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American manufacturing needs investment, not isolation

By Jared Bernstein

Sep 20, 2018

International trade policy has become a source of great anxiety under our current chaotic presidential leadership. Instead of amplifying the benefits of globalization and ameliorating its downsides, current policies are needlessly alienating allies (raise your hand if you believe Canada and Europe are security threats) and actively weighing on American businesses. For example, the Trump administration’s tariffs are hurting American farmers who depend on export markets, as well as manufacturers who use targeted goods in production. Even companies supposedly benefiting from the tariffs are crying uncle: Alcoa, our country’s largest aluminum producer, has requested an exemption so it can import untaxed inputs from Canada.

But it’s not enough to just complain about the Trump administration’s trade policy. Those of us who have long argued that there’s a lot wrong with the globalization status quo need to answer the question: “OK, if you don’t like what Trump’s doing, what’s your big idea?”

So, here’s mine: Instead of blocking international competition, let’s finally get in it to win it. This means eschewing Trump’s atavistic attempt to turn back time. But it also means a stepped-up role for government in promoting U.S. manufacturing.

For those who decry uplifting our factory sector as “picking winners,” please, for both economic and political reasons, stand down. First, you’ve seen our tax code, right? We already pick sectoral winners in this country, based largely on who’s got the most connected lobbyists rather than smart policy. Second, our competitors, unbound by pristine ideology, are way ahead of us in this space — actively supporting key industries, subsidizing research that’s applicable across sectors, and looking around corners for market share in the next big thing. Third, our manufacturers, long under siege from aggressive outsourcing, are a key source of quality jobs and productive innovation.

Supporting manufacturing means supporting our manufacturers.

Small manufacturers should be the primary beneficiaries to this approach. The large ones — firms like GE or Ford — are already solidly established multinationals. America hosts hundreds of thousands of small manufacturers who could plausibly expand and thrive in today’s global economy with the right guidance. Fortunately, there’s a simple way to help many of these small firms: Expand the Manufacturing Extension Partnership (MEP).

The MEP is an existing, highly effective agency housed within the U.S. Commerce Department, but with satellite centers in every state. The central mission of the MEP is to provide local manufacturers with business and technical guidance. Rather than paying the high fees charged by large consulting companies, these local manufacturers pay for MEP services on a sliding scale.

Over 26,000 companies consulted with MEP in 2017, and they reported $12.6 billion in new and retained sales, $1.7 billion in cost savings, $3.5 billion in new investment, and over 100,000 jobs. Recent MEP projects have helped small manufacturers implement the necessary technology to link up with digital supply chains, meet new food safety and cybersecurity demands, realize energy savings, and upskill their workforce.

Ready for the punchline? MEP’s budget is $140 million per year. (That’s million… with an “m.”) This low cost, coupled with the high projected economic benefits, means that its bang for the buck — dollars returned to the Treasury per dollar of program cost — is projected to be about 9:1.

When you see a benefit/cost ratio of that magnitude, it’s worth asking if the program is worth expanding. In fact, many MEP centers are inadequately staffed to meet precisely the type of growing demands you’d expect in our increasingly complex world.

Supporting manufacturing means supporting our manufacturers. Step one is to boost the agency’s budget to about $200 million, which, by the way, would kick it up to a whopping 0.005 percent of federal spending (the Trump administration’s 2018 budget foolishly proposes to get rid of the MEP). Let the record show that Japan spends $2.1 billion on MEP-like functions; Germany spends $650 million; Canada spends $260 million.

Step two is to emulate our competitors, most notably China, and invest more in technological advances that could help our manufacturers capture new market share in AI, quantum computing, additive manufacturing (3-D printing), robotics, autonomous vehicles, energy storage, and more.

We need to, once and for all, end our policy passivity when it comes to investing in our manufacturers.

This part of the plan faces a big challenge. Here in the U.S., we have deep, liquid capital markets, world-class universities, and a strong tradition of applying technological gains to commerce. But in recent decades, these attributes have collided with the serious problem of outsourcing production, jobs, and recently even R&D. “Invent here, produce there” was bad enough. We are now at risk of “invent there, produce there, and then export back here.”

The good news is that we have a little-known set of institutes in place, which exist to solve this problem by supporting and onshoring the R&D with the potential to launch a U.S. advanced manufacturing renaissance.

Across America, there are 14 manufacturing innovation institutes — public-private partnerships wherein industry, academia, and government scientists collaborate to find advances in the areas just mentioned. While large manufacturers already do such research in their own areas of production, small firms generally do not, and very few firms of any size engage in long-term R&D that isn’t connected to their near-term bottom lines.

But there’s a problem with funding. The statute that created the institutes envisioned that their public funding — federal funding of $1 billion over five years, about $70–100 million per institute, with private matching — would dry up to be replaced with purely private support.

While it certainly makes sense to regularly evaluate the contribution of the institutes, history shows that when such functions go private, they also go global, meaning they are no longer targeted towards smaller, domestic manufacturers but instead offshore their services to multinationals and foreign entities (this was the experience with the initially public/private microchip consortium, Sematech). Simply put, left to its own devices, the private market will under-invest in domestic manufacturing, especially in small- and medium-sized factories.

There are, of course, many more pieces to a plan to revitalize U.S. manufacturing, including skills training and pushing back on unfair practices by our trading partners. But along with reversing the administration’s protectionism, we need to, once and for all, end our policy passivity when it comes to investing in our manufacturers. America doesn’t build walls against the future, but neither do we give up on it without a fight.


 

Jared Bernstein is a Senior Fellow at the Center on Budget and Policy Priorities. From 2009 to 2011, Bernstein was the Chief Economist and Economic Adviser to Vice President Joe Biden, Executive Director of the White House Task Force on the Middle Class, and a member of President Obama’s economic team.