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ITIF Report Details 50 Policies to Improve U.S. Manufacturing Competitiveness

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Last week, the Information Technology and Innovation Foundation (ITIF) released a  report titled, “Fifty Ways to Leave Your Competitiveness Woes Behind: A National Traded Sector Competitiveness Strategy,” by Stephen Ezell and Robert Atkinson in which they stated, “A comprehensive strategy aimed at strengthening U.S. establishments competing in global markets is needed for the United States to boost short-term recovery and long-term prosperity…”

“The United States is increasingly isolated in its belief that countries don’t compete with one another and that only firms compete” said ITIF Senior Analyst Stephen Ezell, co-author of the report. “Our traded sector establishments are up against competitors that are aided in countless ways by their governments. It’s time to level the playing field.”
The report, presents 50 federal-level policy recommendations to help restore U.S. traded sector competitiveness, along with 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, reform regulations, and better assess U.S. traded sector competitiveness.

A nation’s traded sector includes industries such as manufacturing, software, engineering and design services, music, movies, video games, farming, and mining, which compete in international marketplaces and whose output is sold at least in part to nonresidents of the nation. They are the core engine of U.S. economic growth and face unique challenges.

Because these industries face competition in the global market that non-traded, local-serving industries (retail trade or personal services) do not, their success is riskier. “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.”

If a company like Boeing loses market share to Airbus, thousands of domestic jobs at Boeing, its suppliers, and the companies at which their employees spend money will be lost. In contrast, a local grocery store may compete for business with other supermarkets, but it is not threatened by international competition. If Safeway loses market share to Wal-Mart, the jobs remain in the United States.

Ezell and Atkinson state, “The fact that the U.S. traded sector has not created a single net new job in 20 years is a core reason for the current U.S. economic malaise.” They cite the research of Nobel Prize-winning economist Michael Spence, who has demonstrated that “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).”

Ezell and Atkinson corroborate what I have written previously ─ “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….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.”

The reasons why the authors emphasize the importance of manufacturing as a “traded sector” are:
•    It will be difficult for the U. S. to balance its foreign trade without a robust manufacturing sector because manufacturing accounts for 86 percent of U.S. goods exports and 60 percent of total U.S. exports.
•    Manufacturing remains a key source of jobs that both pay well.
•    Each manufacturing job supports as an average of 2.9 other jobs in the economy.
•    The average wages in U.S. high technology are 86 percent higher than the average of other private sector wages.
•    Manufacturing, R&D, and innovation go hand-in-hand.
•    The manufacturing sector accounts for 72 percent of all private sector R&D spending.
•    Manufacturing employs 63 percent of domestic scientists and engineers.
•    U.S. manufacturing firms demonstrate almost three times the rate of innovation as U.S. services firms.
•    Manufacturing is vital to U.S. national security and defense.
They contend that “the engines of a nation’s competitiveness are in fact not mom and pop small businesses, but rather firms in traded sectors, high-growth entrepreneurial companies, and U.S.-headquartered multinational corporations. Although such firms comprise far less than 1 percent of U.S. companies, they account for about 19 percent of private-sector jobs, 25 percent of private-sector wages, 48 percent of goods exports, and 74 percent of nonpublic R&D investment. And, since 1990, they have been responsible for 41 percent of the nation’s increase in private labor productivity.”

The report notes that “traded sector businesses improve the local economy in three ways:
1.    Traded sector businesses bring money into a region by selling to people and businesses outside the region.
2.    They help keep local money at home through import substitution, which occurs when local residents and businesses purchase locally produced products instead of importing goods and services.
3.    They improve economic equity since “their productivity and market size tends to lead them to offer higher wage levels” and “jobs at traded sector companies help anchor a region’s middle class employment base by providing stable, living wage jobs for residents.”
While the authors believe all 50 recommendations are needed, they believe the 10 most critical recommendations are:

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 which focuses 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.
Only two of their top 10 recommendations made the list of the most critical recommendations in the second edition of my book: # 4 and # 10. However, I support all of their other top 10 recommendations, as well as many of their other 40 recommendations, especially the following:

