An industrial repatriation for an American-led world


We propose in this page some excerpts from the preface by David P. Goldman, strategic consultant and American commentator, at the The Reshoring Imperative symposium, published by the American Compass think tank.

Until recently, the issue of production chains did not appear on the agenda of American politics. Our supply chains, however, have been guided by government actions in the past twenty years, only that they were not our governments, but those of Asia, and especially of China. America has an industrial policy, off-shoring. State support for capital-intensive manufacturing, the Asian model brand since the Meiji restoration in Japan in 1868, has shifted industrial output from the United States to Asia. Along with this shift, employment in American industry has dropped to 11.4 million from 20 million in 1980. We also have a chronic trade deficit in manufacturing, an accumulating foreign debt, a very low savings rate, a economy based excessively on consumption and stagnant productivity. To paraphrase Trotsky: you may not be interested in the production chains, but the production chains are interested in you. The so-called neoliberal consensus rationalized the emptying of the American industrial base. A liberal economist believes in free trade; a neoliberalist talks about free trade and in the meantime seeks loans subsidized by foreign governments. For various reasons, America must bring back some key industries to its territory. Among these reasons are: national security. The Covid-19 pandemic has shown America’s dependence on imports of protective equipment, medicines and potential vaccine development. The second reason is American soft power. For example, the lack of industrial capacity for 5G telecommunications equipment leaves us exposed to a significant reduction in influence, for the benefit of China. The same problem will recur in other key sectors, in the absence of decisive action. Another reason: productivity. Lack of manufacturing capacity has a direct impact on productivity and important indirect effects. Then: innovation: The American tradition of innovation, from Thomas Edison to the Bell laboratories, was generated by the cooperation of scientists, engineers and labor supply chains, not by academic research done in isolation. Finally, resilience. The relocation of the American industry has shifted the economy towards consumption, to the detriment of investments. America planted the seeds of the digital revolution but has not been able to reap the benefits. We invented semiconductors, but today we only manufacture 10 percent of computer processors. In 2015 it was 25 percent. We have invented all the fundamental digital technologies: flash memory, LCD screen, LEDs, plasma, semiconductor lasers, and sensors that make smartphone cameras work. All of these products are now manufactured in Asia […].

Asia’s manufacturing growth has produced some benefits for the United States, or at least for some Americans: American companies have exited the hardware sector and have focused on the software business, which is low in capital and benefits from cheap imports from Asia. This has produced huge growth in market capitalization for a handful of companies. American consumers have benefited from cheap products that would have cost much more if made in America, even if it is a kind of pact with the devil; the decline in investment in manufacturing and employment has generated stagnant productivity in household incomes. Average real income fell from 1999 to 2012 and did not return to 1999 levels until 2016.

For various reasons, the symbiotic model that Niall Ferguson called “Chimerica” ​​is no longer sustainable. The destruction of the economic and social fabric in the old industrial centers due to this change contributed to the election of Donald Trump, who presented himself on a program based on the recovery of jobs in the industry. The pandemic revealed dependence on CIna and other Asian countries for necessary devices and basic drugs. America’s effort to contain Chinese domination in the next generation of broadband revealed the lack of hardware manufactures in America, a weakness strategic. For long-term structural and short-term economic reasons, the question of the production chains has imposed itself on the political agenda, where it will remain for a long time. Trump recently wondered why America should rely on a global production chain, rather than producing everything on national soil. But bringing production back home is impossible in the near future, for a very simple reason: America’s imports from China in 2018 amounted to a quarter of the manufacture’s $ 2 trillion GDP, too large a portion to be replaced by short. The most significant slice, 70 billion smartphones, cannot be easily relocated to the United States, as Apple CEO Tim Cook says, because the specialist engineering skills that are now abundant in China are scarce in the United States. More generally, true autarky is certainly unnecessary and unwise. But the targeted repatriation of certain segments of strategic industries is necessary.

American production chains have been driven by government actions in the past twenty years, but not by the American government

We have the opportunity to bring crucial industries back with a qualitative leap in productivity driven by information technologies. If we fail to seize this opportunity, however, we risk that our strategic rivals increase their advantage in production techniques. China has set aside huge sums for 5G, artificial intelligence and Stem education, with the aim of becoming the dominant power in technology. America’s competitive position in the world, growth prospects and national security depend on maintaining a superior ability to innovate. Revitalizing the American industry requires a range of political initiatives, including, among other things, tax incentives for research and development, direct subsidies for some specific projects, review of international trade policy, regulatory reforms

