BCG is correct that the United States can become an industrial powerhouse again, but they are wrong that market forces acting alone will produce such a result. Rather, as ITIF explains in Innovation Economics: The Race for Global Advantage and reports like A National Traded Sector Competitiveness Strategy,it will take a coordinated set of policies around the “4Ts” of Technology, Tax, Trade, and Talent to power sustained American industrial renewal. U.S. manufacturing simply won’t be globally competitive if we continue to impose the world’s third-highest corporate tax on manufacturers, permit continued foreign mercantilism through currency and standards manipulation or IP theft, and fail to address skills, education, and immigration challenges.
Fifty Ways to Leave Your Competitiveness Woes Behind: A National Traded Sector Competitiveness Strategy
By definition, countries that wish to successfully compete in the global economy must have highly competitive traded sectors. A nation’s traded sector comprises those industries and establishments which compete in international marketplaces and whose output is sold at least in part to nonresidents of the nation. Traded sectors include almost all of a nation’s manufacturing activity, some services (such as software, Internet, and engineering services, and entertainment content like music, movies, and video games), and some of the extraction sectors (e.g., farming or mining). Because these industries face market competition that is global in nature in a way that non-traded, local-serving industries (e.g., retail trade or personal services) do not, their success is by no means assured. For example, while we may not know whether Safeway, Giant, or Walmart are going to gain market share in the U.S. grocery store industry, we do know that the industry itself will be healthy, dependent only on the income and purchasing habits of American consumers. On the other hand, while we may not know whether Boeing or Airbus are going to gain market share in the global aircraft industry, we also do not know whether there will be aviation industry jobs in the United States, since this depends on the United States winning in global competition in this industry. Put differently, if a grocer goes out of business another will emerge to take its place to serve local demand, but if a traded sector enterprise such as a manufacturer or software company closes, the one that takes its place may well be located in another country.
This report presents 50 federal-level policy recommendations to help restore U.S. traded sector competitiveness (and an additional 13 state-level recommendations). The recommendations are organized around federal policies regarding the “4Ts” of technology, tax, trade, and talent as well as policies to increase access to capital, reduce regulatory burdens, and enable better analysis of the competitiveness of U.S. traded sectors.
While we believe all 50 recommendations are needed, we list what we believe are the most critical 10 recommendations here:
- Create a network of 25 “Engineering and Manufacturing Institutes” performing applied R&D across a range of advanced technologies.
- Support the designation of at least 20 U.S. “manufacturing universities.”
- Increase funding for the Manufacturing Extension Partnership (MEP).
- Increase R&D tax credit generosity and make the R&D tax credit permanent.
- Institute an investment tax credit on purchases of new capital equipment and software.
- Develop a national trade strategy and increase funding for U.S. trade policymaking and enforcement agencies.
- Fully fund a nationwide manufacturing skills standards initiative.
- Expand high-skill immigration, particularly that focused on the traded sector.
- Transform Fannie Mae into an industrial bank.
- Require the Office of Information and Regulatory Affairs (OIRA) to incorporate a “competitiveness screen” in its review of federal regulations.
Finally, while the report presents 50 specific recommendations, it also articulates four key themes that permeate the report and which should be viewed as essential thematic components of a U.S. traded sector competitiveness strategy. Beyond implementing specific policies, these are the key themes U.S. policymakers must embrace if the United States is to restore its traded sector competitiveness:
- The federal government must place strategic focus on its traded sectors, because it simply can’t rely entirely on its non-traded sectors to sustainably power the U.S. economy.
- The United States needs to embrace and reintegrate an engineering culture. While America has thrived on science-based innovation and has a strong science culture, it needs to become much more of an engineering economy. The notion that the United States can win through science alone is fallacious, because science is a public good that’s freely traded around the world, whereas gains from engineering-based innovation are capturable and appropriable within nations.
- The United States must move toward an economic system more focused on production than consumption. This means being willing to give short-term consumption less priority in our politics. Examples include raising the gasoline tax to invest more in roads and highways, pushing for a lower U.S. dollar, and raising taxes on individuals in order to cut them on businesses, particularly those in traded industries.
- There is a need to seriously rethink the structure of the global trading system and ensure that it is a trading system based on market-oriented principles. Unfortunately, the last decade in particular has seen a troubling rise in “innovation mercantilism,” which fundamentally hurts the U.S. competitive position while violating the spirit and often the letter of the World Trade Organization.
Winning the Race 2012 Memos
As the 2012 presidential campaign moves in the final stage, ITIF is presenting general principles and specific recommendation ideas across several policy areas we believe the next President and Congress should adopt to restore U.S. global competiveness and prosperity.
As chronicled in Innovation Economic: The Race for Global Advantage, the United States is losing its once formidable edge as an innovator. Many other nations are putting in place better tax, talent, technology and trade policies, and reaping the rewards in terms of faster growth, more jobs, and faster income growth. It’s not too late for the United States to regain its lead but it will need to act boldly and with resolve.
Week by week until the November election, the Winning the Race series will put forward creative yet pragmatic ideas in policies affecting taxes, trade, education, broadband, the digital economy, clean energy, science and technology and other areas. Taken as a whole, the series represents a new Innovation Consensus to replace the outdated Washington Consensus.
Memo One (September 3, 2012): Boosting Innovation, Competitiveness, and Productivity
Memo Two (September 10, 2012): Trade and Globalization
Memo Three (September 17, 2012): Corporate Tax
Memo Four (September 24, 2012): Digital Communication Networks
Memo Five (October 1, 2012): Traded Sector Industries
Memo Six (October 9, 2012): Digital Economy
Memo Seven (October 15, 2012): STEM Skills
Memo Eight (October 22, 2012): Clean Energy
Memo Nine (October 29, 2012): Science and Technology
Memo Ten (November 5, 2012): Overcoming the Barriers
Complete List of Policy Recommendations: Top Policy Recommendations for the Obama Administration to Help the United States Win the Race for Global Advantage
Foreign IT IP Theft Damages U.S. SME Manufacturers
It’s vital that that the United States pursue a “whole of government” approach to combat foreign IT IP theft. This starts with the quality of trade agreements the United States enters into (and the trade infringement remedies they permit) and continues through the effectiveness of U.S. agencies and policies charged with combatting IP theft and enforcing trade agreements. While these efforts are spearheaded by the U.S. Trade Representative’s Office, the U.S. International Trade Commission, and particularly U.S. Customs and Border Protection on the enforcement side, the U.S. Federal Trade Commission (FTC) also has a vital role to play in cracking down on foreign manufacturers who are ripping off U.S. intellectual property and using stolen information technology in their products.
Manufacturing in America - A Story of Global Competition
The conventional wisdom that U.S. manufacturing job loss is simply a result of productivity-driven restructuring (akin to how U.S. agriculture lost jobs but remains healthy) is fundamentally flawed. U.S. manufacturing lost jobs because manufacturing lost output; and it lost output because its ability to compete in global markets declined significantly. If the United States is to rectify this and restore U.S. manufacturing competitiveness and jobs, it must embrace a comprehensive national manufacturing strategy focusing on the "4Ts" of technology, tax, trade, and talent.