With manufacturing plan, Obama misses the bigger picture

President Obama's new program to revive American manufacturing, largely by improving its access to federal and university research contains some promising, if small-scale, features. But it ignores the structural and global challenges mainly responsible for domestic industry’s malaise. In a word: Imports keep corroding what had been a powerful engine of job-creation, growth, and technological progress.

Here’s one way to grasp the scale mismatch between the Obama plan and the plight of domestic manufacturing: The President’s proposal would devote $500 million annually in federal and private sector funding (much of it already appropriated or spent) to promoting advanced manufacturing. Last year, however, manufacturing in the United States ran a $565 billion trade deficit. So far this year, that deficit is running 14.5 percent higher – despite a slowing economy, which is supposed to curb Americans' appetite for imports. Every dollar of this trade deficit represents lost opportunities for production, employment, and innovation. Worse, the borrowing needed to pay for these goods further boosts already dangerous levels of US debt.

Aren't these old-line Rust Belt firms, you may ask, that just can't hack the global competition? Hardly. Last week, my organization – the U.S. Business and Industry Council – released a study showing that more than 100 of America’s most advanced manufacturing industries – including sectors such as semiconductor production equipment, electro-medical devices, pharmaceuticals, construction equipment, ball and roller bearings, turbines and turbine generator sets, and plastics and resins – have lost sizable chunks of their home markets to imports between 1997 and 2009 (the last year for which government data is available). In fact, nearly a fourth of the industries studied – including several machine tool-related categories, broadcast and wireless communications equipment, and turbines and turbine generator sets – had lost more than half of their US market to imports as of 2009.

A CEO would never tell prospective investors, “My firm is doing great; I’m losing market share to my competition.” But in a way, that is what Mr. Obama, the nation's CEO, has been suggesting with this and his other manufacturing initiatives. According to his prescription, now that the auto sector has been rescued, America’s most valuable or promising industries need little more than limited doses of government-encouraged research and development and a “greener” focus – along with a return to normal economic growth – to regain world-class status.

The rising import penetration experienced by so many of America’s industrial and technological crown jewels undercuts that claim. Moreover, the American market is where US-based manufacturers should be doing best. It’s the market they presumably know best. And it’s one in which they face no trade barriers.

Strangely, the main culprits in this saga include not only foreign governments that have long rigged global manufacturing markets with impunity. They also include American corporations that for decades have followed the offshore mantra: manufacture and even innovate in low-cost, regulation-light, often heavily subsidized foreign production bases and then import back to the high-price US market. The marvel is not that US companies do it. The surprise is that our trade policies so often actually encourage them to do it.

The president is right to view domestic manufacturing as prerequisite of recovery and lasting prosperity. And contrary to market purists, government programs along the lines of what the president announced have an excellent record of helping to develop state-of-the-art technology, and of transferring it to companies and individual entrepreneurs in sectors ranging from agriculture to information technology, to aerospace, to pharmaceuticals. Moreover, federal support – including purchases – has often been needed to enable breakthrough discoveries to become commercially viable.

At the same time, these new presidential measures – just as with many of their predecessors – will greatly underperform unless they fix America’s fundamentally flawed trade policy. To start, when it comes to spending taxpayer dollars, or using them to leverage private sector resources, the US needs strict requirements to keep American companies' R&D, and eventually their production and hiring as well, in the US.

Without this kind of overhaul, which Obama has so far resisted, American manufacturing can't be an engine of growth and will remain primarily an engine of imports, deficits, and debt.

– Alan Tonelson, author of “The Race to the Bottom,” is a research fellow at the U.S. Business and Industry Council, a national organization representing nearly 2,000 small and medium-sized domestic manufacturing companies.