The Emerging American Industrial Policy

 

 

The Emerging American Industrial Policy

By Keith B. Belton

American Affairs Fall 2021 / Volume V, Number 3

August 20, 2021

 

 

Calls for an American industrial policy have attracted support across the political spectrum.1 While proponents on the left see value in righting the wrongs of inequality and climate change,2 propo­nents on the right are most alarmed by the rise of China as a strategic competitor.3

 

Arguments over a U.S. industrial policy are not new. But unlike past debates, the current one is not about whether the U.S. government should support and foster a robust manufacturing sector (it is doing so and will continue to),4 nor is it about government decisions supplanting market forces (it never was). Rather, it is about which policy actions

are best suited to address the challenges of the twenty-first century.5

 

Indeed, over the last few years, the federal government has, through a wide range of actions, created an industrial policy.6 Congress has expanded export controls and interagency review of foreign investments in strategic sectors. Presidents Trump and Biden have embraced Buy American policies and utilized Title III of the Defense Production Act. The most recent defense reauthorization bill contains provisions to secure U.S. production of electronics, semiconductors, and printed circuit boards. And Congress may not be done. Recently, the U.S. Senate passed the United States Innovation and Competition Act, a bill that has been called “the most significant government intervention in industrial policy in decades.”7

 

To be sure, this isn’t the kind of top-down industrial policy prac­ticed during the Cold War by Eastern-bloc nations or by modern China through its five-year plans and Made in China 2025. It does involve prioritizing strategic sectors, but in a targeted manner that leverages market forces—as might be expected of a nation that values free enterprise.

 

This emerging American industrial policy is characterized by its focus on capabilities critical to national security, supported by resili­ent supply chains, and achieved through political consensus. Understanding its features will sharpen what has been, until now, a rather nebulous debate. Congress, in particular, has a significant role to play, but only if it is willing to take advantage of its window of opportunity.

Capabilities Matter

According to several measures, U.S. manufacturing is in decline. In the past few decades, the sector has lost millions of jobs, its share of GDP has shrunk, and the U.S. trade deficit has soared, including in the most advanced technologies.8 But these long-term trends did not trigger the flurry of policymaking action seen only recently.

A better, but still insufficient explanation is the rise of China, which supplanted the United States as the leading manufacturing nation in 2010. China’s technology acquisition practices have spurred the United States to play defense, primarily through the use of domestic trade policy tools—a popular, yet ineffective, response.9 The flurry of U.S. countermeasures, however, only began in the past five years, while China’s economic rise has been steady since 2001, when it joined the World Trade Organization. And China isn’t solely to blame for U.S. manufacturing’s decline.

 

The best explanation for the emerging American industrial policy is the realization among policymakers that the nation has lost critical capabilities that create good jobs, spur innovation, and offer a com­parative advantage. This important concept warrants some explanation.

 

A capability refers to collective know-how—the competence to perform a certain task that cannot be performed by an individual acting alone. Collective know-how is embodied in a manufactured good. In a 1958 essay, Leonard Read described a pencil as a simple object that, perhaps surprisingly, no single person knows how to make.10 Its existence reflects multiple competencies found along a global value chain and brought together by firms acting in their self-interest.

 

The more complex the product, the more competencies are required to produce it, and the more important it is to economic growth and national wealth. For example, a passenger jet is more complex than a pencil—reflecting the involvement of a much larger number of competencies in its value chain and providing greater economic rewards.

 

More than a decade ago, Cesar Hidalgo and Ricardo Hausmann used export data to operationalize this concept, which they refer to as economic complexity.11 To simplify their work, Hausmann offered an analogy. In the game of Scrabble, players choose random letters and take turns creating words on a playing board using the letters they possess. Longer words are awarded more points than shorter words. Now consider that each player represents a nation, each letter repre­sents a capability, each word represents a unique manufactured product, and longer words represent more complex products. The challenge to a nation (player) is to obtain a diverse array of capabilities (letters) to produce new products (words) that generate greater wealth (longer words and higher scores).12

Loss of U.S. Capabilities

Just as a Scrabble player becomes worried when he or she has few unique letters to make longer and higher-scoring words, U.S. policy­makers are alarmed by losses in domestic manufacturing capabilities, losses which seem to be mounting in recent decades.13

 

In their 2012 book Producing Prosperity, Gary Pisano and Willy Shih documented dozens of capabilities that the United States has lost: ultra-heavy forgings, machine tools, permanent magnets, rare earth element processing, rechargeable batteries, LED manufacturing, semiconductor fabrication, liquid crystal displays, precision glass, and fiber-optics components. To Pisano and Shih, loss of a manufacturing capability is most important when it is critical to innovation (e.g., a nascent product or process).14

 

A recent example is telecommunications equip­ment. In the late 1990s, the two largest global firms were U.S.-based Lucent and Canada’s Nortel. Within ten years, Nortel was out of business and Lucent was a much smaller firm. According to Robert Atkinson, the decline of Lucent was due to the industrial policy of other nations (China in particular), bad policy decisions (overzealous antitrust enforcement by regulators and telecom reform from Congress), and poor management (e.g., the selling off of core assets during an eco­nomic downturn).15

 

More generally, the United States loses capabilities to other nations through theft, sale, and/or neglect. The United States is the top target of economic espionage—to the tune of hundreds of billions of dollars per year—and it is easier for a foreign nation to steal know-how than to spend R&D dollars to catch up.16 For foreign entities seeking to legally obtain manufacturing know-how, U.S. firms are attractive acquisition targets. In the 1980s, Japan was particularly adept at acquiring U.S. biotechnology start-ups. A 1992 study found that 90 percent of the resulting technology flow was from the United States to Japan.17

