Made In the USA

made in the usa

Reviving American Manufacturing

(before it’s too late)

The Plight of American Manufacturing Since 2001, the U.S. has lost 42,400 factories— and its technical edge.

By Richard McCormack

contents

A2 The Plight of American Manufacturing

by richard Mccormack

A6 Playing Ourselves for Fools

by Robert Kuttner

A10 Industrial Policy: The Road Not Taken

by Jeff Faux

A13 The Great Industrial Wall of China

by Carolyn Bartholomew

A16 The Politics of Industrial Renaissance

by Harold Meyerson

A18 Losing

Our Future

by Joan Fitzgerald

A 21 FDR Had It

Right

by Leo Hindery Jr., Edward G. Rendell, Leo W. Gerard, Donald W. Riegle Jr., and R. Thomas Buffenbarger

report this Coverspecial art by Harry Campbell was made possible through the generous support of the this special Charles Stewart report Mott Foundation, was made possible through the the Ford Foundation, and generous support of the Alliance The Annie E. Casey Foundation. for American Manufacturing For reprints, please andbulk Charles Rodgers. contact Dorian Friedman at For bulk reprints, please dfriedman@prospect.org. contact Adam Waxman at awaxman@prospect.org. publisher George W. Slowik Jr. special report editor Mark Schmitt publisher George W. Slowik Jr. consulting editor Shelley Waters Boots special report editors director of Kuttner external Robert and relations Harold Meyerson Dorian Friedman, (202) 776-0730 x111

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a2 january / february 2010

S

omething has gone radically wrong with the American economy.

A once-robust system of “traditional engineering”—the invention, design, and manufacture of products—has been replaced by financial engineering. Without a vibrant manufacturing sector, Wall Street created money it did not have and Americans spent money they did not have.

Americans stopped making the products they continued to buy: clothing, computers, consumer electronics, flat-screen TVs, household items, and millions of automobiles.

America’s economic elite has long argued that the country does not need an industrial base. The economies in states such as California and Michigan that have lost their industrial base, however, belie that claim. Without an industrial base, an increase in consumer spending, which pulled the country out of past recessions, will not put Americans back to work.

Without an industrial base, the nation’s trade deficit will continue to grow. Without an industrial base, there will be no economic ladder for a generation of immigrants, stranded in low-paying servicesector jobs. Without an industrial base, the United States will be increasingly dependent on foreign manufacturers even for its key military technology.

For American manufacturers, the bad years didn’t begin with the banking crisis of 2008. Indeed, the U.S. manufacturing sector never emerged from the 2001 recession, which coincided with China’s entry into the World Trade Organization. Since 2001, the country has lost 42,400 factories, including 36 percent of factories that employ more than 1,000 workers (which declined from 1,479 to 947), and 38 percent of factories that employ between 500 and 999 employees (from 3,198 to 1,972). An additional

90,000 manufacturing companies are now at risk of going out of business.

Long before the banking collapse of 2008, such important U.S. industries as machine tools, consumer electronics, auto parts, appliances, furniture, telecommunications equipment, and many others that had once dominated the global marketplace suffered their own economic collapse. Manufacturing employment dropped to 11.7 million in October 2009, a loss of 5.5 million or 32 percent of all manufacturing jobs since October 2000. The last time fewer than 12 million people worked in the manufacturing sector was in 1941. In October 2009, more people were officially unemployed (15.7 million) than were working in manufacturing.

When a factory closes, it creates a vortex that has far-reaching consequences.

The Milken Institute estimates that every computer-manufacturing job in California creates 15 jobs outside the factory. Close a manufacturing plant, and a supply chain of producers disappears with it. Dozens of companies get hurt: those supplying computer-aided design and business software; automation and robotics equipment, packaging, office equipment and supplies; telecommunications services; energy and water utilities; research and development, marketing and sales support; and building and equipment maintenance and janitorial services. The burden spreads w w w. p ro s p ect. o rg

made in the usa

rebecc a cook / reuter s / l andov

Sick Transit: The abandoned Fisher Body 21 plant, built in 1919 to produce bodies for Buick and Cadillac, deteriorates near downtown Detroit, Michigan.

to local restaurants, cultural establishments, shopping outlets, and then to the tax base that supports police, firemen, schoolteachers, and libraries.

Has U.S. manufacturing declined because its companies are not competitive? Hardly. American companies are among the most efficient in the world.

The nation’s steel industry, for instance, produces 1 ton of steel using two manhours. A comparable ton of steel in China is produced with 12 man-hours, and Chinese companies produce three times the amount of carbon emissions per ton of steel. The same kinds of comparisons are true for other industries.

But American companies have difficulty competing against foreign countries that undervalue their currencies, pay health care for their workers; provide subsidies for energy, land, buildings, and equipment; grant tax holidays and rebates and provide zero-interest financing; pay their workers poverty wages that would be illegal in the United States, and don’t enforce safety or environmental regulations.

Proponents of free trade and outsourcing argue that the United States remains the largest manufacturing economy in the world. Yet, total manufacturing gross domestic product in 2008 (at $1.64 trillion) represented 11.5 percent of U.S. economic output, down from 17 percent in 1999, and 28 percent in 1959. As for our balance of trade, U.S. imports of goods totaled $2.52 trillion in 2008, while exports came to $1.29 trillion— creating a goods deficit of $821 billion.

Those imported goods represented 17.6 percent of U.S. GDP. The U.S. trade deficit in goods and services in 2008 stood at $700 billion—or more than $2,000 for every American.

Our trade deficit will not diminish absent a significant increase in domestic manufacturing. Those unconcerned about the decline of American manufacturing might want to read Winwood Reade’s 1872 volume The Martyrdom of Man, in which he chronicled the economy of ancient Rome: “By day the Ostia road was crowded with carts and mule-

teers, carrying to the great city the silks and spices of the East, the marble of Asia Minor, the timber of the Atlas, the grain of Africa and Egypt; and the carts brought nothing out but loads of dung.

That was their return cargo.”

Today, America’s biggest export via ocean container is waste paper—our version of dung. The largest U.S. exporter via ocean container in 2007 was not even an American company, but Chinese: American Chung Nam, which exported 211,300 containers of waste paper to its Chinese sister company, Nine Dragons Paper. By comparison, Wal-Mart imported 720,000 containers of sophisticated manufactured products from overseas factories into the United States, followed

by Target (435,000 containers), Home Depot (365,300 containers), and Sears, which owns K-Mart (248,600 containers). Our own Ostia Road.

The United States is not losing old, inefficient industries that produce “buggy whip” products for which there is no more demand. There is ample demand for telethe american prospect

a3

visions, sporting goods, bicycles, blenders, hearing aides, golf clubs, laptops, and desktops. The industries that have left the United States are still producing products that are in demand.

Indeed, the U.S. is losing the industries of the future. In 2004, it lost world dominance in high-tech exports, when China exported $180 billion worth of information- and communications­t echnology products and the U.S. exported just $149 billion.

Without a printed circuit board (PCB) industry, for instance, a country cannot expect to have an industrial foundation for high-tech innovation. But the domestic PCB industry shrunk from $11 billion in 2000 to $4 billion in 2008, a period during which the industry was growing globally. U.S. PCB manufacturers accounted for only 8 percent of global production in 2008, down from 26 percent in 2000. China’s share of the global PCB market in 2008 was 31.4 percent or $16 billion, four times larger than the U.S. industry. Asia now controls 84 percent of the global production of printed circuit boards, which are used in tens of thousands of different products.

Today, the U.S. PCB industry is in free fall. For the first nine months of the year, U.S. shipments were down by 25.5 percent over the same period in 2008.

“The industry has been crippled beyond repair,” says Doug Bartlett, chairman of Bartlett Manufacturing, the oldest PCB company in the United States until it went out of business in June 2009.

What about the promise of the solar industry? There was only one American company (First Solar) among the top 10 worldwide in photovoltaic-cell production in 2008. But the European Commission does not even classify First Solar as being an “American” company, instead labeling it “international” because it does most of its production in Asia. The U.S. federal government has invested hundreds of millions of dollars in photovoltaics research and development, yet the United States accounted for only 5.6 percent of global production of photovoltaics in 2008, down from 30 percent in 1999. Chinese production, by contrast, represented only 1 percent of a4 january / february 2010

global output of photovoltaics in 1999. greater efficiency of U.S. steel production.

By 2008, its output had risen to 32 perThe U.S. machine-tool industry— cent of global production. the industry that’s the backbone of an The wind-energy industry? Only one industrial economy and the means by U.S. company (General Electric) ranked which all products are manufactured— among the 10 largest in the world. GE’s produced $4.2 billion in equipment worldwide market share in 2008 was in 2008, a paltry 5.1 percent of global 18.6 percent. output. American machine-tool conIn 2008, 1.2 billion cell phones were sumption has collapsed in tandem with sold throughout the world, none of which American manufacturing. Since 1998, were manufactured in the United States. U.S. machine-tool consumption has Motorola held 8.4 percent of the global fallen by 23 percent. Chinese consumpmarket in 2008, but that figure sunk tion has increased by 714 percent, from to only 4.5 percent in the first quarter $2.7 billion in 1998 to $19.3 billion in of 2009 (a 46 percent decline from the 2008. U.S. consumption stood at $6.7 same quarter in 2008). billion in 2008. For the Apple held 1.1 percent eight months ending U.S. Manufacturing in August 2009, U.S. of the global market for on the Decline m a c h i ne -t o ol c oncell phones in 2008.

Value added by the manufacsumption declined to In 2007, only 8 perturing sector as a percentage cent of all new semicononly $1.04 billion. The of GDP, 1947–2007 ductor fabrication plants evaporation of orders, (fabs) under construcsays Mike Austin, vice 30% tion in the world were president of Atlas Tech25% located in the United nologies in Fenton, States. Twelve percent Michigan, “is the last 20% of new fabs were being straw for many people built in China, 40 perin this industry.”

15% cent in Taiwan, and 6 Machine tools have long been considered percent in South Korea, 10% according to Semiessential to maintaining 5% conductor Equipment the country’s national Materials Internationsecurity. In 1948, Con0 al. In 2007, the United gress passed the Nation ’47 ’57 ’67 ’77 ’87 ’97 ’07 States produced 17 peral Industrial Reserve Act source: federal reserve bank, st. louis cent of the world output based on the idea that of semiconductors, a the “defense of the U.S. number that has been declining since requires a national reserve of machine 1995, when the U.S. accounted for 23 tools for the production of critical items percent of global output. of defense material.” In 1986, President The decline of America’s longtime lead- Ronald Reagan, a staunch free-trade ers in manufacturing is better known. In advocate, supported a five-year Volun2008, 12 percent (8.7 million) of all the tary Restraint Agreement with Japan and cars produced in the world were made in Taiwan on imports of machine tools based America. China has now surpassed the on national-security grounds. In makUnited States in motor-vehicle produc- ing his determination, Reagan said the tion (9.3 million in 2008), as has Japan industry was a “vital component of the (11.56 million). The U.S. steel industry U.S. defense base.”

Dozens of other industries are nearly produced 91.5 million tons of steel in gone from U.S. shores. U.S. producers of 2008, down from the 97.4 million tons in 1999. By comparison, China’s steel indus- luggage account for 1 percent of the Amertry produced 500 million tons in 2008, ican market, but virtually every Amerimore than five times the amount of U.S. can owns luggage. U.S.–based production producers and up from the 124 million of high-performance outerwear used by tons it produced in 1999, despite the far skiers, hikers, mountain climbers, bikers, w w w. p ro s p ect. o rg

made in the usa police officers, and military personnel accounts for less than 1.7 percent of all of the outerwear sold to Americans.

