, not jobs per se
There is a natural inclination to make job creation the central goal. Indeed, in an effort to avoid a critical tweet from President Trump, companies are tripping over themselves to see who can announce the most new jobs. But focusing on the quantity of manufacturing jobs is a mistake; quality matters more. That is because the real economic challenges facing the nation today are a massive trade deficit and feeble productivity growth. The goal should be to eliminate the former problem by turning around the latter one. Yes, that will create fewer manufacturing jobs, but they will be good ones that produce more output – and consumers will benefit more from lower prices.
Do more than deals
Deals like the one involving Carrier’s plant in Indiana should be a component of any national traded-sector strategy, but they won’t be enough. To ensure that more traded-sector work is done here, the United States needs to be a more attractive place for firms to operate. But if the plan is just to cut taxes and regulations, this won’t do the trick.
The costs of producing in the United States are already lower than those in many nations, including Germany, Japan, and the United Kingdom, and are almost on par with Korea. That said, the administration shouldn’t be oblivious to costs – after all, manufacturers in the United States pay among the highest effective corporate taxes in the industrialized world. What we need is a better traded-sector business climate plus robust traded-sector policies that help US traded-sector companies boost exports and innovation.
That means rejecting the advice of traditional free-market think tanks like the Heritage Foundation, whose ideological blinders make it impossible for them to differentiate between wasteful government programs and those that help firms boost their competitiveness and productivity. As such, the Trump administration needs to expand, not eliminate, funding for programs like the Manufacturing Extension Partnership program at the National Institute of Standards and Technology, the Manufacturing USA program, the newly enacted Manufacturing Universities program, the Ex-Im Bank, and skills-training programs for manufacturing workers.
Change the playing field through technology
Not all manufacturing is geographically “sticky.” Functions like electronics assembly, cutting and sewing low-end clothes, and stamping commodity metal parts don’t need to be done in the United States; they can be done just as easily in a low-wage economy. So trying to grow these kinds of functions in the United States would require heroic policy efforts to overcome the centrifugal forces drawing them away. But other kinds of production are more likely to grow and stay in the United States, and a Trump traded-sector policy should focus on them. Two kinds of industries tend to be especially sticky: emerging industries (e.g., advanced materials, artificial intelligence systems, and engineering-based biology) and industries that are constantly innovating (like aerospace, semiconductors, and biotechnology). This all means that policies such as expanding federal support for research and increasing tax incentives for innovation are critical for US competitiveness.
Pay attention to where advanced production occurs
Growing traded-sector output is important, but the benefits need to be widely shared geographically. If we have learned anything from the last two decades, it is that a rising tide doesn’t lift all regional boats. For example, high-tech industries have flourished on the coasts in recent years while manufacturing has been hollowing out in the Midwest. And when we ignore large swaths of America, voters rebel, making it harder for pro-growth policies like the Trans-Pacific Partnership trade agreement to move forward.