 

Most concerning, however, is the loss of U.S. capabilities through neglect. Pisano and Shih refer to this phenomenon as “erosion of the industrial commons,” referring to the collective operational capabilities (e.g., knowledge, skilled people, and supplier networks) that allow for product and process innovation.18 Two major factors con­tributed to the erosion seen in recent decades. The first is offshoring by multinational corporations seeking greater efficiencies. A wave of offshoring occurred after China joined the World Trade Organization in 2001. The second is the industrial policy of nations seeking to expand their own capabilities at the expense of the United States—and the lack of any U.S. government response. South Korea, for ex­ample, employed industrial policy to expand its global market share in shipbuilding.19 And in just the past six years, China overcame the United States as the world leader in electric vehicle production, due largely to its industrial policy.20

 

Capabilities tend to build upon each other. A nation that excels in making a smartphone, for example, is more likely to develop the next-generation smartphone. This is because the next-generation smartphone requires many of the same capabilities. Hidalgo refers to this as the principle of relatedness.21

 

Once lost, capabilities tend not to return.22 To illustrate this phe­nomenon, Sridhar Kota and Tom Mahoney paint a bleak picture of U.S. manufacturing’s decline from a dominant position in the 1960s (“invent here, manufacture here”) through decades of outsourcing production (“invent here, manufacture there”) to the more recent outsourcing of R&D (“invent there, manufacture there”).23 As an example, they de­scribe U.S. production of color televisions, a mature technology that was outsourced to Asia, where labor was cheap. Meanwhile, Japanese pro­ducers, like Sony, continued to innovate with solid-state chassis, in-line tubes, and integrated circuits, which laid the foundation for future innovations such as flat screens. By outsourcing its manufacturing capa­bilities, U.S. producers like Zenith and RCA lost the capability to innovate and create the next-genera­tion television.

 

Other examples abound. In the 1970s, the packaging and testing of semiconductors—a labor-intensive activity—was outsourced to Asia, where it remains to this day.24 During the 1981–82 recession, the U.S. machine tool industry lost its leading global market share because many of its most skilled workers, who had lost their jobs, either re­tired or found gainful employment elsewhere.25 They took their skills with them, leaving a gaping hole that could not easily or quickly be filled. Today, Germany and Japan lead the world in the making of machine tools. The United States was also the pioneer in the development and production of photovoltaic cells (invented by Bell Labs in 1954). Today, Asian countries dominate solar manufacturing, espe­cially in solar panels. The reason? Panel production draws on capa­bilities found in microelectronics, which had been outsourced to Asia, where supplier infrastructure is now most heavily concentrated.26

 

It may seem counterintuitive that, in the modern age of globalization, production capabilities remain relatively “sticky.” That this is true largely reflects the power of tacit knowledge. Unlike codified knowledge, which can be written down (e.g., in blueprints, books, chemical formulas, algorithms, etc.), tacit knowledge only resides in human brains through years of training and mentorship by those who possess it.27 Public policies to nurture, retain, and expand tacit knowledge are necessarily centered on the movement and training of people—a topic we will return to.

A Nexus to National Security

If the industrial commons of a nation is slowly being eroded, at what point will alarm bells sound? One might expect politicians to be most sensitive to a loss of capabilities associated with national security. And so it is with the United States. In the past five years, U.S. policy­makers have taken numerous actions to restore lost or diminished capabilities seen as imperative to national security, and these actions represent the foundation of the emerging American industrial policy.

 

The clearest example is the defense industrial base, which is increasingly dependent on foreign suppliers, including from strategic competitors.28 China, for example, is the single or sole supplier for a number of specialty chemicals used in munitions and missiles. Single sourcing—when only one of multiple potential vendors is qualified to supply the U.S. military—is becoming more common (e.g., proprietary carbon fibers from Japan and Europe are used in DoD missile, satellite, and space launch programs), as is sole sourcing—when only one supplier can provide a capability (e.g., all large caliber gun barrels, howitzer barrels, and mortar tubes are made on one production line at one arsenal). Fragile suppliers (firms that are financially challenged) are a continual worry (e.g., high-tenacity polyester fiber used in DoD tent systems), as are fragile markets (e.g., only one of the top twenty printed circuit board manufacturers is a U.S. firm). The ever-growing complexity of global value chains in military weapons systems has heightened concerns over cybersecurity, which has recently become a top priority of DoD.29

 

Policymakers are acting to address these vulnerabilities. President Trump employed Title III of the Defense Production Act to address acute problems (e.g., the processing of rare earth metals30 and the scaling up of hypersonic technologies31) and Congress created whole new pro­grams under the National Defense Authorization Act (NDAA) to re­store key capabilities (e.g., the making of semiconductors32 and printed circuit boards33). It is not much of an exaggeration to say that the latest NDAA could be subtitled the Made in America Act, such is the priority that Congress is giving to halting the erosion of the defense industrial base.

 

National security is also at stake when foreign firms purchase U.S. firms with critical capabilities or access to critical capabilities. In August 2018, Congress passed the Foreign Investment Risk Review Modernization Act (firrma) to ensure closer scrutiny of potential purchases of U.S. firms by foreign entities. The law expanded the scope of transactions subject to review by the federal interagency Committee for For­eign Investment in the United States (cfius).34

 

The United States has long taken action to prevent the most advanced manufacturing technologies from getting into the hands of those who seek to do it harm. In the last few years, policymakers have expanded U.S. export controls to cover emerging and foundational technologies35 with dual (military and civilian) uses. And the Trump administration effectively blocked Chinese tech giant Huawei from U.S. commerce due to security concerns over next-generation wire­less technology.36

 

Moreover, U.S. policymakers are not operating under some narrow, military-focused definition of national security. Their expan­sive defini­tion includes health and economic security. For example, the federal government took action to lessen dependence on China for essential medicines,37 a growing problem in recent years.38 Im­portant “upstream” sectors in the U.S. manufacturing supply chain—steel and aluminum pro­duction, which have been decimated by overproduction from Chi­na—received protection through the impo­sition of tariffs on imports.