Do you need ceramic tile for a new kitchen floor? One major American manufacturer remains: Summitville Tiles of Summitville, Ohio. The company’s president and CEO, David Johnson, says the industry has been “virtually wiped out” by international competitors and adds, “The industry is just about finished.”

The furniture industry lost at least 60 percent of its production capacity in the United States from 2000 to 2008 with the closure of 270 major factories during that period. Imports of wood furniture accounted for 68 percent of the U.S. market in 2008, up from 38 percent in 2000.

The rapid relocation of the world’s manufacturing belt from the U.S. to China has also meant a shift in these nations’ technological capacities. As foreign manufacturers flock to China to take advantage of its cheap labor, devalued currency, and manufacturing subsidies, they have also shifted their research and development endeavors to China.

Georgia Tech’s biennial “High-Tech Indicators” study found that China improved its technological standing by 9 points (on a scale of 100) between 2005 and 2007, moving that nation ahead of the United States in technological capability for the first time since Georgia Tech started keeping score two decades ago.

America’s technological standing peaked at 95.4 in 1999; by 2007, it had declined to 76.1. China’s standing rose from 22.5 in 1996 to 82.8 in 2007. In that year, the U.S. had also fallen behind the European Union. South Korea, Singapore, Taiwan, Brazil, India, and China are all increasing their technological capacities, while the U.S. position degrades.

That American technological supremacy has declined alongside its manufacturing supremacy should come as no surprise. “The proximity of research, development, and manufacturing is very important to leading-edge manufacturers,” a report from President George W. Bush’s Council of Advisers on Science and Technology warned in 2004. The continuing shift of manufacturing to lower-

cost regions and especially to China is beginning to pull high-end design and R&D capabilities out of the United States.

(Not surprisingly, the Bush White House did not publicize this report.) The report recommended that the U.S. make its research and development tax credit permanent. It has not. Once the world’s most generous, the U.S. research and development tax credit is now lower than those of 17 other nations.

Decoupled from domestic manufacturing, the tax credit no longer pays for itself as it once did. If our innovation system discourages an invention from being manufactured in the U.S., says Susan Butts, senior director of external science and technology programs at Dow Chemical, then American industry will not generate the taxes “that fund the federal investment in research.”

Executives of U.S. manufacturing companies understand that they are up against not just foreign companies but mercantilist nations. As Wayne Johnson, director of worldwide strategic university

egy aimed at creating the industrial jobs needed in America to generate trillions of dollars of tax revenue. Without a surge in U.S. production and exports, how will the United States pay off its mounting debts and cover the retirement and medical costs of the largest generation of Americans in history? Creating more jobs for dental hygienists, health-care workers, retail clerks, and bartenders will not do it.

There are nascent signs that the administration is awaking to the need for new economic policies aimed at private-sector industrial investment and the creation of good jobs. President Barack Obama has appointed Ron Bloom, a financial whiz, to be his “senior counselor for manufacturing policy.” Bloom, a graduate of Harvard Business School, worked for years in the investment-banking industry before taking a job with the United Steelworkers, using his experience to help restructure companies to assure their survival and their ability to employ American workers.

He also worked on the Obama administration’s Task Force on the Automo-

Since 1998, U.S. machine-tool consumption has fallen by 23 percent. Chinese consumption has increased by 714 percent. customer relations at Hewlett-Packard told a 2008 conference sponsored by Bush’s Office of Science and Technology Policy, “We in the U.S. find ourselves in competition not only with individuals, companies, and private institutions, but also with governments and mixed government-private collaborations.”

What domestic manufacturers want is for the United States government to shift its economic policies away from consumption to incentives that favor investment in new factories, equipment, and jobs in the United States. They want the United States to abandon policies that favor geopolitical global interests that have no regard for the economic health of the United States and its millions of taxpayers and retirees.

To the disappointment of the domestic manufacturing community, the Obama administration has yet to devise a strat-

tive Industry, which (at least for now) saved General Motors and Chrysler from extinction. Bloom is piecing together a strategy that will build upon investments being made in the $787 billion economic stimulus package aimed at helping the U.S. clean-energy sector.

There is little time to waste. “We need a modern-day Paul Revere,” says Brian O’Shaughnessy, chair of Revere Copper Products, the oldest industrial company in the United States. “We all need to wake up and understand the forces of foreign economic mercantilism that are waging an economic war against us.” tap Richard McCormack is editor of Manufacturing & Technology News.

He was founding editor of High Performance Computing and Communications Week in 1991 and New Technology Week in 1987. the american prospect

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Playing Ourselves for Fools The trading system America sold the world is killing U.S. industry. Here’s a better way.

By Robert Kuttner

A

mid a generally poisoned atmosphere of vicious partisan combat, trade policy is unfortunately the last bastion of relentless bipartisanship.

I say “unfortunately” because there is a stunning disconnect between America’s trade policy and America’s national interest. Since World War II, administrations of both parties have been promoting a design for global trade that displays a studied indifference to the fate of U.S. manufacturing.

U.S. trade negotiators strive for an ever purer strain of free trade (combined with protection for agriculture but not industry). But in the real world of industrial competition, governments help their industries—except for the American government. Dissenters from the prevailing free-trade fantasy are dismissed as protectionist, a word that ranks in the foreignpolicy lexicon slightly below terrorist.

Why would the U.S. government, which has not been shy about defending the nation’s military security, be such a pushover when it comes to trade? The story begins with the recovery of Europe and Japan from World War II and with the logic of the Cold War. In that era, the U.S. was industrially pre-eminent. We were building an alliance system. One of the perquisites of membership in our system was access to the huge consumer market of the United States. We were so far ahead that it didn’t matter if military allies like Germany or France, Korea or Japan, practiced a somewhat different form of capitalism, namely state-led economic development, or that contrary to the dogmas of laissez-faire, state-led development actually worked.

Moreover, we had our own vast, unacknowledged system of industrial planning and research and development.

It was called the Pentagon. Even as American diplomats began venturing a6 january / february 2010

cautious criticisms of “Japan, Inc.” or “Deutschland, A.G.,” and of flagrantly state-subsidized ventures such as the Airbus consortium, U.S. industry was enjoying huge spillovers from technologies created by military agencies such as the Defense Advanced Research Project Agency (DARPA) and from the research spending of the National Science Foundation and the National Institutes of Health that subsidized our great universities as incubators of industry. We were hypocrites. We had our own closet industrial policy—though it was not coherent or strategic, and it withered over time.

Fast forward to the 1980s. By now, the state-led industrial development of nations such as Japan is more than a minor pinprick. Europe has recovered, with no small dose of planning (actually initiated by an American named Marshall.) The Cold War is ending. China is knocking on the door. Entire domestic industries are being displaced. The role model for newly emergent nations is not the laissez-faire model that the United States is promoting to the world but frankly mercantilist forms of capitalism such as those of Korea and Brazil.

So what did the United States do? It would have made sense for our leaders to realize that we were no longer in the cozy womb of 1950s industrial supremacy.

We might have initiated a new round of trade talks intended to clarify which policies of industrial aid, applied researchand-development assistance, wage subsidies, regional policies, domestic content requirements, and other forms of mercantilism are legitimate tools of economic development and which ones are predatory. We might have created robust tribunals to identify and punish illicit behavior. We might have used our still-substantial economic leverage to deny market privileges to flagrant and

chronic violators. We might have devised an industrial policy of our own.

But we did none of these. Instead, we doubled down on a fantasy of ever purer free trade that nobody else really bought. But if we were willing to play by the rules of an imagined free trade while others practiced state-led growth, our trading partners were more than happy to indulge our delusion.

Why did America behave this way?

The reason for this seemingly irrational trade diplomacy was one part military goals crowding out industrial ones, one part ideology, and one part the increasing influence of Wall Street. the military part of the story is little appreciated. As the leader of an alliance system, the United States promotes the idea that allied nations should have common weapons systems, ideally American ones. But other nations have demanded in return that before they agree to buy very expensive fighter planes, we must agree that most or all, and in some cases more than 100 percent of the plane, be produced in the purchasing country. This is known as domestic content. (How can more than 100 percent of a product be made in the importing country? As part of the deal, the seller agrees to buy other products from the customer nation. This is called an offset. Boeing has found itself having to use or unload billions of dollars of gadgets made in Poland or Korea that were part of offset deals negotiated by the Pentagon.) Paradoxically, the need to do military deals for U.S.–designed weapons has actually turned out to be a big export loser for U.S. industry, for it has accelerated the transfer of production technology and the offshoring of manufacturing to mercantilist competitor nations. These military bargains, further, set a bad precedent that the U.S. government acquiesces to conw w w. p ro s p ect. o rg

t h o m a s d . m c av oy / t i m e l i f e p i c t u r e s / g e t t y i m a g e s

made in the usa tent requirements that have come back to haunt us in purely commercial deals.

Then there is ideology, also known as neoclassical economics. Within the economics profession, only a very self-confident (and tenured) economist is willing to challenge the dogmas of free trade, and when such challenges are ventured they are done with careful disclaimer and politesse. The young Paul Krugman made his scholarly reputation by very gently, and with impeccable algebra, questioning some of the theoretical assumptions of free-trade theory. Laura Tyson, just before her appointment as President Bill Clinton’s chief economic adviser, published a brave book in 1992, Who’s Bashing Whom, cataloging all the ways that foreign governments advantage their industries. But by the time Tyson took office, she and such other advocates of more muscular trade diplomacy and industrial policy as Robert Reich were marginalized by the Wall Street wing of the Clinton presidency: Robert Rubin, Larry Summers, and their allies at the office of the U.S. trade representative.

Free-trade economists provided intellectual cover, but the push for ever “freer” trade mainly came from the U.S. financial industry seeking global reach and from allied industries eager to produce in the cheapest possible location far from all forms of domestic regulation. Rather than trying to create a trading system that offered a level playing field for U.S. industry, the free-trade establishment launched a broad expansion of its hapless efforts at being laissez-faire to a skeptical world, in the so-called Uruguay Round of trade negotiations, launched in 1986 and completed in 1994. Despite some weak gestures toward greater symmetry, the Round was mainly aimed at global deregulation.

Ostensibly, the Uruguay Round aimed at breaking down “non-tariff barriers,” protecting intellectual property and above all opening up trade in “services.” Some of this sounded good. If the global trading system came down hard on nations like Japan and Korea whose manufacturers often pirated and copied American technologies, this would be a blow against foreign mercantilism. But the new intellectual property pro-

tections had little beneficial effect on U.S. industrial innovations. With violations rampant, enforcement through the World Trade Organization process was selective. Mostly, cases had to be tried in the courts of the offending countries, which almost never ruled against local manufacturers. But the new WTO rules did forbid preventing the U.S. from imposing retaliatory sanctions through its unilateral intellectual-property enforcement mechanisms, which had been permissible before the Uruguay Round.

“Services” turned out to mean mainly

A Man With A Plan: Secretary of State George C. Marshall brought planning to postwar Europe.

financial services—the global financial bubble that crashed the economy. The real teeth of the Uruguay Round had to do with promoting financial deregulation and making it more difficult for nations to control their own financial systems.

