New Economic Index Reveals U.S. Weakness in Advanced Industries, China Surging; ITIF Report Urges “Moon Shot” Response
WASHINGTON—Compared to its competitors in the global economy, the United States is weak in a group of advanced industries that are strategically important for economic and national security, according to a new economic index produced by the Hamilton Center for Industrial Strategy at the Information Technology and Innovation Foundation (ITIF), the world’s leading think tank for science and technology policy. Meanwhile, China has been surging.
In a report on its new “Hamilton Index of Advanced-Industry Performance,” ITIF urges Congress and the Biden administration to respond with an economic “moon shot” initiative to increase America’s industrial concentration in advanced sectors by 20 percentage points in a decade.
“This is an urgent wakeup call,” said ITIF President Robert D. Atkinson, who authored the report. “The conventional wisdom is that international trade is win-win proposition. But the reality is that nations are in a fierce win-lose competition for global market share in these advanced, traded-sector technology industries, because winning is critical for economic and national security. That’s especially true for the United States and its allies: China’s gains are our loss. The administration and Congress should respond by treating this trend like the economic Cold War that it is.”
ITIF’s Hamilton Index aggregates OECD data on output in seven advanced-industry sectors—pharmaceuticals; medicinal, chemical, and botanical products; electrical equipment; machinery and equipment; motor vehicle equipment; other transport equipment; computer, electronic, and optical products; and IT and information services.
The new report focuses on three years—1995, 2006, and 2018 (the last year for which data is available)—and 10 countries and regions that together account for more than three-quarters of global production in the advanced sectors: the United States, Canada, Mexico, Germany, the EU-28 minus Germany, China, India, Japan, Korea, and Taiwan. Accompanying the report, ITIF also has produced an interactive data visualization for 66 countries over the entire 24-year period from 1995 through 2018.
The data show U.S. performance has been weak and declining in four out of the seven industries—both in absolute market share and relative to the global average industry-concentration level, a standardized ratio known as “location quotient.”
America’s performance has been strongest in IT and other information services (software and Internet companies) and other transportation equipment (principally aerospace). Significant growth in the former limited the overall U.S. decline in Hamilton Index industries to 1.5 percentage points—from a 24 percent global market share in 1995 to 22.5 percent in 2018—but masked steep declines in computer and electronic equipment, electrical equipment, machinery and equipment, and motor vehicles.
In relative terms, America’s market share in the aggregated Hamilton Index of Advanced-Industry Performance dropped from 96 percent of the global average concentration level in 1995 to 94 percent in 2018—meaning advanced industries make up a smaller share of U.S. GDP than of global GDP. Removing IT and information services from the equation showed the U.S. decline in the other six advanced industries was far worse: America skidded from 96 percent of the global average industry-concentration level in 1995 to just 80 percent of the global average in 2018.
Many of America’s competitors held significantly higher relative shares of the global market: In 2018, China’s global market share in Hamilton Index industries was 34 percent above the global average, Japan was 43 percent higher, Germany 74 percent above par, and South Korea and Taiwan were both more than twice the average.
To help close these gaps, ITIF’s report calls on Congress and the administration to launch an economic “moon shot” initiative, committing the United States to increase its advanced-industry concentration level by 20 percentage points in a decade. Assuming a 3 percent growth rate in the rest of the U.S. economy, ITIF estimates doing so could add nearly $2.5 trillion to America’s advanced-industry output over 10 years.
Among the report’s other findings:
- For advanced industries to constitute the same share of the U.S. economy as they do in the rest of the world, U.S. advanced-industry output will need to expand by close to $100 billion annually to start.
- For advanced industries not including IT and information services to represent the same share of the U.S. economy as they do globally, U.S. output would have to expand by more than $250 billion, representing 1.2 percent of U.S. GDP.
- If auto production constituted the same share of the U.S. economy as the industry does as a share of global GDP, it would be 77 percent larger, or $130 billion in annual revenue, which would represent 14 additional auto factories.
- To match China’s overall level of advanced-industry concentration, U.S. output in all Hamilton Index sectors would have to expand by more than 42 percent, or around $680 billion annually.
- The advanced industries comprising the Hamilton Index constitute approximately 8 percent of the global economy. As the pie grew from 1995 to 2018, their combined value increased from $2.5 trillion to $7.2 trillion—and in the period from 2006 to 2018, China captured 37 percent of the increase.
- There was a strong negative correlation (-0.78) between the change in the respective shares of global output that China and the United States held in advanced industries from 1995 to 2018. In other words, the more ground China gained in these industries, the more the United States lost.
“Policymakers need to recognize that the United States is not in a comfortable or secure place in these industries,” said Atkinson. “Lawmakers deserve credit for advancing the competitiveness legislation that is now on the table. They should pass and fully fund it, particularly the CHIPS Act and the provisions in the Senate bill regarding the National Science Foundation. But as important as those measures are, Congress and the administration will need to do more. Increasing federal support for key inputs such as scientific research and high-skill immigration is necessary but not sufficient. It is time for the federal government to do what so many other nations do: provide incentives tied to quantitative goals in a specific set of advanced sectors—if for no other reason than because other countries are doing more, especially China.”
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The Information Technology and Innovation Foundation (ITIF) is an independent, nonprofit, nonpartisan research and educational institute focusing on the intersection of technological innovation and public policy. Recognized by its peers in the think tank community as the global center of excellence for science and technology policy, ITIF’s mission is to formulate and promote policy solutions that accelerate innovation and boost productivity to spur growth, opportunity, and progress.