Resilient Supply Chains

The global pandemic, which started in manufacturing-centric China, continues to disrupt supply chains and draw attention from politicians calling for a reshoring of production. The United States is not alone; calls for reshoring can be heard around the world: in France,39 Germany,40 Australia,41 Japan,42 and South Korea.43

 

But is reshoring the answer to a nation’s manufacturing woes? Not completely. Better than reshoring is the broader concept of resilience—a manufacturing sector that can adjust in real time to supply chain disruptions anywhere while minimizing any loss to customers. Resilience includes reengineering (e.g., making supply chains shorter or simpler, including reshoring), collaboration along the supply chain (e.g., through shared information), governance (e.g., establishing over­sight of supply chains), and agility (e.g., spotting and responding to a disruption quickly).44

 

The pandemic is inducing actions by U.S. manufacturers to en­hance the resilience of their supply chains.45 And the government is not standing idly by. Congress included provisions for reshoring semiconductors46 and strategic minerals and metals47 in the NDAA. DoD an­nounced funding to enhance the security of the U.S. electronics supply chain.48 Federal contracts have been awarded to begin domestic produc­tion of essential medicines.49 The Trump administration imposed a ban on certain imports made from forced labor in China.50 The Biden presidential campaign offered a detailed plan to enhance domestic manu­facturing resilience.51 And the Biden administration is working to identi­fy the most vulnerable and critical supply chains.52

Building on This Foundation

The emerging American industrial policy enjoys bipartisan support, and often consensus support, which is striking in an otherwise toxic political environment. In recent years, Congress enacted, by wide margins, re­forms to strengthen the defense industrial base in the 2021 NDAA53 (in which Congress easily overrode a presidential veto), expansion of U.S. export controls to include emerging and foundational technologies54 (the Export Controls Act was included in the 2019 NDAA), and expanded national security review of foreign purchases of U.S. firms55 (Foreign Investment Risk Review Modernization Act). President Biden signed an executive order to expand Buy American policies, which have long enjoyed widespread public sup­port.56

 

During his presidential campaign, Biden—despite emphasizing major policy differences with the incumbent Trump—never promised to re­verse certain Trump administration actions against China that were politically popular but drew the ire of many economists (i.e., tariffs on various Chinese imports and the Phase One agreement with China). He also supported the United States, Mexico, and Canada Agreement (usmca), negotiated by the Trump administration, which replaced nafta with stronger protections for U.S. manufacturing workers.57 In important respects, candidate Biden’s manufacturing plan was similar to that of Donald Trump.58 It is no coincidence that the outcome of the last two presidential elections was determined by industrial states (Wiscon­sin, Pennsylvania, and Michigan); U.S. politi­cians see value in supporting domestic manufacturing capabilities.

 

This emerging American industrial policy provides a foundation for future efforts. The key question is this: which government actions will bolster U.S. capabilities to create new and higher-value products? Going back to the Scrabble analogy, a nation should seek to (1) obtain and maintain a wider array of unique letters and (2) create the highest scoring words with the letters it has.

 

An effective national strategy should have three goals: (1) identify vulnerabilities and opportunities, (2) expand the capability frontier to acquire closely related capabilities currently out of reach, and (3) nur­ture tacit knowledge through policies that involve the movement and training of people. And it should have staying power while retaining flexibility to respond to changing circumstances and events.

 

To advance the discussion, I offer six policy actions that seem prudent: establish an ongoing monitoring system of U.S. capabilities, develop a stress test for supply chains, facilitate the adoption of smart manufacturing through information governance, offer incentives for foreign direct investment (FDI) “greenfield” development, subsidize employer-driven workforce training, and enact a Factory Bill similar to the long-standing Farm Bill.

Identify Vulnerabilities and Opportunities

Historically, industrial policy arises when a nation monitors the capabilities of a more advanced economy and seeks to replicate them. This approach, however, often fails because no two nations are alike in terms of capabilities or in the obstacles that prevent them from acquiring new capabilities. Success is more likely when self-improve­ment, rather than replication, lies at the core of industrial policy.

 

With self-improvement in mind, the U.S. government should develop an ongoing program to identify existing capabilities at risk and new capabilities within reach. Without an ability to discern the relative magnitude of both vulnerabilities and opportunities, U.S. industrial policy will be tilted toward appeasing interest groups with the most political clout.

 

One path forward would be to task the Department of Commerce International Trade Administration (ITA) with this monitoring func­tion. It could leverage trade data, utilizing and perhaps modifying the methodology first developed by Hidalgo and Hausmann. They used trade data to quantify the complexity of exported products and to discern whether a nation enjoys a comparative advantage.59 That methodology can also be used to discern which products lie just beyond a nation’s capabilities and which products are well beyond reach.