The North American Free Trade Agreement of 1993, likewise, was less about trade and more about making it easier for U.S.–based multinationals and banks to take over Mexican companies and to set up branch plants in Mexico for re-export to the U.S. It also had the handy and deliberate side effect of defining a lot of ordinary health, safety, and environment legislation as a violation to the free-market precepts of NAFTA . A plan to extend this principle to all of the Organisation for Economic Co-operation and Development member nations, the proposed Multilateral Agreement on Invest-

ment, was averted in 1997, when word of the scheme was prematurely leaked and a storm of protest killed the plan.

In 1999, when China was negotiating its entry into the WTO, it was a lot weaker economically and financially, and the stench of the Tiananmen massacre still lingered, the U.S. had far more diplomatic leverage than the rather pitiful show of humility befitting a debtor nation displayed on President Barack Obama’s recent maiden trip to Beijing. But as the memoirs of both Robert Rubin and Joseph Stiglitz confirm, that leverage was used mainly to gain access for U.S. banks and insurance companies to Chinese markets, not to require China to modify its system of predatory industrial mercantilism. curiously, the high watermark of American pushback against Asian mercantilism came during the Reagan era.

Though Ronald Reagan was ideologically a free-marketer, he was also a nationalist. At the time, there was still a large rump group of U.S.–based manufacturers such as Intel, Motorola, Boeing, Corning, and others, which functioned as a lobby against foreign mercantilism. The military was also alarmed that we might be falling behind in technologies critical to the national defense. Reagan’s purely economic advisers were traditional conservatives, but his trade officials, led by Clyde Prestowitz, mounted an offensive against foreign, most notably Japanese, mercantilist practices, and actually made some headway. The pre-WTO 1980s were also the golden age of DARPA , of the Plaza Accord that enlisted the cooperation of other nations in reducing an overvalued dollar in a fashion that made U.S. products more competitive without roiling money markets, and of the Super 301 provision of U.S. trade law, which allowed effective retaliation against unfair foreign trade practices.

But beginning in 1989 with George H.W. Bush, and continuing under Clinton and George W. Bush, the U.S. government largely ceased defending U.S. manufacturers against predatory practices of foreign companies and states.

Most American multinational companies, abandoned by their government, the american prospect

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a8 january / february 2010

Economic Nationalism

Some forms of economic nationalism are predatory. Others are legitimate tools of economic development. The trick is to fashion common rules—and smart strategies.

practice

legal under wto?

Currency manipulation Subsidy of exports Indirect export subsidy (subsidizing foreign plants that relocate to export)

predatory

Selling below cost

China, Korea

WTO doesn’t apply

China, Japan

No, but hard to enforce Gray Area No effective remedy

China China, Japan, Korea, Brazil

No

China, Japan, Korea

No, but hard to enforce

China is a WTO member but has not signed the WTO procurement code

No

China, Japan, Korea

Favoritism for domestic suppliers

ambiguous

China, Japan, Korea, Brazil

Illegal if linked to subsidy

Discriminatory technical rules Favoritism in procurement

example countries

No

Theft of technology, counterfeiting, piracy

Forced technology transfer

Gray Area Legal if “voluntary”

China

Export restrictions for foreign-owned companies

Gray Area Legal if “voluntary”

China

Unfair labor standards

Yes

China, much of Third World

Lax environmental standards

Yes

China, much of Third World

Domestic content

Gray Area

China, Japan, Korea, much of Eastern Europe

Taxes that favor exports (VATs)

Gray Area

All major nations but U.S.

Government cheap capital, loans, tax concessions

Gray Area

China, Japan, Korea, Brazil; European Union and member nations; U.S. and states

Yes

All major nations

Gray area

All major nations and EU

R&D subsidies

Yes, but illegal if favoritism

All major nations

Wage subsidies

Yes

Government military spending Regional development subsidies

sensible

have been left to make a separate peace with foreign mercantilist practices.

That means accepting deals to shift their research, technology, and production offshore, sometimes in exchange for explicit subsidies for land, factories, research and development, and the implicit subsidy of low-wage and powerless workers and weak environmental or safety requirements. At other times, the terms of the deal are more stick than carrot: If you want to sell here, the companies are told, you must manufacture here.

Or even worse, you can manufacture here but only for re-export to your own domestic market and not for local sale.

For the most part, American industry has accurately concluded that the U.S. government could not care less where it manufactures. This is true of both traditional low-skill industries, which are often seen as logical candidates to move offshore, and the most advanced industries as well. Prestowitz tells the story of an American entrepreneur named Igor Khandros, a man who epitomizes why the U.S. possesses—and squanders— great competitive advantage.

Khandros, an engineer, was a refugee to the U.S. from what was then Soviet Ukraine. He worked at IBM and eventually invented a brilliant new technology for testing semiconductor wafers. By 2000, he was president of his own company, FormFactor, which now has $500 million in sales, employs 1,000 people in Livermore, California, and exports 80 percent of its products—an all-American success story.

A Korean firm, Phicom, paid Khandros the ultimate compliment. It stole his technology. Unable to get redress in the Korean courts, Khandros enlisted Prestowitz’s help and took his case to the U.S. government, then in the process of negotiating a trade deal with the Koreans. Our government told Khandros, however, that it had more important issues with Korea. But a senior Commerce Department official had a consolation idea—Khandros could cut costs by moving his own production to Asia!

With government help like this, it’s a small wonder that U.S. firms just make their own deals with predatory states

Subsidies to develop targeted industries National industrial policies

Gray area Yes, but illegal if favoritism

Germany, Denmark All major nations; U.S. less so Most major nations except U.S.

Adapted from Peter Navarro, in Manufacturing a Better Future for America

and move offshore. With the exception of intellectual-property thefts, trade law stipulates that a manufacturer who is the victim of foreign subsidy, or dumping, or coercive terms of market access, has no direct legal remedy. Rather, the plaintiff files a complaint with a body called the U.S. International Trade Commission.

The USITC makes a fact-finding and recommendation, but then it is up to the president to decide whether to retaliate.

Invariably, the State Department and the Pentagon have other fish to fry with nations as diplomatically important as China, Japan, Korea, Brazil, or Germany.

Cases in which our government grants w w w. p ro s p ect. o rg

made in the usa a remedy, such as imposing a tariff, are the exceptions, but such scattershot remedies against dumping are no substitute for reform of the whole trading system or for a U.S. decision to adopt an industrial policy of its own. in this fashion, we are losing industry after industry. The ranks of the companies that behave like patriots have dwindled. Most big multinationals are now too cozy with foreign mercantilists to put up much of a fuss anymore. It has fallen to smaller companies, trade unions, and a few large firms still committed to producing domestically, such as Corning and U.S. Steel, to fight to continue production within the U.S. In the meantime, the promise of an industrial renaissance spearheaded by the Obama administration’s investment in green energy or mass transit or highspeed rail or a smart grid is now running up against the hard reality that there are just too many products that we no longer make and too many foreign links in the

could be used to rebuild our own industry.

However, there are other nations that practice what can be called a kind of soft mercantilism. And much of what they do is less to be deplored than imitated. The chart opposite lists foreign industrial strategies that are arguably predatory and compares them with other tactics that could be considered legitimate tools of development. Some of the practices, such as China’s use of artificially cheap capital and outright subsidies to develop new industries, could be considered legitimate domestic development tools but predatory in the context of trade.

Tariffs could be fairly imposed to offset the anti-competitive effect on companies that enjoy no such government aid. That would also push China toward increasing its domestic consumption and growth, rather than enabling Beijing to base its development on a beggar-my-neighbor strategy of chronic trade surpluses.

Japan and Korea rank somewhere in the middle of the list. Both countries industrialized by showing government

Why would the U.S. government—not shy about defending its military security—be such a pushover when it comes to trade? industrial supply chain. It will not do to have made-in-America mean only the final assembly of rail cars or wind turbines while the engineering and advanced manufacturing reposes abroad. We need a comprehensive industrial strategy to reclaim manufacturing, and a companion trade policy to make sure that foreign producers do not capture advantage by placing thumbs on the scale.

China is surely at one end of the mercantilist spectrum, with its direct government subsidies of local industry and its strategic government carrots and sticks for Western multinationals. Its entire industrial system is a violation of the premise and spirit of open trade. If the Western democracies had a realistic conception of their long-term interest, they would add high tariffs to Chinese goods until China began behaving like a normal commercial nation. The proceeds

favoritism to domestic industrial groups that were almost impossible for foreign companies to break into. Both showered favored industries with artificially cheap bank and public capital. Both used a thicket of subtle barriers that made it hard for exporters to crash their markets, and Korea maintains selectively high tariffs. Taiwan, generally considered a more market-oriented country, launched its information-technology industry with a state-led program, in which the Taiwanese government acquired the necessary technology through the creation of two government-funded research institutions and presided over a planning process of nominally private firms. Today, this small nation is the world’s dominant manufacturer of laptops, motherboards, computer monitors, and a great deal more. According to Dan Breznitz, author of the definitive English-language

book on the Taiwan miracle, Innova­ tion and the State, “The decision of the state to focus its attention on building a local supplier network for [multinational corporations], coupled with the way it constructed its capital markets, paved a development path for an IT industry.”

A good example of soft economic nationalism is the research and development, industry, and labor subsidies of the European Union and member nations such as Germany and Denmark. Remarkably enough, Germany has the world’s highest labor costs in manufacturing and the world’s largest manufacturing export surplus relative to gross domestic product.

Germany doesn’t have a planning czar, but it has a tacit understanding among government, industry, and labor that the whole system works to keep high-end manufacturing in Germany. An elaborate apprenticeship system and a program of wage subsidies helps assure the high productivity of German workers in return for their high wages. The German federal government and state governments also have subsidized the creation of new, green industries and used regulatory policy to create domestic demand for their products. Some free-trade purists would argue that subsidizing workers is a covert form of subsidizing industry, and they would be right. The policy is sensible nonetheless.

I conclude from all of this that trade policy and industrial policy are inextricably linked; that we need a radically different approach to trade, so that the global trading system has a single set of rules rather than a maze of double standards; and that we need standards to differentiate legitimate development policy from predation, as well as buffers to protect our legitimate interests when other nations pursue predatory policies.

And just as we need to drop the fantasy that other nations admire our fantasy of laissez-faire, we need to jettison the delusion that industrial policy doesn’t work.

Judging by the success of Japan, Korea, China, Brazil, Taiwan, and the U.S. at an earlier stage of our history, it works just fine. All that remains to accomplish this is to wrest control of policy-making from Wall Street, so that Main Street can have healthy industries once more. tap the american prospect

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Industrial Policy: The Road Not Taken In the 1970s, Wall Street and its economists defeated manufacturing.

By Jeff Faux

B

y the mid-1970s, cracks in the American industrial base were already visible. For the first time in the 20th century, the United States began running trade deficits. Factory closings that had earlier been limited to apparel, shoes, and plastic toys spread to steel, small appliances, and auto parts.

And the decision by the Arab states to control oil prices signaled that the era of cheap energy that had fueled American manufacturing was coming to an end.

These early signs of trouble set off this country’s last serious debate over the question of whether the government should have a policy for supporting a healthy manufacturing industry—that is, an “industrial policy.”

