Introduction

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.

The health of U.S. traded sector enterprises in industries such as semiconductors, software, machine tools, or automobiles—all far more exposed to global competition than local-serving firms and industries—cannot be taken for granted. As Gene Sperling, Director of the National Economic Council (NEC), recently put it, “If an auto plant opens up, a Walmart can be expected to follow. But the converse does not necessarily hold—that a Walmart opening does not definitely bring an auto plant with it.” The same could be said for a movie studio, software or Internet company, global engineering consulting firm, or any other establishment facing global market competition. Thus, the international competitiveness of U.S. traded sector establishments is central to the health of America’s economy. It’s simply impossible to have a vibrant national economy without a globally competitive traded sector, and that’s why dozens of nations have implemented specific strategies to bolster the competitiveness of their traded sector industries and establishments.

Manufacturing is a key traded sector and most important reason why it matters is precisely because it is the key enabler of the U.S. economy’s traded sector strength. Indeed, there is no traded sector more important (in terms of scale) to the vitality of America’s economy than manufacturing, and in particular advanced, technology-oriented manufacturing. Despite what some pundits and neoclassical economists have argued, manufacturing remains indispensable to the health of the U.S. economy, not just because it is central to traded sector strength but also for four other critical reasons, as noted in our previous publication The Case for a National Manufacturing Strategy. First, the United States will have great difficulty balancing its foreign trade without a robust manufacturing sector, for manufacturing accounts for 86 percent of U.S. goods exports and 60 percent of total U.S. exports. Second, manufacturing remains a key source of jobs that both pay well—21 percent more than the average hourly compensation in private sector service industries—and have large employment multiplier effects—each manufacturing jobs supports as many as 2.9 other jobs in the economy. Moreover, average wages in U.S. high-technology industries (which are principally in traded sectors) are 86 percent higher than the average private sector wage. Third, manufacturing, R&D, and innovation go hand-in-hand, with the manufacturing sector accounting for 72 percent of all private sector R&D spending, employing 63 percent of domestic scientists and engineers, and U.S. manufacturing firms demonstrating almost three times the rate of innovation as U.S. services firms. Finally, manufacturing is vital to U.S. national security and defense.

Unfortunately, the past decade was a particularly difficult one for America’s traded sectors in general and manufacturing in particular. As Nobel Prize-winning economist Michael Spence has demonstrated, from 1990 until the Great Recession started in 2007, the U.S. achieved virtually no growth in traded sector jobs. The malaise has been a downright decline in manufacturing, as the United States lost nearly one-third of its manufacturing workforce in the previous decade, saw on net over 66,000 manufacturing establishments close, accrued a trade deficit in manufactured products of over $4 trillion, and experienced a decline in manufacturing output of 11 percent at a time when U.S. GDP increased by 11 percent (when measured properly). Moreover, every lost manufacturing job has meant the loss of an additional two to three jobs throughout the rest of the economy. The 32 percent loss of manufacturing jobs was a central cause of the country’s anemic overall job performance during the previous decade, when the U.S. economy produced, on net, no new jobs. And while some have seized on the recent modest rebound in manufacturing jobs off Great Recession lows, the reality is that, at the rate of growth in manufacturing jobs that occurred in 2011, it would take until at least 2020 for employment to return to where the economy was in terms of manufacturing jobs at the end of 2007. Simply put, the broader U.S. economy won’t fully recover until its traded sectors—including manufacturing—regain their global competitiveness.

Yet while they should lead the way, market forces acting alone will not lead to a renaissance in traded sector performance. A sustained recovery will require effective public policies to support and underpin U.S. traded sectors. Therefore, the federal government needs to articulate a comprehensive national traded sector competitiveness strategy that addresses the “4Ts” of technology, tax, trade, and talent, as well as finance (providing access to capital), regulatory reform, and better competitiveness analysis. As the Information Technology and Innovation Foundation (ITIF) documented in The Case for a National Manufacturing Strategy, beyond the vital importance of traded sectors such as manufacturing to a nation’s economic health, the United States needs such a strategy because: 1) over a dozen competitor countries have implemented strategies to support their manufacturing and other traded sectors;14 2) systemic market failures and externalities affect manufacturing activity; and 3) if and when a country loses key traded sectors like manufacturing, it’s unlikely to get them back.