 

Aside from monitoring U.S. capabilities, ITA should also recommend specific government actions that would be helpful in halting the slide of existing capabilities and/or securing a new technology. This turns out to be a significant challenge because government seldom has information about specific market dynamics—it must rely on indus­try for this information, and industry may choose to engage in rent-seeking behavior. Nevertheless, ITA should engage with industry experts and seek information that it can sort through to develop policy recommendations. In 2008, Dani Rodrik offered helpful sug­gestions, including the use of both carrots and sticks to ensure good policies are retained and bad ideas quickly jettisoned (e.g., including a sunset clause that can be extended only if a retrospective review shows that the policy is having the intended effect).60

 

Importantly, ITA would not be tasked with acting on this infor­mation—lest it lose its objectivity or be “captured” by industry. Rather, it would serve as a resource to the president and to Congress, who would be tasked with acting on the recommendations.

 

Apart from this monitoring of capabilities, particular attention should be paid to supply chain resilience. In this case, the government can borrow an idea from the 2009 financial reform law, which created a stress test for financial institutions. According to one recommendation, the federal government should develop a stress test for supply chains of U.S. companies that provide critical goods and services.61 The test would assess how fast supply could recover from disruptive events.

 

This stress test would have to account for a variety of different shocks, from pandemics to natural disasters to climate change to major conflict. One important decision to be made is whether the stress test would be “self-graded” or assessed by a government agen­cy. Perhaps the most practical solution would be for the National Institute of Standards and Technology (NIST) to develop a test to be used at the discretion of private industry. NIST has undertaken simi­lar exercises before; in recent years, it successfully developed a voluntary cybersecurity framework and a voluntary privacy framework, both highly regarded. A supply chain stress test could serve as a gold standard for manufacturing firms serving national security—including medical security—needs. It could also be employed by the U.S. government for the nation as a whole, to identify significant weaknesses and to set national priorities.62

 

Woefully inadequate is the effort President Biden put in place through executive order,63 in which each federal department is re­sponsi­ble for a “one-and-done” review of supply chains within its jurisdiction and reporting to two different White House advisers, each with other significant responsibilities. Such an effort seems certain to preserve the status quo because it does not establish a consistent methodology to evaluate supply chains or vest responsibility with one accountable individual; nor does it provide early detec­tion of diminishing capabilities—as an ongoing monitoring system should.

Expand the Capability Frontier

Industrial policy shouldn’t be about recreating the halcyon days of postwar U.S. manufacturing. A better strategy is to expand the capa­bility frontier by acquiring (incrementally) more complex capabilities (following the principle of relatedness) that will likely be important in the future. And the appropriate role of government is to do what the private sector won’t—or can’t—in order to diversify capabilities.

 

How can a nation expand its capability frontier for manufacturing? Many countries, including the United States, believe the next indus­trial revolution (the fourth industrial revolution, or Industry 4.0) will be smart manufacturing—the integration of sensors, controls, and software platforms to optimize performance at the production unit, plant, and supply chain levels. Such digital integration, facilitated by the Industrial Internet of Things (IIoT), allows for real-time decision-making via data analytics, including the use of artificial intelligence (AI) techniques. Smart manufacturing offers considerable potential to elevate productivity through improved products and processes.64

 

The federal government can and should facilitate private sector adop­tion of smart manufacturing through leadership in establishing information governance—norms of behavior for the creation, trans­mission, storage, analysis, use, valuation, security, and deletion of information.65 Although these norms of behavior are still evolving, nations are acting to shape them to provide their domestic producers with a first-mover advantage.

 

It is not difficult to foresee how elements of information governance shape and limit opportunities for smart manufacturing. Interoperability—which cannot be achieved without technical standards—is critical to the advent of the Industrial Internet of Things. Lax cybersecurity along a complex and multifaceted supply chain will discourage investment in supply chain integration. Policies that limit the flow of digital information across national borders (e.g., data localization requirements) can and will become nontariff trade barriers.

 

The current U.S. approach to smart manufacturing can be characterized by its preference against government mandates and a reliance on markets and private-sector leadership. This is in stark contrast to the approach of other nations, such as Germany, where government coordi­nates closely with its industry and labor organizations, or China, which has developed a multidecade plan to produce the most complex prod­ucts.

 

To ensure global leadership by the United States, multiple govern­ment agencies should play a more significant role in information governance. For starters, NIST should insist on a seat at the table in the setting of consensus technical standards governing the flow of information within and across supply chains. The Federal Communications Commission should allocate sufficient spectrum to deploy 5G—neces­sary to support the IIoT—as quickly as possible. The U.S. Trade Representative should build on its success in shaping digital trade policy with the usmca in future trade agreements. That agree­ment, enacted in 2018, contains numerous provisions reflecting a U.S. posture on digital trade policy and information governance for smart manufacturing.66 DoD should push harder to ensure its lower-tier suppliers adhere to cybersecurity requirements; security concerns inhibit investment in smart manufacturing.

 

In some cases, critical capabilities may be acquired most easily by attracting foreign direct investment (FDI) in “greenfield” development. States and localities already offer incentives for FDI. In situations where a state seeks to attract critical capabilities that the United States lacks, the federal government should add to the offered state incentives. For example, consider fabrication of semiconductor chips, a product critical to both economic and national security. Since 1990, the United States has steadily lost global market share to Asia, suggesting to some that the industrial policy of other nations (espe­cially government subsidies) is the reason.67 Taiwan leads the world in the most advanced semiconductor chips, and certain U.S. states have offered incentives (infrastructure, regulatory approvals) to attract FDI in this state-of-the-art capability.68 In cases like this, federal incentives could make the difference in attract­ing and securing a new capability.