For its advocates, industrial policy seemed a no-brainer. The manufacturing sector was the generator of productivity and innovation. It had been the engine of America’s rising prosperity and the bedrock of its political as well as economic power. Without America’s capacity to become the “arsenal of democracy”— churning out the tanks, ships, planes, and ordnance that overwhelmed its enemies across two oceans—World War II might well have ended differently.

The war’s end left the U.S. as the dominant manufacturing power in the world for some three decades. But with largescale U.S. government help, Europe and Japan reindustrialized and quite naturally began to regain their old markets and compete with U.S. companies at home.

So if our government could help rebuild the manufacturing capacity of Germany and Japan, why would helping U.S. manufacturing stay competitive be beyond the pale? Moreover, aid to economic sectors deemed critical for our future was an American tradition. The early debates between Hamilton and Jefferson were over which a 10 j a n u a r y / f e b r u a r y 2 0 1 0

sector—manufacturing or agriculture— should have priority. In the 19th and 20th centuries, tariffs, taxes, procurement, and even public ownership had been employed to pick such industrial winners as clipper ships, railroads, airplanes, telephones, long-distance radio, and television.

In fact, went the argument, government policies were constantly affecting the allocation of investment to private enterprise, but with little regard to the longer-run development needs of the country. Much of it came as a by-product of military spending. Conscious, direct aid—such as the 1970s bailouts of the Penn Central Railroad, Lockheed, the Franklin National Bank, and the Chrysler Corporation—was ad hoc, panic-driven, and crudely political. While this might not have mattered when the U.S. was the industrial king of the global mountain, it was now time to get our act together.

Specific proposals for carrying out an American version of industrial policy included: ■ a national development bank, inspired by the Depression-era Reconstruction Finance Corporation, which had provided investment funds to manufacturers when private banks were not lending; ■ tax-code revisions, such as ending the favorable treatment of foreign over domestic investment, and the introduction of a “border adjustable” value-added tax that other countries used to give an advantage to domestic production; ■ civilian adaptations of the Department of Defense’s use of procurement contracts to spur technological innovation; ■ generous government financing of technical education and training and lifetime learning to upgrade skills.

The idea of a purposeful industrial policy was also connected to a growing

interest in how the nation should think about its long-term future. Toward the end of his presidency, Dwight Eisenhower had established a Commission on National Goals. John Kennedy had given the country an example of how modern goal-setting could work in his pledge to go to the moon. Richard Nixon in 1970 had proposed a national growth policy that would guide public and private investments. Later that decade, Sens.

Hubert Humphrey (Democrat) and Jacob Javits (Republican) introduced legislation for a national economic policy commission to counterbalance Washington’s penchant for short-term economic fixes with a longer-term perspective. Similar bills started to make their way through the House, and the Joint Economic Committee held extensive hearings.

Concern about the future was not limited to the Washington elite. Organized around the celebration of the nation’s bicentennial in 1976, state and local governments around the country sponsored citizen forums to develop plans for what their community might look like by the year 2000. Issues included energy conservation, land-use and transportation planning, poverty and equal opportunity and—especially in declining industrial areas—the future of manufacturing.

Around the same time, local grass-roots movements for industrial revitalization formed, generating a mix of ideas about community development, employee ownership, and the mutual responsibilities of citizens, business, and local government.

But the democratic discussion of the future of the nation in general, and its industrial base in particular, had powerful enemies. Opposition from conservative Republicans was to be expected, especially given the Reaganite takeover of the GOP after the party’s defeat in the 1976 election. But with Jimmy Carter in w w w. p ro s p ect. o rg

made in the usa the White House and his party in control of Congress, the critical debate was among Democrats. Its outcome has had a profound impact on the course of the U.S. economy over the last three decades.

Within the administration, opposition was led by the chair of the Council of Economic Advisers—Charles Schultze from the Brookings Institution. His argument was basically ideological: Government could not make better decisions than the market. And even if it could, what the private economy produced—whether it should have a manufacturing sector at all—was none of the public’s business.

Schultze’s view ref lected the postwar “neoclassical synthesis” of two strains of capitalist economic thought.

One was the post-Depression macro­ economic focus on economy-wide aggregate numbers, symbolized by the gross domestic product—the dollar value of everything the economy produces. The other strain came from 19th-century microeconomics—the modeling of how perfectly informed rational autonomous individuals maximizing short-term profits respond to price changes. The synthesis conceded to the liberals that government had a responsibility for fiscal and monetary policies to stabilize the overall economy. It conceded to the conservatives that all other decisions should be made by the unfettered market.

About the vast, messy meta-economy in between, where most corporate managers, workers, investors, speculators, inventors, schemers, and rent-seekers actually lived and worked, synthesis economists had nothing to say. This world could not easily be fit into the mathematical modeling that economists felt was necessary to assert their discipline’s claim to being a science. Moreover, understanding it required tools beyond the economists’ training— engineering, psychology, politics, management, marketing, labor relations, law, and most of all, the study of how complex institutions behave and change over time.

Such an approach to economics has a distinguished American intellectual tradition reaching back to figures such as Thorstein Veblen, John R. Commons, and Adolph Berle. But by the late 1970s their work was largely swept outside the eco-

nomic policy mainstream—as were even prominent economists whose support for industrial policy came from their study of business institutions. These included John Kenneth Galbraith, whose widely read books dissecting the behavior of the modern corporation were deemed by the synthesis majority as insufficiently mathematical; Nobel Prize winner Wassily Leontief, whose pioneering “input output” methodology analyzing the flow of resources to and from economic sectors made him seem too friendly toward planning; and Lester Thurow of the Massachusetts Institute of Technology, who seemed too interested in studying the way businessmen actually behaved and the effect of their behavior on the distribution of income and wealth.

Over the next decade, a widening circle elaborated the case for a conscious nurturing of a high-wage road to future prosperity as an alternative to the low-wage road on which the country was traveling. Analysts at the Business Roundtable on the International Economy at the University of California, Berkeley, insisted that we had something to learn from the Japanese. Robert Reich, a lawyer, and Ira Magaziner, a business consultant, argued that sectoral policies

tries to capture U.S. markets as a way to gain Cold War allies, was opposed.

More important was the hostility of the Treasury Department, which represented the interests of financiers who were against giving the government power to guide private investment in ways that would serve the interests of American producers, rather than American global investors. It was one thing for the government to subsidize capital with tax breaks, loan guarantees, and bondholder bailouts.

But for the government to do it on some systematic and thought-out basis—that was the road to socialism, if not worse.

America’s financial elite was also aware that if manufacturing industries were to shrink, so would the political power of the strongest American unions.

The industrial-policy debate consummated the marriage of Wall Street and the mainstream economics profession that continues today. For believers in the neoclassical synthesis, financial markets are easy to romanticize; buyers and sellers reacting almost instantaneously to minute price changes that are supposed to reflect all of the available information on businesses, about which neither buyer nor seller has to know anything at all. This simulated perfect market lent itself to

Our government helped rebuild the manufacturing capacity of Germany and Japan.

Why not help rebuild U.S. manufacturing now? were essential for growth. Labor economists at the Economic Policy Institute showed how the erosion of wages from the manufacturing sector was spreading throughout the labor force. Economists Barry Bluestone and Bennett Harrison wrote a book whose title, The Deindustrialization of America, became the iconic phrase in the policy debate.

But policy debates are rarely settled on their philosophical merits alone. To a large degree, the conflict within the policy class was a proxy for the conflict of interests among those with power and money at stake. For example, the State Department, representing the foreign-policy establishment, which favored helping foreign indus-

the mathematical models needed to gain tenure and win Nobel Prizes in economics. And global investors, like neoclassical economists, are free-traders, indifferent to where exactly investment goes, so long as it maximizes what economists call efficiency—and financiers call profit.

A dowry helped. Wall Street firms contributed funding to friendly economics departments and think tanks and gave consultant contracts to economists to build models showing that their exotic derivatives were low-risk bargains.

On the other side of the debate, support for industrial policy within the Carter administration came from the departments of Commerce and Transthe american prospect

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portation, and the Labor Department where economist Ray Marshall, an institutionalist from the University of Texas, was secretary. Their allies outside the government included the AFL-CIO and CEOs of several industrial corporations, such as Ford, Cummins Engine, RCA , and Bendix. Though most of the business press was skeptical, the editors of Business Week were friendly. Even a few Wall Street mavericks joined up. Felix Rohatyn, of Lazard Freres, commented that “the thought that this nation can function while writing off its basic

long-term health of the U.S. economy— the deregulation of finance, which shifted growth from production to overleveraged consumer debt, and the abandonment of U.S. industry to unwinnable competition with low-wage Chinese mercantilism.

But it was not to be. Following the advice of his Brookings economists, Carter went into his re-election year with back-toback recessions and double-digit inflation.

Upon becoming president, Ronald Reagan immediately ripped out the solar panels that Carter had installed in the White House. Industrial policy was dead.

The revitalization of American manufacturing must be linked to national goals so that people can understand the stakes involved. industries … is nonsense.” Vice President Walter Mondale was very sympathetic.

Carter himself seemed conf licted.

Ideologically, he was a free-marketer, a sentiment that the aggressive Schultze skillfully exploited. On the other hand, as an officer in the Navy’s nuclear program to power submarines, he had been involved with long-term strategic planning, and he certainly understood the role of government in maintaining his family’s peanut business.

But Carter never quite grasped that the great and tragically aborted cause of his administration—a long-term alternative-energy policy financed and nurtured by government—was, in fact, industrial policy.

Still, had Carter won a second term, manufacturing and energy policy might have been integrated, which could have significantly changed the direction of the U.S. economy over the last 35 years. At the very least, the country would be way ahead of where it is now in the development of green industries, energy-efficient transportation, and a 21st-century work force. It would likely have a much smaller trade deficit and foreign-debt burden.

And having a Democratic Party conscious of the importance of a healthy domestic industrial base could have prevented the Clinton administration from later making two decisions that undermined the a 12 j a n u a r y / f e b r u a r y 2 0 1 0

A brief hope for its revival flickered when Mondale announced his bid for the 1984 presidential election. But surrounded by the Wall Street/Brookings crowd, Mondale abandoned industrial policy in favor of a macroeconomic attack on Reagan’s deficit spending. He proposed a tax increase to balance the budget—and was obliterated at the polls.

By the next presidential election, industrial policy among Democrats had shrunk to Michael Dukakis’ proposals to subsidize high-tech research and development. This was ideologically more acceptable. But without a manufacturing policy, it was perverse. Subsidizing new ideas that are then outsourced for production only further undercut U.S. manufacturing competitiveness.

The end of the Cold War seemed to provide another opportunity to shape the country’s industrial future. In the campaign of 1992, Bill Clinton promised government help to redirect the technological resources and talents of the military-industrial complex to work on such civilian projects as medical technology and high-speed public transportation. When he selected Laura Tyson, who had studied under Thurow and been an industrial-policy advocate at the University of California, Berkeley, to chair his Council of Economic Advisers, mainstream economists went apoplectic.

But they had little to worry about.

Clinton quickly abandoned his promised conversion policy. Tyson just as quickly accommodated herself to the center of economic-policy gravity in the new administration—the partnership of Goldman Sachs’ Robert Rubin and Harvard’s Larry Summers. Under Clinton, economic policy was reduced to cheap money, tight budgets, and free trade. Seeing the writing on the wall, U.S. manufacturers accelerated their flight to factories overseas.

