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.htm Copyright ©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 Today, America’s biggest export via ocean container is waste paper. Richard McCormack, “The Plight of American Manufacturing.” The American Prospect, January 2010. IMPORTS TO THE U.S. BY RETAILER Containers of sophisticated manufactured products from overseas factories. Wal-Mart Target Home Depot Sears 720,000 435,000 365,200 248,600 Richard McCormack, “The Plight of American Manufacturing.” The American Prospect, January 2010. 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% Richard McCormack, “The Plight of American Manufacturing.” The American Prospect, January 2010. Reviving American Manufacturing Special Issue by The American Prospect The Plight of American Manufacturing By 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 A once robust system of “traditional engineering” – the invention, design, and manufacture of products – has been replaced by financial engineering.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 14 How 12many hours of labor does it take 12to produce a ton of steel? …10in the United States? … 8in China? 6 4 2 2 0 US China Richard McCormack, “The Plight of American Manufacturing.” The American Prospect, January 2010. AMERICAN COMPANIES HAVE DIFFICULTY COMPETING AGAINST FOREIGN COUNTRIES THAT Undervalue their currency Pay healthcare for their workers Provide subsidies for energy, land, buildings, and equipment Grant tax holidays and rebates Provide zero-interest financing Pay their workers poverty wages Don’t enforce safety or environmental regulations Richard McCormack, “The Plight of American Manufacturing.” The American Prospect, January 2010. 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, highend 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.” Richard McCormack, “The Plight of American Manufacturing.” The American Prospect, January 2010. 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. Richard McCormack, “The Plight of American Manufacturing.” The American Prospect, January 2010. FEDERAL POLICY ON R&D The 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.” Richard McCormack, “The Plight of American Manufacturing.” The American Prospect, January 2010. 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. “Playing Ourselves for Fools” The trading system America sold the world is killing U.S. industry. Here’s a better way. By Robert Kuttner 17 “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, stateled 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 PENTAGON U.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 Robert Kuttner, “Playing Ourselves for Fools.” The American Prospect, January 2010. 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 Robert Kuttner, “Playing Ourselves for Fools.” The American Prospect, January 2010. 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.” Robert Kuttner, “Playing Ourselves for Fools.” The American Prospect, January 2010. 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. Bridgestone b. Cooper c. Firestone d. B.F. Goodrich e. Goodyear f. Michelin g. Pirelli h. U.S. Rubber Company i. 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.” Robert Kuttner, “Playing Ourselves for Fools.” The American Prospect, January 2010. “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 Joan Fitzgerald, “Losing Our Future.” The American Prospect, January 2010. GERMANY Since the 1970s – • Federal investment in research and development • Direct subsidies • Tax allowances • Loans for renewable energy 1991 – “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. Joan Fitzgerald, “Losing Our Future.” The American Prospect, January 2010. 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 Joan Fitzgerald, “Losing Our Future.” The American Prospect, January 2010. 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 onethird of global solar production Joan Fitzgerald, “Losing Our Future.” The American Prospect, January 2010. 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) Joan Fitzgerald, “Losing Our Future.” The American Prospect, January 2010. 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! Joan Fitzgerald, “Losing Our Future.” The American Prospect, January 2010. “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. Leo Hindery et. als, “FDR Had It Right.” The American Prospect, January 2010. 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. Leo Hindery et. als, “FDR Had It Right.” The American Prospect, January 2010. 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. Leo Hindery et. als, “FDR Had It Right.” The American Prospect, January 2010. “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 Leo Hindery et. als, “FDR Had It Right.” The American Prospect, January 2010. 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 services o 69% about finance o 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 POLICY Ron 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 Richard McCormack, “The Plight of American Manufacturing.” The American Prospect, January 2010. 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 Reagan Under 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. Robert Kuttner, “Playing Ourselves for Fools.” The American Prospect, January 2010. Military Policy Purchase of U.S. weapons systems by ally countries Offset requirements – sometimes 100% or more Robert Kuttner, “Playing Ourselves for Fools.” The American Prospect, January 2010. “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.” Richard McCormack, “The Plight of American Manufacturing.” The American Prospect, January 2010.