Nurture Tacit Knowledge

Many, if not most, capabilities require skilled workers with substantial tacit knowledge—the kind of knowledge that is not written down nor embodied in tools. Tacit knowledge resides only in human brains as a result of learning by doing, typically after years of mentoring from someone with that knowledge. Therefore, policy must be geared toward attracting, training, and retaining workers at scale—a particu­lar chal­lenge given the “skills gap” problem that has permeated U.S. manufacturing for at least a decade.69

 

Incentives for employer-driven skills training are an attractive idea. Oren Cass has suggested an open-ended $10,000 grant per worker to manufacturers (similar in magnitude to the per-student federal subsi­dy in U.S. higher education) for workforce training of the employers’ choosing.70 Such a grant is predicated on the belief—confirmed in sur­veys—that manufacturers underinvest in training because they fear potential “poaching” by competitors.71 Other policy options also align with employer-driven training, including offering a tax credit for each new apprentice at a manufacturing establishment, similar to South Carolina’s successful program, and increasing funding for the Perkins vocational education and training program.72

 

Immigration provides a critical influx of skilled labor when the domestic labor supply is insufficient or unlikely to provide sufficient capabilities. For this reason, the federal government must be careful in restricting visa programs that could affect the specialized expertise needed by manufacturers. Even a pause in such visas—as the Trump administration implemented for the H-1B (specialty occupations) visa and the L-1 (company transfer of foreign executives) visa—creates business uncertainty and increases the likelihood of permanent offshoring.73 The United States should also consider immigration reform that allows more skilled workers a path to citizenship, not unlike that of Canada. U.S. immigration is mostly oriented toward family members; Canada allows for greater numbers of immigrants based on economic criteria.74

Enact a Factory Bill

At this point, it is important to consider how the emerging American industrial policy should evolve. One option is to retain the status quo, with the Congress and the president undertaking initiatives in piecemeal fashion. The status quo, however, is suboptimal: It does not allow for alignment and coordinated leadership of the several dozen federal programs that impact manufacturing. It does not ensure that the most critical capabilities are identified and nurtured. And it is reactive (focusing on old capabilities that have been lost) instead of proactive (focusing on important, emerging capabilities).

 

In recent years, other options have been offered. Kota and Mahoney called for Congress to create a National Manufacturing Foundation, which would combine nearly two dozen disparate feder­al programs sup­porting manufacturing under the control of one cabinet-level secretary. They would also provide this new federal agency with significant fund­ing for R&D and vest it with the power to create industrial policy. But a bill based on this model, introduced by Senator Gary Peters in the 116th Congress, failed to attract Republican support, which often proves elusive when propos­ing a new federal agency.75

 

Another option is for Congress to task the executive branch with a duty to coordinate industrial policy and to develop a strategic plan that would be revisited every few years. It would allow for accountability by placing responsibility with one Senate-confirmed individual within the White House. This stand-alone proposal has, to date, also failed to advance on its own.

 

The most ambitious legislative option would be a hybrid: combining investments in innovation with executive branch coordination to develop future capabilities important to economic and national secu­rity. With this in mind, Congress should consider developing a Factory Bill modeled after the Farm Bill that has, for nearly a century, supported U.S. agriculture and its supply chain. First developed in the 1930s to address the plight of farmers during the Dust Bowl and Great Depression, the Farm Bill has since been reauthorized about every five years. It has shaped U.S. agriculture policy and helped to create the world’s most productive food industry. A Factory Bill would be to manufacturing what the Farm Bill is to agriculture.

 

A Factory Bill has several upsides. Such a bill, authorized every five years, would allow for periodic reevaluation and adjustment of estab­lished federal programs that fill an important need, such as Manufacturing USA (which conducts pre-commercial R&D in cut­ting-edge tech­nologies)76 and the Manufacturing Extension Partnership (which shares, with small firms, best practices to boost productivity).77 It would allow for coordination and alignment across pro­grams and departments with­out creating a new federal agency. And periodic reauthorization will help the United States respond to the evolving industrial policies of competitor nations.

 

A Factory Bill, however, is only possible if the chairmen of the relevant authorizing committees in the House of Representatives and the Senate make it a legislative priority. Is this likely, given that so many other matters compete for Congress’s attention? The answer to this important question depends on the politics—and clout—of domestic manufacturing. Given significant bipartisan support for recently enacted industrial policy legislation, the power of industrial states in determining the outcome of the last two presidential elec­tions, and President Biden’s embrace of most of the Trump administration’s actions against China, congressional support for a Factory Bill, at least in the near term, seems like a safe bet.

 

In fact, ongoing efforts in Congress confirm the political viability of a proactive industrial policy for the United States. In June, the U.S. Senate passed the U.S. Innovation and Competitiveness Act (referred to as the “China bill”) on a bipartisan basis; support came from nearly all Democrats and nineteen Republicans.

 

The bill combines major investments in innovation and top-down coordination. It would establish a manufacturing czar in the White House to coordinate industrial policy and develop a periodic strategic plan focused on capabilities. It would invest heavily in emerging technologies important to manufacturing. It would establish a new federal program to identify vulnerabilities in critical supply chains. It would ensure U.S. leadership in the development of international standards. It would significantly expand Manufacturing USA and the Manufacturing Extension Partnership. It would temporarily reduce tar­iffs on a wide array of imports used as intermediate inputs by domestic manufacturers.

 

Although these provisions offer substantial benefits, the bill is far from ideal. It emphasizes subsidies over other governmental activities that may be more effective in nurturing capabilities. It doesn’t do enough to advance tacit knowledge and employer-driven workforce training. To achieve worthwhile goals (enhancing supply chain resili­ence), it embraces actions unlikely to succeed (e.g., creating a searchable database of supply chain info compiled through voluntary submissions from firms) while ignoring more effective actions (devel­oping a supply chain stress test).