Today, despite the catastrophes they have engendered, the Wall Street– ­Economics Department bond remains tight. Summers is back as Barack Obama’s chief economic adviser, and his indifference to manufacturing’s fate is more than matched by his enthusiasm for bailing out bankers and brokers.

So, what lessons from this history might we draw today, for what may be our last chance to escape a future in which we can only compete globally by lowering our wages?

First, the revitalization of U.S. manufacturing must be linked to the pursuit of national goals so that people can understand the stakes involved. Two in particular are especially resonant: the transformation to an energy-efficient future and the reduction of our trade deficits and our massive and relentlessly growing foreign debt. Neither of those widely understood objectives can be achieved without a robust and competitive manufacturing sector.

Second, the goal of industrial policy cannot be bigger profits for hollowed-out companies with American names but the enhancement of U.S.–based production.

Third, economic policy-making must be open to skills other than macroeconomics and hedge-fund trading. The history of industrial policy reminds us that the future of the American economy is much too important to be left to financial speculators and the economists who give them cover. tap Jeff Faux is the founder and now dis­ tinguished fellow at the Economic Pol­ icy Institute. He is currently writing a book on America’s future. w w w. p ro s p ect. o rg

made in the usa

An aircraft manufacturing factory in Shanghai, China

The Great Industrial Wall of China Beijing’s mercantilism challenges America’s market ideology and industrial future.

By Carolyn Bartholomew

a ly s o n g / r e u t e r s / l a n d o v

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n a flight to Beijing, my seatmate turned out to be a corporate counsel for a major U.S. manufacturer. He was leading the negotiations for the company’s entrance into a significant sector of the Chinese economy.

Surprisingly, he acknowledged that his company’s intellectual property would eventually be lost as a result of the deal, through technology transfer, reverse engineering, or flat-out theft. He knew that the company’s crown jewels were going to be taken no matter what protections he negotiated. Still, he worked diligently to close the deal. He had the assistance of the U.S. government in pushing the transaction and the support of the Chinese government in backing it. The deal would be a short-term gain but a long-term risk to his company and

the U.S. economy, and it would utterly exclude the people not at the bargaining table: the American workers whose jobs would be lost to China.

A wide variety of financial incentives offered by Chinese government authorities to U.S. companies prove irresistible to business people like my seatmate, despite the many dangers of investing in China. No wonder my seatmate admitted that he lies awake at night thinking about his children’s economic future.

China is not a free-market economy, but it is a very effective one. Despite the economic orthodoxy that subsidies, protectionism, and central government economic planning create inefficiencies and hobble growth, it is hard to argue with 30 years of success by Beijing’s economic technocrats and their authoritarian masters.

Much of China’s success is due to its willingness to cheat while most other nations, including the United States, faithfully adhere to most of the rules established by international organizations such as the World Trade Organization and the International Monetary Fund. China is blatantly protectionist. In order to provide an advantage for Chinese industries and companies, and to attract U.S. companies to locate in its country, the Beijing government manipulates its currency, showers subsidies on favored industries, provides low-interest loans from a state-owned banking system, tolerates and even encourages the theft of intellectual property, and ignores WTO rules.

The Chinese government has a centralized planning process, through which it identifies a strategy for supporting pilthe american prospect

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lar industries within China while creating so-called national champions to compete abroad. Many of the industries are in basic manufacturing sectors where neglected U.S. industries, such as textiles and apparel, furniture, and machine tools, have been allowed to wither away.

Much of the Chinese economy, including the aviation, shipping, oil, electricity, and telecommunications sectors, is still owned or controlled by the Chinese government. And the government maintains strict control over other key industries, including automotive, information technology, construction, and steel.

The Chinese government wields all the tools at its disposal to support and protect its national champions. For example, the Chinese government controls the price of gasoline and diesel fuel and provides special discounts to favored industries, such as transportation and fishing. It seizes farm land and turns it over to favored industries without adequate compensation to the farmers. It allows companies to underpay workers and refuses to allow them to

hard drives, magnets, and other consumer products. They are also critical to some defense technologies. If China cuts exports of rare earth minerals, it will be protecting and promoting its own related industries, including green technologies, at the expense of foreign companies.

The Obama administration has identified green technology as a sector critical to our future economic growth. But the Chinese have turned the full force of their economic planning on this same sector, so we have been falling behind before we even get started. China has already built the world’s largest solar-panel manufacturing industry, exporting over 95 percent of its output to the United States and Europe. While the Chinese government was criticizing the modest “buy American” provisions in the U.S. stimulus package, it required that at least 80 percent of the equipment for its first solar plant be made in China. The Chinese government ensured that Chinese domestic companies won the bids this spring for 25 large contracts to supply wind turbines. The

Our government exists to serve the people and not just the corporations that are so anxious to outsource the economy to China. organize independent labor unions. When under international pressure, China may remove one trade barrier, only to replace it with another. So, when the WTO ruled against the Chinese on regulations relating to local content of car parts, the Chinese sought to use environmental regulations to achieve the same ends. China rebates the value-added tax on some exports, which is allowed by WTO rules, but it selects which taxes to rebate, which is not.

China controls or threatens to control access to raw materials at the source. Rare earth minerals are a recent and telling example. China controls the production of over 90 percent of these minerals, much of it in China. Over the past 15 years, China has also acquired or tried to acquire the few sources of these critical materials outside China. Rare earth minerals are necessary components in electrical engines for hybrid cars, plasma screens, a 14 j a n u a r y / f e b r u a r y 2 0 1 0

bids of all six multinational companies for those contracts were disqualified on various technical grounds.

Despite repeated promises, the Chinese government has refused to sign on to the government procurement agreement, which would prohibit favoritism to domestic companies. Since 2001, the Chinese government has committed annually to join the GPA as soon as possible. At the Joint Commission on Commerce and Trade meeting in October, the annual trade-focused gathering between high-level U.S. and Chinese trade and commerce officials, the Chinese promised yet again that they would do something on this front in 2010. in july 2009, the U.S.–China Economic and Security Review Commission, an organization created in 2000 by Congress and assigned to study the national-security

implications of the U.S.–China economic relationship, held a hearing in upstate New York. As chair of the commission, I endorsed Rochester for the venue because its existing manufacturing, research and development, and skilled-worker base positions the city as a U.S. center for green innovation. But the hour is very late.

We found that, on green technologies, the Chinese government has already adopted the predatory practices it has honed to a fine art in other industries.

Much of the research and development as well as engineering on green technology—the engine for innovation— are moving to China to co-locate with the green-technology manufacturing that is already there. The technology now being developed in China includes solar panels, advanced batteries, LEDs, lasers, wind turbines, infrared, and sensors.

The Chinese government is offering extensive subsidies to the world’s greentechnology manufacturers to encourage them to move production to China. And when the manufacturing leaves America, the research-and-development operations are sure to follow. After all, the manufacturers want their researchers and engineers on-site to work out problems and suggest work-arounds. This one-two punch has been a successful strategy for China in the automotive sector where battery and fuel-cell research formerly conducted in America is being conducted alongside auto assembly lines in China.

The Chinese government has been applying the same strategy to the aerospace sector. For example, on Nov. 14, General Electric announced a new technology joint venture with AVIC, the Chinese state-owned aviation company, to develop and market integrated avionics systems for commercial aircraft customers. The press release noted that “the new avionics company, to be headquartered in China … will build on [GE’s] extensive avionics capabilities and its China Technology Center in Shanghai to create a technology center of excellence to serve the commercial aviation market.” AVIC’s vice president, Zhang Xinguo, said in the same release, “The joint venture is based in China but will target the U.S. and the global market.”

The Chinese government is a master w w w. p ro s p ect. o rg

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knowing what we know of the Chinese economic plan, why haven’t we acted to counter it?

The simple answer: U.S.–China policy has, over the past two decades, been driven by the interests of the multinational corporations, and those global firms have benefited from many of China’s policies.

Starting several decades ago, it was a handful of the exporting elite—Boeing, Motorola, and GE among them—who argued persuasively to the Bush, Clinton, and Bush administrations that U.S. economic interests would be served if only these companies had access to the Chinese consumer. The implication was that the American worker would benefit because production here in the United States would increase as the Chinese consumer bought American products. Then, as more and more companies signed on, and the investment banks got involved, production shifted to China. Our trade deficit with China soared from over $2 billion at the time of Tiananmen Square in June 1989 to $268 billion in 2008. The cumulative trade deficit with China over the past 20 years? Two trillion dollars.

Instead of adjusting our trade and economic policy, U.S. policy-makers adjusted the rationale for the continuation of a status quo that was failing the American worker. Of the estimated 1.94 million U.S. jobs lost to China since China’s economic reforms started 30 years ago, 1.05 million of them—over half—were lost since China acceded to the WTO in 2001. Yet in 2004, Greg Mankiw, then chair of President George W. Bush’s Council of Economic Advisers, said that outsourcing American jobs was good for the economy. Perhaps he believed that those

people who lost their jobs could make up it is a combination of all of these factors. the difference in income by day trading Government officials and the private their severance payments and unemploy- sector working together on issues connectment benefits on the stock market. Today, ed with China have come up with “innovaof course, we see the result of that sort tive” ideas that benefit corporate America of thinking. With the global economic but perplex working Americans and their crisis, American workers have ended up champions. One of those recent ideas was without jobs and without pension funds. a proposal to use stimulus funds to develop The Chinese government has been a joint U.S.–China venture wind-power masterful in playing companies off each farm in West Texas. These taxpayer-proother. Beijing threatened to buy Airbus vided funds would have created more than planes instead of Boeing aircraft every 2,000 manufacturing jobs in China and, time Congress was about to vote on what according to The New York Times, slightly was then called “most over 300 in Texas. To add favored nation” trade insult to injury, the stimThe U.S.–China status, giving China ulus program is funded Trade Relationship the same rights as other with borrowed money, U.S.–China trade in goods trading nations even much of which has been (in billions), 2000–2008 though China’s behavprovided by the Chiior remains predatory. nese government. So, we $350 325 would be increasing the China has been master300 debt load on the Ameriful in coercing technol275 u.s. imports can worker while ensurogy transfer from U.S. 250 225 companies as it built ing that Chinese workers 200 its targeted industrial got jobs in industries in 175 sectors. And it continwhich we are vying to be 150 125 leaders. ues to employ a broad 100 array of levers to build It is clear that action 75 its economy—incentives must be taken to address 50 u.s. exports 25 such as a choice spot in the hazards of global cli0 one of the many vast, mate change. It is also subsidized researchclear that the United and-development indusStates and China must source: u.s. department of commerce, bureau of economic analysis trial parks. cooperate on the effort.

U.S. policy-makers What is less clear is why have never adjusted, perhaps because it U.S. workers should be expected to foot the is so difficult to admit that the founda- bill, particularly when China has foreign tions on which decades of policy have been currency reserves of $2.3 trillion.

The danger is that U.S. business interbuilt—free trade, financial-services deregulation, and repeated tax cuts in the face ests in China may be manipulating the of rising deficits—are flawed. Perhaps they cooperation process to support the transcannot grasp that the advantages of free- fer of more jobs from the U.S. to China. market capitalism are being trounced by For example, a new Energy Cooperation a centrally controlled Leninist capitalism Program (ECP), “a public-private partthat flouts the international trade rules nership focused on commercialization of with abandon. Perhaps they cannot accept clean energy solutions” according to the that English economist David Ricardo’s office of the U.S. trade representative, was early 19th-century theory of compara- launched in October as part of “an ongotive advantage might no longer hold true. ing partnership among the Departments Perhaps many in government now serve of Commerce and Energy, [the Trade and with one eye on their post-service employ- Development Agency], and U.S. industry ment in the private sector. Or perhaps with respective Chinese counterparts.”