•    Lower the effective U. S. corporate tax rate – As of April 1, 2012 (when Japan lowered its corporate tax rate), the United States took the mantle of having the highest statutory corporate tax rate at almost 39 percent (when state and federal rates are combined) of any OECD nation.
•    Combat foreign currency manipulation
•    Better support and align trade promotion programs to boost U. S. exports.
•    Better promote reshoring.
I also support their recommendation that Congress should broaden the R&D tax credit’s scope to make it clear that process R&D (R&D to develop better ways of making things) qualifies for the tax incentive and that Congress should expand the R&D credit to allow expenditures on employee training to count as qualified expenditures.

With regard to trade enforcement, they recommend that the U. S. “exclude mercantilist countries from the Generalized System of Preferences (GSP)” because “the top 20 GSP-beneficiary countries – Argentina, Brazil, Bolivia, Colombia, India, Indonesia, Pakistan, the Philippines, Russia, Thailand, Turkey, and Venezuela-are on the U.S. Trade Representative’s Special 301 Watch List (which documents countries that fail to adequately protect U.S. companies’ or individuals’ intellectual property rights).”

I believe that enacting legislation to address foreign currency manipulation by China in particular should be in their top 10 recommendations. I also recommend that we enact legislation to establish either a Natural Strategic Tariff as recommended by economist Ian Fletcher in his book  Free Trade Doesn’t Work: What Should Replace It and Why, or a Balanced Trade Restoration Act to authorize sale of Import Certificates using either the Warren Buffet plan or the Richmans plan (as explained in their book Trading Away our Future).

I completely disagree with their recommendation to “Forge new trade agreements, including a high-standard Trans-Pacific Partnership and Trans-Atlantic Partnership.” As documented by Alan Uke in his book,  Buying Back America, the U. S. has a trade deficit with nearly every single one of the countries with which it has a trade agreement. In fact, the U. S. has a trade deficit with 66 countries, the most egregious being the $278 billion deficit with China. Remember the touted benefits of NAFTA with Canada and Mexico? Well, in 2010, we had a trade deficit with Canada of $28 billion and $66 billion with Mexico. Do we want to increase our current trade deficit by adding more trading partners?

Additionally, the report articulates four key themes that the authors believe should be viewed as essential components of a U.S. traded sector competitiveness strategy. They recommend that the following key themes must be embraced by U.S. policymakers if the United States is to restore its traded sector competitiveness (summarized):

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 become much more of an engineering economy because 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, giving short-term consumption less priority in our politics.
4.    The structure of the global trading system must be seriously restructured to ensure that it is a trading system based on market-oriented principles and not the “innovation mercantilism” that has risen in the last decade, which fundamentally hurts the U.S. competitive position while violating the spirit and often the letter of the World Trade Organization.

Beyond federal policies to support traded sector competitiveness as a nation, the report also includes a section on recommended policies that states should implement to bolster their competitiveness, and in turn, the competitiveness of the broader U.S. economy. The state policy recommendations utilize the same “4Ts” framework as the federal recommendations.

Ezell and Atkinson state, “Implementing the policies recommended in this report will make the United States a more attractive investment environment for traded sector enterprises and their establishments. The technology policies will help spur innovation in advanced manufacturing, upgrade the technology capacity of manufacturing and other traded sector firms, help restore America’s industrial commons, and support the productivity, innovation, and competitiveness of traded sector SMEs. The tax policies will stimulate a favorable climate for private sector investment by making the overall U.S. corporate tax code more competitive with that of other nations and also by leveraging tax policy to incent private sector R&D and investment.”

In conclusion, they urge that U.S. policymakers understand that “manufacturing is not some low-value-added industry to be cavalierly abandoned.” Manufacturing is vital to U.S. competitiveness. I highly recommend reading all of this comprehensive, well-researched, well-documented report to be able to evaluate all of their recommendations and benefit from the details that are the basis for each recommendation.

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