The House of Representatives is working on several bills that could be combined and conferenced with the Senate bill. If the end result were to become law, implementation would represent the biggest shift in U.S. industrial policy since World War II, when the United States became, as Franklin Roosevelt declared, the Arsenal of Democracy.78 And yet its purpose—to diversify U.S. capabilities in order to enhance economic and national security—harkens back to 1791, when Treasury secretary Alexander Hamilton sent his Report on Manufactures to Congress.

 

If enacted, the bill could also represent the first Factory Bill: imper­fect but foundationally correct in its focus on developing future capa­bilities and resilient supply chains. Congress could—and should—seize the opportunity and seek to periodically reauthorize its manu­facturing provisions.

 

Industrial policy is not a relic of the past. It is part and parcel of twenty-first-century international development, including development of the most advanced economies. Although not created in a top-down manner, the emerging American industrial policy is based on a political consensus that certain capabilities, critical to national and economic security, are worth preserving and expanding. The next step, should Congress so choose, is to turn the serendipitous into the deliberate, and ensure consistent and measurable progress in strengthening U.S. manu­facturing and its value chains.

 

This article originally appeared in American Affairs Volume V, Number 3 (Fall 2021): 3–17.

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Notes

1 Steven K. Vodel, “America Needs an Industrial Policy—Now More Than Ever,” Hill, October 13, 2020.

2 David Dayen, “First 100: How Biden Must End Corporate-Run Industrial Policy,” American Prospect, February 12, 2020.

3 See Mo Hu and Yi-Hua Lee, “US Conservatives Find New Merit in Industrial Policy,” Voice of America, September 22, 2020; Ethan Paczkowski, “America Needs a Comprehensive Industrial Policy,” Medium, September 11, 2020.

4 For a history of U.S. industrial policy over time, see Christian Stensrud, “Industrial Policy in the United States,” Civitas, October 2016.

5 President Biden’s national security adviser acknowledged this when he wrote, “advocating industrial policy was once considered embarrassing . . . now it should be considered close to obvious.” See Jennifer Harris and Jake Sullivan, “America Needs a New Economic Philosophy. Foreign Policy Experts Can Help,” Foreign Policy, February 7, 2020. A former Reagan administration official recently argued for an industrial policy appropriate for the “post-cloud era.” See Mark Mills, “Industrial Policy: Old-Think in the New Cloud Era,” Manhattan Institute, February 18, 2021.

6 Others have begun to acknowledge this emerging industrial policy. See David Ignatius, “The US Is Quietly Mobilizing Its Economy against China,” Washington Post, March 5, 2021.

7 Catie Edmonson, “Senate Overwhelmingly Passes Bill to Bolster Competitiveness with China,” New York Times, June 8, 2021.

8 According to the U.S. Federal Reserve, employment in the U.S. manufacturing sector dropped from 19.5 million in May 1979 to 12.2 million in November 2020. The first decade of the twenty-first century saw the most precipitous drop, of nearly six million employees. The manufacturing share of nominal GDP has dropped from 28.5 percent in 1953 to 11 percent today. According to the U.S. Bureau of Economic Analysis, the U.S. trade deficit in goods grew steadily from $447 billion in 2000 to $916 billion in 2020. The trade deficit in high-R&D-intensive goods steadily increased from $100 billion in 2006 to $300 billion in 2018.

9 Keith B. Belton, J. D. Graham, and Suri Xia, Made in China 2025 and the Limitations of US Trade Policy, working paper, Indiana University, Paul H. O’Neill School of Public and Environmental Policy, 2020.

10 In 1980, Milton Friedman appeared on episode one of the PBS show Free to Choose, in which he borrowed from Leonard Read’s essay to illustrate the power of free enterprise.

11 Hidalgo and Hausman created a map of thousands of product types and grouped product types by related competencies; products requiring similar competencies are located close to each other on the product map. Because every nation possesses a unique set of capabilities, each nation exports a particular subset of products on the product map. The more advanced economies export a greater array of products, and the most complex products are exported only from advanced economies. Economic growth occurs when a country expands its capabilities to make new product types on its product map. These new product types typically leverage a nation’s existing capabilities. For example, it would not be surprising for a nation with capabilities in materials science and aerospace engineering to develop a commercial airliner made of lightweight carbon fiber composites. See Cesar A. Hidalgo and Ricardo Hausmann, “The Building Blocks of Economic Complexity,” Proceedings of the National Academy of Sciences 106, no. 26 (2009): 10570–75.

12 Ricardo Hausmann presented a twenty-minute overview of his thinking at the World Economic Forum in 2015. This instructive video can be found on YouTube, entitled, “Secrets of Economic Growth.”

13 Sridhar Kota and Thomas C. Mahoney, “Loss of the Industrial Commons Is an Existential Threat to U.S. Manufacturing,” Indiana University, Paul H. O’Neill School of Public and Environmental Affairs, Manufacturing Policy Initiative, 2020.

14 Gary P. Pisano and Willy C. Shih, Producing Prosperity (Boston: Harvard Business School Press, 2012).

15 Robert D. Atkinson, “Who Lost Lucent?,” American Affairs 4, no. 3 (Fall 2020): 99–135.

16 The value of economic espionage to a nation is best illustrated by the former East Germany, which stole industrial secrets from West Germany for decades. Glitz and Meyersson determined that, between 1970 and 1988, the benefits of the espionage exceeded the cost by more than tenfold. See Albrecht Glitz and Erik Meyersson, “Industrial Espionage and Productivity,” American Economic Review 110, no. 4 (2020): 1055–1103.