According to the American Chamber campaign-finance laws give the leverage to American corporations rather of Commerce–China, the ECP is based than to American workers. Most likely, on AmCham China’s Aviation Coop2000

of opacity in many facets of its work. We have little insight into Chinese military spending, for example, or into the internal workings of the Chinese Communist Party. In economic planning, however, there is no big secret. The Chinese government is open about its economic plans and has been for decades. The 11th Five Year Plan, under which it is now working, is a detailed blueprint for economic growth. Despite the global economic crisis, the blueprint is being followed.

the american prospect

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eration Program and “will draw upon the expertise of AmCham–China members and U.S. companies in partnership with Chinese entities to help develop clean energy solutions in China.” Similarly, the Aviation Cooperation Program “provides a platform for U.S. aviation companies and the government to work closer together to support the fast growing China market.” Take away the selfcongratulation, and you are left with the simple fact that the U.S. government, at the behest of China-based multinationals, is spending tax dollars to move production and jobs to China.

Cooperation has a nice ring to it. But we need a new partnership among American corporations, workers, and officials— a partnership that puts the interests of the American economy and American workers first. At home, we need a national economic, innovation, and industrial strategy. The Chinese government has one and it works. If we continue to resist developing a national plan, we are practicing unilateral disarmament to the detriment of our economic future.

And internationally, we need to strengthen the trade mechanisms that already exist. Then we need to bring new cases challenging Chinese subsidies and mercantilist practices. Unfortunately, some of the existing WTO mechanisms can now be characterized as too little, too late. Cases taken to the WTO are narrowly decided, in secret, without the benefit of precedent. The cases are allowed to drag on for years. By the time action has been taken, the damage is often already done.

Further, we need to stop dancing around the Chinese government’s unfair monetary and foreign-exchange practices. The Obama administration could begin by making an honest statement noting that China has gained an enormous trade advantage by manipulating its currency, in contravention to the rules of the WTO and the International Monetary Fund. The next step would be to bring a formal complaint to both bodies to remove this long-standing violation.

Today, the rationale for not disturbing Chinese leaders is that we must sell them ever more Treasury bonds in order a 16 j a n u a r y / f e b r u a r y 2 0 1 0

to finance our growing debt. But this argument is specious. The Chinese cannot start dumping their dollar holdings without jeopardizing the value of their vast hoard, estimated to be between $800 billion and $1.7 trillion. And, as long as they continue to depend on an export-driven economic growth model based on an artificially low-value currency, they must continue to acquire and hold dollars to maintain the peg.

So, we do have a position of strength from which we can bargain. Unfortunately, President Obama’s weak performance on his trip to China apparently didn’t impart that message. Nor do the fearful murmurings of his economic advisers.

The Chinese government has successfully buffaloed them all with the implied threat that China will sit out the next Treasury auction.

Government exists to serve the people and not just the corporations that appear so anxious to outsource the economy to China. We have a 17.5 percent real unemployment rate, a trade deficit with China

of $268 billion in 2008, and a gross domestic product expected to decline by 2.7 percent in 2009. China’s official unemployment rate is only around 5 percent, it had a global trade surplus of $290 billion in 2008, and its accumulated foreign-currency reserves now total $2.3 trillion. Its GDP is expected to grow by 8.5 percent for the year.

At the behest of U.S.–based multinationals, Washington has championed the causes of corporate interests masquerading as free trade. But, free markets and free trade work only when everyone follows the rules. China doesn’t, and as the third largest economy in the world, its rule-breaking is capturing market-share and industrial leadership from everyone else. For the sake of American workers, and the economic future of my seatmate’s children, this must change. tap Carolyn Bartholomew chairs the U.S.– China Economic and Security Review Commission, but the views expressed in this article are her own.

The Politics of Industrial Renaissance Business and government may waver, but the American people want more manufacturing.

By Harold Meyerson

S

o who’s for reviving American manufacturing? American manufacturers? Well, some of them, under certain conditions. The American people? Most of them, under most conditions. The American government? Well, parts of it. Sometimes.

Reviving American manufacturing may be an economic and strategic necessity, without which our trade deficit will continue to climb, our credit-based economy will produce and consume even more debt, and our already-rickety ladders of economic mobility, up which generations of immigrants have climbed, may

splinter altogether. That’s no guarantee, however, that American manufacturing will actually be revived. The forces arrayed against it—chiefly, finance and big retailers, Wall Street and Wal-Mart— have tremendous political clout.

The epochal shift that’s overtaken the American economy over the past 30 years—from making things to making debt—is not easily reversed. The two main economic sectors to have profited by that shift—finance, which has compelled manufacturers to move offshore in search of higher profit margins, lower wages, and fewer regulations; and retailw w w. p ro s p ect. o rg

made in the usa ers, who have compelled manufacturers to move offshore in search of lower prices for consumers and higher profits for themselves—have a clear interest in perpetuating the current economic order. Time was when the largest American private-sector employer was General Motors, which paid its workers enough for them to buy its product. Today, the largest American private-sector employer is Wal-Mart, which pays its workers so little that they are compelled to shop at Wal-Mart and take on levels of debt that have swelled the big banks’ coffers.

Creating the better paid, less debtridden work force that would emerge from a shift to an economy with more manufacturing and a higher rate of unionization would reduce the huge revenue streams flowing to the Bentonvilles (Wal-Mart’s home town) and the banks.

And as retail and finance have grown, so has their political power. The campaign contributions from the financial sector to Democrats and Republicans alike now dwarf those from manufacturing— a major reason why our government’s adherence to free-trade orthodoxy in what is otherwise a mercantilist world is likely to persist.

You might think that American manufacturers, at least, would seek to defend domestic manufacturing. But the majority of major manufacturers have already offshored much of their production. Earlier this year, President Barack Obama sided with a complaint brought by the

Will He Deliver? Candidate Obama courted autoworkers with a pro-manufacturing message.

was that almost all the tire makers with plants in the United States—Bridgestone, Cooper, Goodyear, Michelin, and Pirelli— also have factories in China. Worse, the Chinese government often requires them to export all the tires they make in China (Cooper recently opened a factory under just such a mandate), essentially compelling them to defend their Chinese factories over their American ones.

So if finance, retail, and much of American manufacturing won’t stand up for American manufacturing, that leaves only the American people among those willing to take that stand. In 2006, Frank Luntz, the Republican pollster, conducted a survey for the Public Policy Fund that

rick bowmer / ap images

The forces arrayed against American manufacturing—chiefly Wall Street and Wal-Mart—have tremendous political clout.

United Steelworkers against China, which by flooding America’s low-end tire market with its exports was costing American jobs. By the terms of the trade agreement we reached with China in 2000, the president is allowed to mitigate the effect of this kind of import surge by imposing a temporary tariff, which is just what Obama did. What was striking in the Steelworkers’ complaint, however, is that no U.S. tire manufacturers joined it. The problem

showed support for manufacturing was broad and, among some groups of Americans, deep. More Americans (88 percent) called manufacturing extremely or very important to the American economy than those who assessed services (70 percent), finance (69 percent), or information (69 percent) the same way. But while Americans believed we led the world in services, finance, and information, they believed by an overwhelming margin (72 percent

to 23 percent) that we no longer led the world in manufacturing. Luntz’s respondents were plainly unhappy that America had lost its lead: Asked to choose between leaving manufacturing to other nations while we focus on cultivating our service and professional sectors, and fostering domestic manufacturing because it spurs economic growth, 81 percent chose the latter.

That’s not to say that the public’s backing of governmental support for manufacturing is a slam dunk, as the opposition to the General Motors and Chrysler bailouts made clear. Luntz’s survey, unsurprisingly, showed that public support rises when the manufacturing in question is high-tech and futuristic (never mind that many GM and Chrysler factories, if not the cars themselves, are precisely that). But at a time when the finance-led economy of the past quarter-century is in a shambles, the opportunity to promote more investment and manufacturing in America has clearly emerged.

At one level—certainly, the level of rhetoric—President Obama knows this.

“We cannot rebuild this economy on the same pile of sand,” he said in a speech this April. “We must build our house upon a rock. We must lay a new foundation for growth and prosperity—a foundation that will move us from an era of borrow and spend to one where we save and invest; where we consume less at the american prospect

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home and send more exports abroad.”

To its credit, the Obama administration has directed billions of dollars in its stimulus package to such clean-energy industries as electric-car battery factories. It has appointed Ron Bloom, who represented the Steelworkers throughout the restructuring of the steel industry and then served on the administration’s auto task force, to coordinate its efforts to jump-start manufacturing. It has levied the tariff on Chinese tires. But it still shuns the words “industrial policy,” and, more important, it largely shuns the substance of industrial policy as well. It opposed domestic content requirements in its stimulus legislation and has offered scant opposition to China’s ongoing manipulation of its currency, which boosts Chinese manufacturing and decimates ours and much of the rest of the world’s.

Other Democratic leaders have gone well beyond the president in their support for efforts to bolster manufacturing, none more than Sen. Sherrod Brown of Ohio. A rising star in the liberal firmament, Brown was elected to the Senate in 2006 after a campaign in which he stressed the need for a trade policy that benefited Ohio workers rather than Chinese industrialists and American financiers. Today, he is beating not only that drum but the industrial policy one as well. The case for manufacturing, he says, “appeals to a broader section of the public than trade does. When I say we should do more training for manufacturing workers, help the alternative-energy industry, file more 301 cases [which prohibit foreign companies from dumping subsidized products on American markets], I only get push-back from the antibig-government guys.”

“It’s made new friends for me,” Brown continues. “Not Democrats, necessarily, but people who understand that this guy is fighting for manufacturing.

That’s a plus, especially when it’s manufacturing related to national security.”

(Luntz’s 2006 survey showed, in fact, that respondents who voted for George W. Bush in 2004 were more concerned than those who backed John Kerry about the offshoring of military-related manufacturing, though heavy majorities in a 18 j a n u a r y / f e b r u a r y 2 0 1 0

both categories opposed the practice.)

Brown says he’s “working with the White House” on a program to help domestic manufacturing, which would make permanent the tax business credit for research and development and help auto-parts plants convert into alternative-energy technology factories.

(The Waxman-Markey climate-change bill, which has passed the House, authorizes $30 billion in loans over two years for that purpose.) He’s authored a bill to alter worker-training programs so that local boards can match the curricula to the local economy. And he continues to promote a trade policy that helps rather than hinders domestic production.

While Brown believes that promoting

manufacturing presents a clear political opportunity for Democrats, he acknowledges that as manufacturing employs a steadily smaller share of the American work force, “younger people probably don’t think about it as much” as their elders—an impression that Luntz’s survey confirms. Politically, American manufacturing is in a race against time: As manufacturing becomes more alien to a growing number of Americans, its support may dwindle, even as the social, economic, and strategic need to bolster it becomes more acute. That makes push for a national industrial policy—to become again a nation that makes things instead of debt, to build again our house upon a rock—even more urgent. tap

Losing Our Future If we don’t develop a national industrial policy for clean-energy production, the strategies of other nations will displace American companies and jobs.