The goal of a U.S. traded sector competitiveness strategy should be to ensure that the United States offers the world’s best traded sector environment, in part by ensuring that U.S. traded sector firms have access to the world’s best technology, talent, and infrastructure, but also the best business and regulatory environment. It should design the nation’s business, regulatory, tax, and innovation policy environments to make the United States the world’s most attractive location for R&D and business investment (including foreign direct investment) in manufacturing and other traded sectors. It should promote a set of policies that support the entire lifecycle of technology development—from R&D, invention, and innovation, to scale-up for efficient production and market development—designed so that U.S. establishments and workers can capture maximum value added. And it should go beyond the country’s goal to double exports to ensure the United States becomes a net exporter again.

Some will argue that if government would simply cut taxes and burdensome regulations, work to decrease domestic energy costs, and generally get out of the way of business, then U.S. traded sectors would thrive. While certainly smart actions in these areas are sorely needed, they won’t be sufficient to restore America’s global competitive position. Rather, the United States needs to adopt the model embraced by leading manufacturing and technology economies such as Germany, Japan, Korea, and others which recognizes that markets relying on price signals alone will not usually be as effective as smart public-private partnerships in spurring stronger traded sector performance. These countries understand that government can—and must—play a constructive role in helping their traded sector firms compete. Ultimately, having a traded sector strategy is simply a way for the United States to understand what it needs to do—whether it’s cutting the effective corporate tax rate, reducing regulatory burdens expanding research funding, etc.—to help its traded sectors become more productive and innovative. Moreover, having a strategy is necessary to help align, coordinate, and amplify the effect of the various state and federal programs that currently exist to assist U.S. traded sector firms.

Some may argue that two documents released by the Obama Administration early in 2012—The Competitiveness and Innovative Capacity of the United States, released in January 2012, and A National Strategic Plan for Advanced Manufacturing, released in February 2012—already suffice to represent a traded sector competitiveness strategy for the United States. For its part, The Competitiveness and Innovative Capacity of the United States report is more of an assessment of America’s traded sector competitiveness than a strategy to strengthen it. And while the Strategic Plan represents an excellent start, it focuses primarily on advanced manufacturing and addresses the technology components, whereas a more comprehensive strategy that also addresses the tax, trade, talent, and finance elements and their impact on traded sectors is needed. The Obama Administration has also spearheaded creation of the Advanced Manufacturing Partnership (AMP), a national effort bringing together the federal government, industry, universities, and other stakeholders to identify and invest in emerging technologies with the potential to create high-quality domestic manufacturing jobs and enhance U.S. competitiveness. In July 2012, the President’s Council of Economic Advisors, in conjunction with the AMP Steering Committee, released an additional Report to the President on Capturing Domestic Competitive Advantage in Advanced Manufacturing. While these reports represent important assets and a start toward building a framework for U.S. traded sector competitiveness, they are necessary but not sufficient. The country still needs a clear and comprehensive U.S. traded sector competitiveness strategy that both goes beyond the sterile ideas that have been recycled for the better part of three decades and that includes key actionable policies that Congress and the Administration should undertake.

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:

1. Create a network of 25 “Engineering and Manufacturing Institutes” performing applied R&D across a range of advanced technologies.

2. Support the designation of at least 20 U.S. “manufacturing universities.”

3. Increase funding for the Manufacturing Extension Partnership (MEP).

4. Increase R&D tax credit generosity and make the R&D tax credit permanent.

5. Institute an investment tax credit on purchases of new capital equipment and software.

6. Develop a national trade strategy and increase funding for U.S. trade policymaking and enforcement agencies.

7. Fully fund a nationwide manufacturing skills standards initiative.

8. Expand high-skill immigration, particularly that focused on the traded sector.

9. Transform Fannie Mae into an industrial bank.

10.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:

1. 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.

2. 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.

3. 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.

4. 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.

Read the full report. (PDF)