The long-term industrial policy debate has defined “industrial policy” as picking specific industries and companies as winners or losers, typically enabled via incentives. A correct, affordable and successful industrial policy would, instead, create the conditions in which US and foreign companies will invest in US re-industrialization in their own self-interest. We need to pick “industry” not “industries.” We need to recreate conditions in which the free market will, once again, allow the US to be largely self-sufficient.
In the decades since World War II, the United States has sacrificed its manufacturing economy based on assumptions about globalization. Some actions were generous: The US did so in part to help the world recover from the war and later to help low-income nations achieve democracy and middle-class status through preferred terms on exports to the United States. Some were more self-serving: US multi-national corporations found lower cost sources for a broad range of consumer goods. The focus on lower purchase price promised greater apparent immediate profit, even if it also entailed unrecognized costs and longer-term risks.
A correct, affordable and successful industrial policy would create the conditions in which US and foreign companies will invest in US re-industrialization in their own self-interest.
Now, many of those assumptions are proving false. The economic and security costs of the US losing much of its industrial base – costs both for the US and for the international system – are becoming evident. But too often this is framed as an irreversible trend.
It doesn’t have to be. There are immediate measures that the US government can take today to set the country on a path toward re-industrialization – without over-expanding government resources or picking winners and losers. The recent Biden administration actions are necessary in the short term since the US has fallen so far behind in key industries such as chips, EV batteries, solar and pharmaceuticals. However, to be self-sufficient, the US needs most industries to become cost/price competitive. That means reducing manufacturing cost by 10% vs. developed countries and 20 to 30% vs. developing countries. Given US debt and deficits, it is not possible to subsidize most industries so much. Instead, the US needs to create the conditions in which companies see the advantage of investing in the United States. Four such steps are outlined below.
First, the United States should put new emphasis on strengthening its manufacturing skilled workforce. The country needs a combination of increased capacity/workforce size (e.g., 5 million workers, a 40% increase, and lower manufacturing costs). A 5 million increase over 20 years means adding 250,000 additional workers/year. Apprenticeships are the best means to close the skills gap. For decades, the country has prioritized and subsidized liberal arts university degrees over apprenticeships. Higher skill levels are key to achieving the industrial and price/quality competitiveness of countries like Germany and Switzerland, enabling a combination of high wages and trade surpluses. The United States should shift resources to apprenticeship programs and engineering degrees, including through apprenticeship loans. Since the high school age cohort size is fixed, the shift would mean hundreds of thousands fewer community college and university students majoring in liberal arts and then not finding relevant careers. The US Departments of Labor and Education should also adjust their narratives, by including apprentice graduate incomes in their many charts that now proclaim “Education Pays.” The charts should make clear that training, on average, pays off as well as degrees for the individual and better for the country. An enlightened system to enable increased immigration of skilled workforce should also play a key role.
Second, lower the USD. Most economists agree that the USD is overvalued by 25 to 35%, due to its status as the world’s reserve currency. This “exorbitant privilege” makes the US a great location for banking and a poor location for manufacturing.
Third, the US should address its tax policy. For decades, the United States had the highest corporate tax rate and lowest duty rates in the world. The country should consider lowering the corporate tax rate from 21 to 15 percent, more than funded by a well-designed VAT or BAT (Border Adjustment Tax) – in line with that implemented by most of the rest of the world – to enable greater industrial competitiveness. In addition, making US duty rates as high as those trading partners charge on imports from the US would roughly double US duty rates.
Fourth, reduce the cost of healthcare and end the practice of employer provided, tax-free healthcare. Healthcare costs are incorporated in manufacturing burden, driving up price levels. The US employer share of healthcare cost averages about the same per employee hour as Chinese salaries.
These are just four steps. They undergird a competitiveness toolkit. The first two, alone would balance the US goods trade deficit over time. And these steps underscore the reality that investing in the conditions to enable domestic production and re-industrialization is a possibility, and an immediate one.
Harry Moser is the founder of the Reshoring Initiative. He was previously president of machine tool maker GF Machining Solutions for 22 years. His awards include: Industry Week’s and Association for Manufacturing Excellence’s (AME) Halls of Fame, SPE’s Mold Designer of the Year and Fab Shop Direct’s Manufacturer of the Year. He participated actively in President Obama’s 2012 Insourcing Forum at the White House and was a member of the Department of Commerce Investment Advisory Council 2019 to 2021. Harry is regularly quoted in the Wall Street Journal, Forbes, and The New York Times, and seen on national TV and radio programs. He holds a BS and MS in Engineering from MIT and an MBA from the University of Chicago. More on his analysis on the potential for American reshoring can be found in his full testimony before the US China Security and Economic Commission from June 2022.
(Photo by Pexels/Anamul Rezwan)