By Joan Fitzgerald

I

f you want to understand the consequences of America’s failure to have a coherent, national industrial policy, look at one signature industry of the future—renewable energy. The U.S. Energy Information Administration estimates that by 2030, total global investment in wind and solar technologies could be worth as much as $3.6 trillion. Unfortunately, the U.S. is headed down a path that will render us consumers of renewable energy—but not leading innovators or manufacturers. Though the U.S. pioneered these technologies, we already have an annual trade deficit of over $6 billion in renewable energy, while nations like China, Germany, and Japan are widening their lead. And India is about to enter the competition with massive investment.

Other countries have deliberate policies to link innovation in renewable energy to manufacturing advantage— ­commercializing the products resulting

from subsidized research and development, subsidizing education of skilled workers, and using domestic green-energy requirements to help launch export champions and thereby create domestic jobs.

China has more predatory policies that include massive subsidies, pricing below cost to capture market share, closed supply chains, requirements that foreign companies produce for export but not for China, and coercive technology transfer. Japan is somewhere in between, with relatively closed supply chains and direct government help for industry. The U.S., by comparison, does nothing at the national level to link clean-energy goals to industrial ones, much less pay attention to supply chains—leaving our states and cities to play this game as best they can—competing against entire countries and against each other.

Consider Germany. During the 1980s, while the U.S. dramatically reduced investment in research and technolw w w. p ro s p ect. o rg

made in the usa ogy development in renewable energy, Germany was forging ahead. In 1991, Germany began implementing a regulatory mechanism called a feed-in tariff, which requires utilities to purchase all the renewable power that is produced, at prices set by the government. Purchases are subsidized, but the subsidy declines over time as technology becomes more efficient. Green-energy producers thus enjoy a reliable domestic market that encourages investment in technologies and reduces the unit cost of production.

German federal research and development funding, direct subsidies, tax allowances, and loans for renewable energy have been in place since the 1970s, and Germany’s increasing production capacity is directly linked to industrial goals.

Germany’s soft mercantilist approach favors German firms. Both national policy and the preferences of German companies to use domestic suppliers have led to the development of strong supply chains. While Germany has turned to Chinese and other foreign suppliers of some components, both the government and the industry seek to keep high-end manufacturing in Germany.

Though Germany is not notably windy or sunny, these policies have put Germany among the world’s leading exporters of wind and solar technology. Comparative advantage was created by public policy. German employment in renewable energy is about 273,700, and the German government estimates that it will reach 400,000 by 2020. here in the u.s., there are promising initiatives under the Obama administration, but they are fragmented. The American Recovery and Reinvestment Act of 2009 (the stimulus) invests $112 billion in various green technologies, and earmarks $2 billion for renewableenergy research. There’s also a $2.3 billion tax credit for domestic producers of clean-energy equipment. But President Obama’s proposal to add another $15 billion annually in renewable-energy research paid for by a cap-and-trade system is not likely to be realized. The cap-and-trade system proposed in the American Clean Energy and Security

Act that passed the House in 2009 will likely be weakened in the Senate version, and passage is questionable. Another essential component of the energy bill is a national requirement, called a renewable portfolio standard, that utilities purchase 20 percent of their power from renewable sources by 2020. But that too will likely be watered down by the Senate.

Because we do not have a national strategy for linking renewable energy to domestic production, the stimulus package has given 84 percent of the $1.05 bil-

megawatts by 2020. In addition to rules enacted in 2006 requiring utilities to purchase more wind and solar energy, China raised tariffs on imported wind turbines and dramatically reduced import duties on components, many of which are in short supply. To develop its own supply chains, China has gradually increased domestic content requirements for wind-farm developments—from 40 percent in 1996 to 70 percent since 2004. In the five-year plan that begins in 2011, mandated utility purchases will

The U.S. does nothing to link clean-energy goals to industrial ones, leaving our states and cities to play this game as best they can. lion in clean-energy grants distributed since September to foreign wind companies. A whopping $545 million went to Spanish utility company Iberdrola S.A. through its U.S. subsidiary. A $1.5 billion, 648-megawatt wind farm planned in Texas would have used turbines produced in China by A-Power Energy under a joint venture between Shenyang Power Group and U.S.–based Cielo Wind Power.

The project sought $450 million in tax credits and other support from the stimulus package even though only 15 percent of the 2,800 new jobs would have been in the U.S. Only after protests from Sen. Charles Schumer, the Campaign for America’s Future, and other groups, did the companies agree to build a U.S. plant that will employ up to 1,000 workers.

Even if the administration wanted to direct stimulus funds to renewable-energy manufacturers there aren’t enough firms that have the capacity to build these large projects. The industrial promise of green technology is being lost. U.S. policy doesn’t seem to care where jobs, suppliers, and advanced research and development are located. China isn’t making that mistake.

China’s goal is to become a leader in manufacturing solar and wind equipment—70 percent to 75 percent of jobs in wind and solar energy are in manufacturing—so it is targeting an expansion of wind-power capacity from 5,600 megawatts in 2008 to 100,000

increase, as will subsidies for renewables.

China is already spending $221 billion of its $586 billion 2009 stimulus package on renewable energy and other clean technologies and is poised to overtake Germany and Japan to become the largest alternative-energy producer in the world. China has more than 100 solar companies that account for one-third of global solar-component production. China’s largest solar-panel producer, Suntech Power Holdings, has captured 25 percent of California’s solar-panel market and will soon build a plant in the United States, but strategic control remains in China. The company plans on selling its U.S.–made panels at below cost in order to build market share. Other Chinese manufacturers will soon follow. U.S. states will no doubt compete with each other in offering subsidies to land these plants. instead of a national policy for capturing the good manufacturing jobs in renewable energy, we have a hodgepodge of state policies. The best include renewable portfolio standards requiring set percentages of electricity to be generated from green sources, investment in research and development often in partnership with universities, technical assistance on business-plan development, assistance in obtaining public and private start-up capital, commercialization, and education and training. The payoff for the american prospect

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any given state may be anywhere from a few hundred to a couple thousand jobs.

While we can applaud each success, this approach will not result in the U.S. becoming a leader in renewable energy.

Several states, such as Pennsylvania, Ohio, and Iowa, have figured out that reaching big employment numbers means developing supply chains, and these states have instituted programs to assist manufacturers in retooling to supply windturbine manufacturers. But too often the strategy is to offer subsidies while asking little or nothing in return, and too many of the jobs pay less than prevailing wages (see Philip Mattera’s April 2009 Prospect article, “A Green Industrial Economy”).

Often, individual states lack the scope or market power to assure success for the companies they try to help. In 2008, for example, the administration of Gov. Deval Patrick of Massachusetts bet heavily on a company called Evergreen Solar, a start-up that emerged out of research done at the Massachusetts Institute of Technology. Massachusetts gave Evergreen Solar $67 million in grants, loans, land, tax incentives, and other aid to produce silicon wafers, cells, and solar panels in the state. The company’s competitive edge was its patented String Ribbon manufacturing process, which had lower silicon costs than its competia 20 j a n u a r y / f e b r u a r y 2 0 1 0

tors. The company, for its part, invested $435 million in facilities and created 577 permanent and 230 contract jobs in Massachusetts. In 2009, Evergreen accepted a $1.8 million tax credit and a 12-year tax break worth an additional $3.9 million for locating another plant in Michigan.

But some competitors with even newer technologies and deeper government subsidies turned out to have lower costs, while China was offering large subsidies and cheap workers. Evergreen, to survive, has announced that it is shifting panel production to China, while keeping wafer and cell production in Massachusetts. The Wuhan government financed about two-thirds of the cost of the facility. Evergreen will write off $40 million worth of equipment at the Massachusetts plant because of the production shift to China. Evergreen CFO Michael El-Hillow says that some jobs in Massachusetts will be eliminated but suggests the losses might be offset by increasing production of wafers and cells.

Evergreen is actually making very rational moves in a highly competitive international environment. As the price of silicon has come down, labor has become a higher percentage of its cost.

To stay competitive, it makes sense for Evergreen to take advantage of China’s

in short, federal and state government subsidies are incubating U.S.-owned companies, which then do an increasing share of research, development, and production offshore. And many companies are giving away technology developed here to do so. To secure a $900 million contract for electricity-generating turbines, GE agreed to share much of the technology so Chinese companies could make the equipment on their own. Other U.S. and European companies have done the same. Delbert Williamson, GE’s president of global sales at the time, told The Wall Street Journal, “They’re interested in having total access to technology and we’re interested in protecting the technology that we made significant financial investment in.” While GE held back on sharing some of the technology and has since created more sophisticated turbines, the point is that companies wanting to do business in China must agree to its protectionist policies. w w w. p ro s p ect. o rg

xinhua / l andov

Your Tax Dollars At Work: Workers assemble solar panels at a factory in Taizhou, China.

offer to subsidize a new facility that will have considerably lower labor costs. And Evergreen wisely located early in Germany where energy policy creates demand for renewable-­energy systems. Indeed, Evergreen’s European sales have grown 20 times since locating there. But absent an American national strategy to help domestic companies remain competitive, individual firms like Evergreen are driven to locate in places where foreigngovernment policy creates a more lucrative environment.

First Solar is another homegrown American solar company that has gone global (see my April 2009 Prospect article, “Cities on the Front Lines”), after receiving $150 million in public and private funding to develop the product and manufacturing process. Looked at purely as a private business decision, it made sense for the company to locate in Germany to take advantage of the huge market there.

But the company has also built four plants in Malaysia, and in September of this year, it entered into a memorandum of understanding to build a 2-gigawatt solarpower plant in China. First Solar employs about 1,000 in its U.S. plants, 2,000 in Malaysia, and 1,000 across Europe.

made in the usa But then GE turns around and criticizes the U.S. for requiring domestic job creation in the stimulus package. GE’s vice chair and energy business CEO, John Krenicki, criticized the minimalist “buy American” and other local content provisions in the stimulus package in an October Financial Times article arguing that “rampant protectionism” will hold back the creation of green jobs.

Corporate CEOs know that the decisions that make sense for their companies are not necessarily good for the country.

In October, Duke Energy announced a joint venture in which it would work with China-based ENN Group to develop commercial-scale solar-power projects in the U.S. for which ENN would supply the equipment. Duke CEO Jim Rogers explained to The Wall Street Journal that while he understood the deal undermines the goal of President Obama’s energy policy to revitalize U.S. manufacturing, the erosion of the U.S. manufacturing base “is irreversible. There’s nothing I can do.”

But that’s too pessimistic. There is plenty that we can do. For starters, the U.S. needs to pass an energy bill with a strong portfolio standard to create a larger U.S. market for renewable energy.

Then we need to combine our energy policy with a coherent industrial policy whereby industries that aim to become global winners thanks to government subsidies do not just produce offshore for global markets but provide good jobs in the U.S. Further, we need to require more local sourcing of components of foreign wind and solar companies in the U.S. and help our manufacturers retool to fill this demand. And we need to insist that foreign competitors like China play by fair rules of trade. It is committing industrial suicide if we leave our remaining great corporations and our start-ups to negotiate one-sided trade and production deals with nations whose policies are far more strategic than our own. tap Joan Fitzgerald is professor and director of the Law, Policy and Society graduate program at Northeastern University. Her forthcoming book is Emerald Cities: Urban Sustainability and Economic Development.

FDR Had It Right If the economy is going to come back, we need to buy—and make—American.