17 John J. Fialka, War by Other Means (New York: W. W. Norton, 1997).

18 Gary P. Pisano and Willy C. Shih. “Restoring American Competitiveness,” Harvard Business Review (July–August 2009).

19 Lars Bruno and Stig Tenold, “The Basis for South Korea’s Ascent in the Shipbuilding Industry, 1970–1990,” Mariners Mirror 97, no. 3 (2011): 201–17.

20 John D. Graham, Keith B. Belton, and Suri Xia, “How China Beat the US in Electric Vehicle Manufacturing,” Issues in Science and Technology 37, no. 2 (2020): 72–79.

21 César A. Hidalgo, et al. “The Principle of Relatedness,” in Unifying Themes in Complex Systems (Springer, Cham, 2018).

22 Pisano and Shih argue that loss of the industrial commons cannot be easily reversed. See Pisano and Shih, Producing Prosperity.

23 Sridhar Kota and Thomas C. Mahoney, “Loss of the Industrial Commons Is an Existential Threat to U.S. Prosperity,” Manufacturing Policy Initiative, Paul G. O’Neill School of Public and Environmental Affairs, Indiana University, 2020.

24 Constantinos C. Markides and Norman Berg, “Manufacturing Offshore Is Bad Business,” Harvard Business Review 66, no. 5 (1988): 113–20.

25 Author conversation with Harry Moser, 2018. See also: David Finegold, et al., The Decline of the US Machine Tool Industry and Prospects for Its Sustainable Recovery (RAND, 1994).

26 See Pisano and Shih, Producing Prosperity.

27 Ricardo Hausmann, “The Tacit-Knowledge Economy,” Project Syndicate, October 30, 2013.

28 The examples provided were taken from the following government reports: Interagency Task Force in Fulfillment of Executive Order 13806, Assessing and Strengthening the Manufacturing and Defense Industrial Base and Supply Chain Resiliency of the United States, 2018 unclassified report. U.S. Department of Defense, Fiscal Year 2019 Industrial Capabilities Report to Congress, Office of Industrial Policy, 2020.

29 Cybersecurity has not become a norm in manufacturing, especially in small and medium-sized manufacturers. Defense contractors and subcontractors are required to implement the information security protections described in the National Institute of Standards and Technology (NIST) Special Publication 800‑171 Rev 1, “Protecting Unclassified Information in Nonfederal Information Systems and Organizations.” Compliance with the requirement by sub-tier suppliers remains relatively low.

30 U.S. Department of Defense, “DoD Announces Rare Earth Element Awards to Strengthen Domestic Industrial Base” (press release), 2020.

31 U.S. Department of Defense, “DoD Has Pedal to the Metal on Hypersonics” (press release), 2020.

32 “Semiconductor Industry Applauds NDAA Enactment, Urges Full Funding for Semiconductor Manufacturing and Research Provisions” (press release), Semiconductor Industries Association, 2021.

33 Tom Temin, “NDAA Requires Pentagon to Secure Circuit Board Supply Chain,” Federal News Network, January 20, 2021.

34 Farhad Jalinous, et al., “Cfius Reform Becomes Law: What Firrma Means for Industry, White & Case, 2018.

35 Thomas McVey and Christopher Skinner, “Developments in Export Controls on ‘Emerging’ and ‘Foundational’ Technologies,” J.D. Supra, September 17, 2020.

36 David Shepardson, “US Moves to Cut Huawei Off from Global Chip Suppliers,” Reuters, May 15, 2020.

37 Chuin-Wei Jong, “Pandemic Lays Bare U.S. Reliance on China for Drugs,” Wall Street Journal, August 5, 2020.

38 Rosemary Gibson, and Janardan Prasad Singh, China Rx: Exposing the Risks of America’s Dependence on China for Medicine (Amherst, N.Y.: Prometheus Books, 2018).

39 M. Rose and S. Kar-Gupta, “France Must Seek Greater Economic Independence after Virus, Says Macron,” Reuters, June 11, 2020.

40 T. Escritt, “Germany Would Like to Localize Supply Chains, Nationalization Possible, Minister Says,” Reuters, March 13, 2020.

41 S. Tan, “Australia Sees Partial Economic Decoupling from China as Canberra Weighs Risk of Over Reliance after Coronavirus Disruptions,” South China Morning Post, July 4, 2020.

42 I. Reynolds and E. Urabe, “Japan to Fund Firms to Shift Production Out of China,” Bloomberg, April 8, 2020.

43 S. Yonhap, “S. Korea seeks to Ease Factory Regulations for More Re-Shoring,” Korea Herald, May 17, 2020.

44 This framework for resilience is borrowed from the work of M. Christopher and H. Peck, “Building the Resilient Supply Chain,” International Journal of Logistics Management 15, no. 2 (2004):1–13; M. Christopher, “The Mitigation of Risk in Resilient Supply Chains,” International Transport Forum Discussion Paper, 2018–19, 2018.

45 See the following sources for more details: B. Aylor, et al., Designing Resilience into Global Supply Chains, Boston Consulting Group, 2020; Willy Shih, “Is It Time to Rethink Global Supply Chains?,” MIT Sloan Management Review (2020); J. Smith, “Post-Pandemic Supply Chains seek ‘Resilience,’ Report Says,” Wall Street Journal, June 23, 2020.

46 Mar Lapedus and Ann Steffora Mutschler, “Regaining the Edge In US Chip Manufacturing,” Semiconductor Engineering, October 26, 2020.

47 Shane Lasley, “Strategic Metals Firepower for Pentagon,” Metal Tech News, December 14, 2020.

48 Defense Media Network, “US Department of Defense Awards Contract to Launch Defense Electronics Consortium,” January 27, 2021.