When America led the world

In the 1970s and 1980s, federal spending on basic research and development reached 1.4 percent of GDP, the equivalent of $ 300 billion today. Most of these funds were managed by NASA or the Defense Advanced Research Projects Agency (Darpa). This effort allowed us to win the Cold War and create the digital age. Of all post-war presidents, Reagan was the strongest in making a commitment to defend the free market. But as coma noted its treasury secretary, James Baker, Reagan “has guaranteed more protection to American imports than all its predecessors in half a century.” This also included restrictions on Japanese auto exports to America, “voluntary” restrictions on steel exports by 18 countries, anti-dumping duties on Japanese computer chips, and many other measures. Large corporations that maintained their labs, including Bell System, General Electric, Rca, Ibm and DuPont, absorbed most of Darpa’s funding. Scientists and engineers worked with production to determine the practicability of innovations. Although big science dominated funding, the climate gave rise to an unprecedented wave of entrepreneurship. Employment in the 1980s grew more than ever after the war, and employment in nascent companies more than made up for the drop in employment in large companies.

Two facts in this context of great innovation are noteworthy. The first is that all the most important technologies of the digital age, without exception, have been started with the subsidies of Darpa or NASA. The second fact is that, even here without exception, the original research projects had not foreseen the enormous commercial potential of these technologies. The discoveries were the “accidental” result of basic research that had a different initial purpose. For example, Darpa funded a study on the night vision of the battlefield and thus developed the laser semiconductor and, with that, the optical networks and the cable TV industry […].

These observations illustrate the inadequacy of the classical free market theory. Entrepreneurs will risk what they do not know, but will not invest in “unknown unknowns”, that is, possible discoveries whose commercial applications cannot be imagined, since the science on which they are based cannot be predicted in advance. Therefore, research and development require state support. Before the “accidental” invention of the laser, it was impossible to imagine a marketable optical network; nobody would have invested to develop and produce one. In practical terms, national security has been the carrier of research for two reasons. First, because taxpayers are willing to accept expenses without specific benefits in the name of national security; second, because the constant tension towards progress in military equipment and cryptography offers a concrete goal for innovation […]. Scientists generate countless promising ideas every day; but it takes experienced engineers and qualified personnel to distinguish the few innovations with a practical impact from those with a mere academic value. If the United States loses the most advanced production capacities and disperses its skilled workforce, our ability to innovate will be mutilated.

Resume driving

It is important to clarify the various purposes that the repatriation of production chains has and to identify policies that serve these objectives in the most direct way. If the fundamental reason is national security, local production could be much more expensive than import, but equally convenient for strategic reasons. If the reason is economic, more precision about the purpose and mechanism is needed. Protecting current jobs and subsidies for new jobs may be desirable in some contexts, but we need to be aware that we could simply transfer income from a group of Americans (consumers who pay higher prices for the same goods and taxpayers who pay subsidies). ) to another (investors and employees of protected industries). A different, and often better, reason is that, as we have seen, a strong and diverse industrial base is the precondition for innovation and growth in labor productivity and income. Innovation does not happen in a vacuum. The collaboration of scientists, engineers and workers in the production chain is necessary to identify innovations that have commercial value. High-tech manufacturing depends on a complex network of production chains, and innovations need a critical mass of domestic inputs […]. In general, innovation in manufacturing does not support job growth. Indeed, while the United States may subsidize employment in manufacturing, for example, through tax credits for new types of work or direct subsidies for specific segments, this could reduce, instead of accelerating, productivity growth by conflicting with the strategic objective to increase American competitiveness towards a potentially hostile Asian competitor. But an industrial return policy that supports key sectors against subsidized foreign competition is more than an exaggerated welfare policy for workers. It is a necessary condition for innovation.

The model that Niall Ferguson called “Chimerica” ​​is not sustainable. A change in the industrial paradigm is needed

The indirect impact of new technologies on use will probably be much greater than the direct impact. The production of 5G devices is highly automated, but the installation of millions of stations and antennas will require a huge amount of work, including highly skilled work, as has happened in the past for optical fiber. The good news is that there is an ongoing revolution in manufacturing that will change the relocation economy. The relocation of jobs in manufacturing from America to China and other countries is often explained as the result of the relative cost of labor. This was certainly the case for some industries, but labor costs cannot explain the shift in capital-intensive industries, and many industrial processes, over time, are becoming more and more capital-intensive. The application of artificial intelligence to robotics greatly reduces the importance of related labor costs. The bad news is that America has so far been unable to prepare for competition for capital-intensive sectors. Our competitors subsidize the high capital rate industry. We follow the stages. The United States invests in that industrial segment a much lower portion of GDP than China and South Korea[…]. Alongside these targeted efforts to lower costs, breathe new life into research and promote selected industries, policymakers can also take initiative to change the climate in which investment decisions are made, thus making the sector more attractive. And they can also reform the institutions within which they act to improve coordination, international negotiations and regulation.

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