By Leo Hindery Jr., Edward G. Rendell, Leo W. Gerard, Donald W. Riegle Jr., and R. Thomas Buffenbarger

O

ur greatest primary task,” said Franklin D. Roosevelt in his first Inaugural Address, “is to put people to work.” Roosevelt had no doubt that this task took precedence over all others.

“Our international trade relations,” he continued, “though vastly important, are in point of time and necessity secondary to the establishment of a sound national economy.”

Today, with nearly 31 million American workers now effectively unemployed— including an unprecedented 14.9 million who are unwilling part-timers or who’ve dropped out of the work force because they can’t find employment—the “primary task” before the Obama administration and this Congress is also to put people to work. The real unemployment rate in the country today isn’t the official 10.2 percent but a staggering 19.2 percent.

Even the average full-time worker is now working only 33 hours a week, a record-low that represents a loss of hours and wages of 17 percent. And these dismal figures do not adequately depict the particularly adverse effect of the recession on people of color and recent immigrants.

The global economic crisis that began in 2007 and our own ongoing jobless recovery are each the result of the very wrongheaded globalization of finance and trade that began in the early 1980s and continued over the next two decades, long before Barack Obama became president.

The abuse of the promise of globalization arose out of two mutually reinforcing, flawed models of growth: first, debt-financed overconsumption in America and a few other major developed economies; and second, dramatic over-savings and under-consumption in the major production-oriented export economies of Asia, especially China.

The shift of the U.S. from a nation that produces wealth to one that consumes it has created an American economy that is inherently prone to crisis, structurally unbalanced, and incapable of maintaining, let alone growing, a large, vibrant middle class. As American manufacturing has been offshored, chiefly to China, the U.S. trade deficit of manufactured goods has increased from 1.9 percent of gross domestic product in 1998 to around 3.7 percent today, and for several years before the current great recession began, it held steady at 6 percent.

Because of the record trade deficits accumulated over just the last 10 years— including a cumulative $6.4 trillion in manufactured goods alone—the U.S. economy is now about $1.5 trillion smaller than it would have been otherwise. This massive loss of economic growth now challenges our ability to recover economically and pay for needed but costly health care, energy, and Social Security reforms.

We need to return to a reasonable balance between manufacturing and services. Today, manufacturing constitutes just 11.5 percent of our GDP and employs just 8 percent of the U.S. labor force— huge declines from levels just a couple of decades ago, declines that coincide directly with our transformation from the world’s largest creditor nation to the world’s largest debtor.

For the first half of the last century, we estimate manufacturing constituted about 35 percent of the nation’s GDP. Even after our GIs returned home from World War II and military production ceased, manufacturing in 1947 still made up 26 percent of GDP, and it never went below 21 percent until 1980.

But starting with the Reagan and first Bush administrations, and continuing the american prospect

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through the next two administrations, the federal government was remarkably indifferent to manufacturing. As a share of GDP, manufacturing has been flat or most often down every year since 1980.

These administrations were usually discreet about their indifference, though Michael Boskin, who chaired George H. W. Bush’s Council of Economic Advisers, is credited with saying, “It doesn’t make any difference whether a country makes potato chips or computer chips!”

Even though more than 5.5 million manufacturing jobs have been lost just since 2000, mostly overseas, some administration officials evidently believe that the decline in our manufactured goods (and, by extension, the labor force that makes them) can be made up by a favorable trade balance in such products as software, legal services, university tuition, and motion pictures.

They couldn’t be more wrong.

America cannot prosper over the long term with less than 12 percent of its GDP coming from manufacturing. This sector should generate at least 20 percent of our nation’s GDP. And when it does, 12 million more workers will be employed directly and up to another 30 million workers indirectly as a result of the very high multiplier effect of new manufacturing jobs.

Even companies that have relied greatly on offshoring American jobs have come to realize that we are on an unsustainable path for the economy. Jeffrey Immelt, the CEO of General Electric, has said, according to Reuters, “The world’s largest economy can no longer count on consumer spending to drive demand, nor can it rely on Wall Street financial wizardry if it wants its population to continue to enjoy a high standard of living. GE, like many U.S. companies, has turned too many core technological procedures over to outside contractors and foreign operations and has outsourced too much.”

When even CEO s of multinational corporations are citing the need for bolstering domestic manufacturing, it is extremely disconcerting to hear some in the administration and Congress still argue that a service job is just as valuable as a manufacturing job. The fundamena 22 j a n u a r y / f e b r u a r y 2 0 1 0

tal differences between manufacturing and service jobs are indisputable: ■ Compensation for manufacturing jobs is on average 15 percent greater than for non-manufacturing jobs.

■ Manufacturing, especially in importintensive industries such as textiles and electronic- and computer-equipment production, offers the best opportunities to women and people of color for wage parity.

■ Manufacturing has by far the largest multiplier effect of all job sectors, creating $1.40 of additional economic activity for each $1 of direct spending, 2.5 other jobs on average for each job in the sector, and, at the upper end, 16 associated jobs for each high-tech manufacturing job.

By contrast, each new service job, even a high-tech one, creates on average no more than 1.6 associated jobs.

■ Service jobs do very little to help the U.S. balance of trade.

In the transition from campaign to administration, Obama’s focus on employing and invigorating Main Street was subordinated by some in his administration to the task of resuscitating (and not even reforming) Wall Street. Now, in order to right our economic ship, the administration and Congress need to

call our new comparable requirement the “U.S. Domestic Investment Act.” Consider, as an instance of our current misguided policy, the proposed $1.5 billion wind farm in Texas that has applied to the federal government for financing from the stimulus package. This wind farm would create only 300 jobs in the U.S., but it would create 2,000 jobs in China, where the wind turbines would be manufactured. Rather than use U.S. tax dollars to stimulate the Chinese economy, our government needs to start buying American and bolstering domestic manufacturing.

The government also needs to significantly increase its investments in modernizing and rebuilding our infrastructure.

It needs to establish a National Infrastructure Bank that would enable the federal government to leverage the private capital markets to fund infrastructure of national or regional significance without affecting the nation’s yearly budget. It needs to provide tax and amortization incentives for large-scale private-sector funding of public infrastructure, as well as investment tax credits for retrofitting buildings in ways that conserve energy.

And it needs to commit $500 billion to a 10-year green-transportation effort that

A federal “buy domestic” procurement program would both reduce our massive trade deficit and help resuscitate U.S. employment. embrace an all-of-government manufacturing policy that has as its stated objective doubling the percentage of GDP and employees the sector represents.

They also need to adopt “buy domestic” requirements for federal procurements, which represent 20 percent of our nation’s GDP. The United States is the only nation among the G-20 not to have a significant “buy domestic” procurement program, yet no single economic stimulus initiative would do more to resuscitate U.S. employment and reduce our massive trade deficit. In May, China, which is by far the single largest importer of goods to the U.S., confirmed its policy of 100 per­ cent domestic procurement. We should

would be funded through an increase in gasoline taxes. Provided it has an associated buy-domestic requirement, each $1 billion invested in public infrastructure generates on the order of 40,000 permanent new American jobs.

The government must also assist American businesses and their workers by demanding trade agreements that have meaningful labor and environmental standards, forbid illegal subsidies and currency manipulation by other nations, and have enforcement “teeth.” One way to effect the latter would be for Congress to enact the pending Trade Enforcement Act of 2009, which would require the U.S. trade representative to initiate w w w. p ro s p ect. o rg

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Made Where? A General Electric wind technician sits atop a wind turbine in Sweetwater, Texas.

negotiations over foreign nations’ unjustified trade practices and, as needed, to reach compensatory settlements. The government especially needs to establish a new trade relationship with China, starting by using its power to levy tariffs to compel China to stop artificially devaluing its currency, which has fueled China’s economic growth and recovery at the expense of our own.

We need as well to make changes to our tax code that boost domestic manufacturing and reward corporations for creating jobs in the U.S. Congress should reduce corporate income taxes and move to a value-added tax on imports. A VAT, which all of our major trading partners currently have in place, would go a long way to restoring the competitive advantage that our domestic producers have lost to their overseas competitors. Congress should also create a permanent 10 percent investment tax credit for renovating and modernizing manufacturing facilities and their equipment.

Even though it seems a political impossibility to label anything right now as “second stimulus,” we can’t run away from the major fiscal efforts needed to reduce real unemployment to a rate of 5 percent—which would require the creation of 22 million jobs, not the 9 million

determined by the administration. To cover the cost of such a policy, we recommend four revenue initiatives, all aimed only at current tax abuses and the top 3 percent to 5 percent of taxpayers, which combined would generate about $212 billion a year for creating new jobs.

First, we recommend adopting a financial transactions tax. The FTT should be set at around one-quarter of 1 percent of the value of all financial transactions— stocks, bonds, derivatives, futures—and it should be levied on corporate, partnership, and very high-income individual buyers and sellers of securities.

“We must lay a new foundation [that] will move us from an era of borrow and spend to one where we save and invest,” President Obama has said, “where we consume less at home and send more exports abroad.” An FTT whose proceeds are dedicated to job creation would meet the president’s goal. It would mark a shift in the nation’s resources that the public could easily understand and support. It would move financing toward longerterm and thus more prudent time horizons, and it would produce revenues of around $150 billion each year.

The FTT should be augmented by three other tax changes: finally ending those “tax breaks for companies that ship jobs

overseas” (as Obama promised during the 2008 campaign), which would raise at least $25 billion a year; classifying and taxing the carried interest earned by hedge-fund and private-equity managers as ordinary income at a 35 percent rate rather than as a capital gain at a 15 percent rate, which would generate around $12 billion per year; and raising (only) the top tax rate on long-term capital gains back to the 28 percent rate signed into law by President Ronald Reagan, which would raise about $25 billion per year.

None of these investment initiatives and national economic-growth policies are anti-competitive or anti-globalization.

They are simply necessary, balanced, and reciprocal economic policy for the world we live in.

If we don’t have the right policies in place and the proper safeguards, then we are undermining the very effectiveness of fiscal stimulus and removing it as one of the central tools to manage economic downturns. We will also continue to disadvantage American workers and taxpayers in favor of our major trade competitors, which already have initiatives in place that advantage their own manufacturers and producers.

Speaking to Congress in 1944, when his health was clearly failing, Franklin Roosevelt laid out his long-range goals for the nation. Outlining a second Bill of Rights—an economic bill of rights—he called for recognizing “the right to a useful and remunerative job in the industries or shops or farms or mines of the nation.”

In the current economic crisis, these are words we need to heed. tap Leo Hindery Jr., a corporate CEO (and former journeyman sheetmetal worker), is chair of the Smart Globalization Ini­ tiative at the New America Foundation.

Edward G. Rendell is governor of Penn­ sylvania. Leo W. Gerard, a journeyman steelworker, is international president of the United Steelworkers. Former Michi­ gan Sen. Donald W. Riegle Jr. is a mem­ ber of the Smart Globalization Initiative.

R. Thomas Buffenbarger, a journey­ man machinist, is international presi­ dent of the International Association of Machinists and Aerospace Workers. the american prospect

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Written by some of the nation’s leading experts on jobs and manufacturing, this book was placed in President Obama’s hands as a guide to getting our economy back on track.

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www.americanmanufacturing.org Alliance for American Manufacturing 727 Fifteenth Street NW, Suite 700 Washington, DC 20005

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If you want to understand the sector that is most vital to America’s economic renewal, you must read Manufacturing a Better Future for America.

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