49 Rick Mullin, “US Backs Domestic Drug Production,” Chemical & Engineering News, January 27, 2021.

50 U.S. Customs and Border Protection, “DHS Cracks Down on Goods Produced by China’s State-Sponsored Forced Labor,” CBP Public Affairs Office, September 14, 2020.

51 On July 5, the Biden presidential campaign website posted, “The Biden Plan to Rebuild U.S. Supply Chains and Ensure the U.S. Does Not Face Future Shortages of Critical Equipment.” On September 9, 2020, Biden released a plan to leverage the tax code and amend federal rules to discourage outsourcing, encourage reshoring, and promote domestic manufacturing.

52 President Joseph Biden, Executive Order 14017, “America’s Supply Chains,” February 24, 2021.

53 Associated Press, “In a First, Congress Overrides Trump Veto of NDAA,” Federal News Network, January 1, 2021.

54 Burt Braverman, “Congress Enacts the Export Controls Act of 2018, Extending Controls to Emerging and Foundational Technologies,” David, Wright, and Tremaine, LLP, September 26, 2018.

55 Farhad Jalinous, et al., “Cfius Reform Becomes Law: What Firrma Means for Industry,” White & Case, August 13, 2018.

56 Editorial Board, “Biden’s Buy American Plan Is Good Politics—and Awful Economics,” Washington Post, January 28, 2021.

57 Tyler Pager, “Biden Says He Supports Usmca, Citing Provisions for Labor,” Bloomberg, December 20, 2019.

58 President Trump’s adviser and “manufacturing czar” Peter Navarro famously complained that candidate Biden was a “poll-driven plagiarist” with his proposed manufacturing policies.

59 Revealed comparative advantage is calculated as a nation’s export share of a product divided by the product’s share of world trade. Values greater than one “reveal” a comparative advantage for a nation.

60 Dani Rodrik, “Normalizing Industrial Policy,” World Bank 2008.

61 D. Simchi-Levi and E. Simchi-Levi, “We Need a Stress Test for Critical Supply Chains,” Harvard Business Review, April 28, 2020.

62 Keith B. Belton, Michael Mandel, and Thomas J. Duesterberg, “Policies to Enhance the Resilience of US Manufacturing,” working paper, Paul H. O’Neill School of Public and Environmental Affairs, Indiana University, 2020.

63 President Joseph Biden, Executive Order 14017, “America’s Supply Chains,” February 24, 2021.

64 Keith B. Belton and Ryan Olson, “The Promise of Smart Manufacturing,” in Smart Factories: Issues of Information Governance, (Manufacturing Policy Initiative, School of Public and Environmental Affairs, Indiana University, 2019).

65 Keith B. Belton, David B. Audretsch, John D. Graham, and John A. Rupp, “Who Will Set the Rules for Smart Factories?,” Issues in Science and Technology 35, no. 3 (2019): 70–76.

66 The usmca, enacted in 2018, contains numerous provisions reflecting a U.S. posture on digital trade policy and information governance for smart manufacturing. See Keith B. Belton, “usmca through the Lens of Smart Manufacturing,” in Insight into Manufacturing Policy (Manufacturing Policy Initiative, School of Public and Environmental Affairs, Indiana University, 2019).

67 Boston Consulting Group and Semiconductor Industries Association, Government Incentives and US Competitiveness in Semiconductor Manufacturing (2020).

68 Debby Wu and Ian King, “TSMC Wins Approval from Phoenix for $12 Billion Chip Plant,” Bloomberg, November 18, 2020.

69 Deloitte, Deloitte and the Manufacturing Institute Skills Gap Study (National Association of Manufacturers, 2018).

70 Oren Cass, “A Better Model for Worker Training,” American Compass, 2020.

71 Lauren N. Smith, et al., “Registered Apprenticeship Programs Serving Indiana Manufacturers: The Sponsor’s Perspective,” working paper, Manufacturing Policy Initiative, Paul H. O’Neill School of Public and Environmental Affairs, Indiana University, 2018.

72 Keith B. Belton, Michael Mandel, and Thomas J. Duesterberg, “Policies to Enhance the Resilience of US Manufacturing,” working paper, Paul H. O’Neill School of Public and Environmental Affairs, Indiana University, 2020.

73 S. Tobocman, “Trump’s New Restrictions on Work Visas Will Hurt Michigan Businesses,” Detroit Free Press, July 8, 2020.

74 Richard Sanders, “A Layered Look at Canadian and US Immigration,” Wilson Center, 2020.

75 Sridhar Kota and Tom Mahoney, “Reinventing Competitiveness: The Case for a National Manufacturing Foundation,” American Affairs 3, no. 3 (Fall 2019): 3–17.

76 Research by Marianna Mazzucato showed that private sector will underinvest in pre-commercial R&D and that past U.S. federal investments are responsible for the creation of most breakthrough drugs and many of the capabilities embodied in the smart phone. Such government investments are needed to overcome the so-called technological “Valley of Death.”

77 Through the sharing of best practices, the Manufacturing Extension Partnership, which operates at the state level, offers assistance to small and medium manufacturers to increase firm-level productivity.

78 For a description of U.S. industrial policy in World War II, see Arthur Herman, “American Needs an Industrial Policy,” American Affairs 3, no. 4 (Winter 2019): 3–28.

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About the Author

Keith B. Belton is founder and principal of Pareto Policy Solutions, LLC. He was the founding director of the Manufacturing Policy Initiative at Indiana University’s Paul H. O’Neill School of Public and Environmental Affairs.