The Case for a National Manufacturing Strategy

This paper builds the intellectual case for why the United States needs a serious national manufacturing strategy. The paper focuses on three key questions where to date consensus has been lacking:

1. Does the United States need a healthy manufacturing sector?
2. How healthy is U.S. manufacturing at the moment and for the foreseeable future?
3. Does the United States need a national manufacturing strategy?

Until there is a consensus that manufacturing is important, that it is not healthy, and that a national manufacturing policy is needed, it will be difficult to create a platform for reframing the conversation. Meanwhile, other nations are putting in place manufacturing strategies that include key components such as tax incentives and large investments in research, skills development, infrastructure, and technology transfer and technical assistance. Every day we do nothing we risk falling further behind.

Manufacturing plays a critical role in the U.S. economy for five key reasons:

1. It will be extremely difficult for the United States to balance its trade account without a healthy manufacturing sector.
2. Manufacturing is a key driver of overall job growth and an important source of middle-class jobs for individuals at many skill levels.
3. Manufacturing is vital to U.S. national security.
4. Manufacturing is the principal source of R&D and innovation activity.
5. The manufacturing and services sectors are inseparable and complementary.

Many who argue against a national manufacturing strategy do so because they claim that U.S. manufacturing is quite healthy and that any job losses are due to superior productivity performance; or they assert that manufacturing is in decline everywhere, such that relative decline in U.S. manufacturing is not a particularly noteworthy concern. This section rebuts both those mistaken perspectives, arguing that:

1. Output growth in U.S. manufacturing sectors is overstated and, when measured properly, job loss in U.S. manufacturing is a reflection also of output decline, not just of productivity increases.
2. U.S. manufacturing decline is neither “inevitable” nor “normal” as demonstrated by the fact that manufacturing is growing in many nations, including developed nations.

Beyond the importance of a robust manufacturing sector to economic health, there are three primary reasons why the United States needs a national manufacturing strategy:

1. Other countries have strategies to support their manufacturers and by lacking similar strategies we are therefore forcing our manufacturers to compete at a disadvantage.
2. Systemic market failures mean that absent manufacturing policies, U.S. manufacturing will underperform in terms of innovation, productivity, job growth, and trade performance.
3. If a country loses complex, high-value-added manufacturing sectors, it’s unlikely to get them back, even if the dollar were to decline dramatically.

It’s important to understand that a considerable part of the loss in U.S. manufacturing jobs has not just been a story of higher productivity leading to fewer jobs—as was the case with the transformation of the U.S. agricultural sector over the last century. It’s been more a story of decline in output due to a loss of international competitiveness. This is why the decline of U.S. manufacturing merits a serious policy response.

To call for a U.S. manufacturing strategy is not to call for the same kind of sectoral or occupational composition in manufacturing that the United States had twenty or fifty years ago. It’s not to nostalgically wish for the re-creation of all the lost jobs from factories employing low-skill workers and producing commoditized products. Obviously the profile of manufacturing evolves over time, just as the U.S. economy evolves. Rather, it’s a call to restore U.S. manufacturing to a competitive position in the global economy, even though the industries and jobs will look very different than they did a generation ago.

Moreover, to call for a national manufacturing strategy is not to call for a de facto, heavy-handed industrial policy that “picks winners and losers” (for example, by picking Duracell to be the nation’s lithium-ion battery champion). Rather, we mean a process of designing our nation’s tax, regulatory, and innovation policy environments to make the United States the world’s most attractive location for advanced manufacturing (including both domestic and foreign direct investment).

There is a groundswell emerging for a comprehensive U.S. national manufacturing strategy, with numerous public agencies, policy organizations, corporate leaders, and elected officials calling for, writing about, and speaking of the need for a U.S. manufacturing strategy. Many of these reports and studies present specific recommendations geared toward certain stakeholders, while others offer more general recommendations, some complementary, some competing. ITIF seeks to use this paper to coalesce support around a consensus on core principles for why now is the time for a serious national manufacturing strategy for the United States. We can be a more powerful voice together than any of us can be on our own.