Ever since Japan began challenging the United States as the leading automobiles and consumer electronics manufacturer in the 1980s, a debate has been raging over whether America's days as the preeminent manufacturing nation in the world are coming to an end. It would only intensify in the next two decades, when another Asian giant, China, emerged as a manufacturing power.
In the face of stiff competition from these and other countries, a number of U.S. manufacturing industries that once formed the bedrock of the American economy have lost steam. American manufacturing shed more than a million jobs and nearly a third of its total work force in the period from 2000 to 2009. As a result, the contribution of the manufacturing sector to GDP declined significantly from more than 20 percent to less than 12 percent now.
The reversal in fortune of American manufacturing and the ascendance of China - the manufactured exports of that country increased from less than one percent of world shipments in 1980 to more than 5 percent by 2001 - has given rise, among punditry, of a declinist school that is convinced that the end is drawing nigh for American economic dominance.
America is in a terminal industrial decline, the conservative pundit Patrick Buchanan lamented in a column last year. Not so long ago, we made all the shoes and clothes we wore, the motorcycles and cars we drove, the radios we listened to, the TV sets we watched, the home and office calculators and computers we used, Buchanan wrote . No more. Much of what we buy is no longer made by American workers, but by Japanese, Chinese, other Asians, Canadians and Europeans.
While pundits like Buchanan maybe over-reacting - the United States remains the world's mightiest manufacturing economy, producing 21 percent of all goods made globally, compared to Japan's 13 percent and China's 12 percent - it is not hard to understand why many Americans are nervous about losing competitive advantage in manufacturing.
It was the country's manufacturing prowess, complemented by its accomplishments in science and technology, which enabled the United States to become the most powerful and prosperous nation in history. America would not have been able to build the infrastructure and defense that are the envy of the world without a century of sustained excellence in manufacturing.
There are a number of reasons many American manufacturing industries have lost competitive advantage in the new global economy. Advances in the areas such as computing, communication and distribution in recent decade shave made it possible for companies to invent and design products in one part of the world and manufacture them in another, for global distribution.(It is an irony that these advances, most of which were spearheaded in the United States, haven't exactly worked in American workers' favour.)
An average American worker earns significantly more than an average Chinese worker. In the United States, manufacturers have to comply with far more regulations, when compared to a country like China. What make American products less competitive are these labor and compliance costs.
As long as China and other countries don't institute compliance standards similar to the United States, their manufacturers will continue to have an advantage when it comes to cost. Same goes for wages. A study by Boston Consulting Group last year predicted that as wages in China goes up, it will reduce the competitive advantage China has at the moment against the United States.
But, ultimately, the United States cannot do much about labor and compliance costs and standards in other countries. However, there are a lot of measures that the country can take, as my co-authors and I proposed in our book, Renewing the American Dream, and in our subsequent writings, which will put manufacturing front and center of the economy, once again.
They include developing and funding an industrial and innovation policy focused on driving research and development and the rapid growth and restoration of manufacturing in targeted sectors.
The Obama administration has put a strong emphasis and dollars into innovation and, in a report last year, the President's Council of Advisors on Science and Technology called for a coherent innovation policy but stopped short of recommending an industrial policy.
For turning things around, America needs a full-throated and definitive industrial and innovation policy with major investment dollars behind it that is clearly targeted on growing manufacturing and creating jobs for American workers.
As we wrote in the book, the nation should implement targeted jobs tax credits for new high value jobs created by manufacturing companies and introduce a re-shoring tax incentive for U.S. companies with high value jobs to bring those jobs back to the country.
Similar incentives should be given, working in collaboration with states and local governments, to bring high tech, advanced manufacturing companies from around the world to make the United States their location of choice.
Another measure that will lead to a revival of manufacturing is making the R&D tax credit permanent. In fact, the government should consider increasing it but by tying it to jobs created and providing additional credits for commercializing and producing goods here in the United States.
Lastly, profits made overseas should be allowed to repatriate on the condition that a specific number of jobs be created with that money.
These measures will no doubt reinvigorate U.S. manufacturing, which will in turn revive the economy. For every dollar U.S manufacturers spend directly they foster another $1.40 in economic activity. (Global India Newswire)
(Frank Islam is the co-author of the book Renewing the American Dream: A Citizens Guide. He is also a member of the advisory committee of the US Export-Import Bank and the Department of Commerce Industry Trade Advisory Committee)