Protectionism Won’t Work: Four Alternatives to Canceling Trade Agreements

Journal of Political Risk, Vol. 5, No. 12, December 2017

By Bhakti Mirchandani

It’s time to create jobs for displaced manufacturing workers and bolster American competitiveness in four ways: (i) invest in growing fields and tradable economies that draw upon a region’s endemic old industrial skills; (ii) fight the opioid epidemic to avoid further declines in labor force participation; (iii) align universities and local manufacturers to ensure that workers are sufficiently skilled to participate in the local tradable economy; and (iv) encourage–and protect–R&D and entrepreneurship in manufacturing.

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What the Fuss is All About: The State of US Manufacturing Jobs

The US share of global manufacturing is down from 29% in the early 1980s to 18.6% in 2015 and up from a low of 16.5% in 2011.[1] Manufacturing employment in the US fell by 8% between 2008 and 2015 due to a combination of US manufacturers’ large investments in automation (only 2 in 5 workers in US manufacturing establishments are now directly engaged in production) and the rapid growth of manufacturing sectors in which labor productivity is extremely high, such as electronic instrument and aircraft manufacturing.[2]  US labor productivity grew particularly fast in computer, electronic, and optical products (up 337% between 2002 and 2015), motor vehicles (up 65%), textiles, apparel, and allied products (up 74%), and basic metals (up 58%)–all of these sectors experienced very steep declines in employment over that period.[3]

Economic nationalists blame free trade agreements for these manufacturing job losses.  Unfortunately, tearing up free trade agreements will not reinstate jobs lost to automation.

Keep Up with the Joneses: Go Beyond Trade Adjustment Assistance

Trade liberalization strengthens US alliances and reduces consumer prices.  At the same time, many import-competing firms and workers face difficult problems.[4]  Since 1962, Congress has responded to these adjustment costs with trade adjustment assistance (TAA), which seeks to provide workers with the skills, resources, and support they need to for reemployment.[5]

Every other major economy spends at least twice what the United States does to help its workers adjust to competition.[6]  Denmark spends more than 2% of its GDP helping unemployed workers back into the workforce, about 20 times as much as the US, while France and Germany spend five times as much.[7]

Instead of cancelling trade agreements, it’s time to try create jobs for displaced manufacturing workers and bolster American competitiveness in four ways: (i) invest in growing fields and tradable economies that draw upon a region’s endemic old industrial skills; (ii) fight the opioid epidemic to avoid further declines in labor force participation; (iii) align universities and local manufacturers to ensure that workers are sufficiently skilled to participate in the local tradable economy; and (iv) encourage–and protect–R&D and entrepreneurship in manufacturing.

Build on Strength: Channel Industrial Skills Toward Tradable Economies and Growing Fields

Old industrial skills can be updated to become relevant for emerging local industries. Akron, Ohio, once a tire making hub, is reinventing itself as “Polymer Valley.”[8]  While the University of Akron’s Polymer Training Centre trains 700 graduate students, Akron Surface Technologies and Akron Polymer Systems commercialize synthetic materials.[9]  Similarly, the Nonwovens Institute at North Carolina State University is modernizing North Carolina’s textile industry through research on heat- and chemical-resistant textiles.[10]

Creating jobs in the tradable economy is key to revitalizing the Rust Belt.  The tradable economy produces goods and services that are sold internationally, bringing capital into the region.  For example, Cleveland has the highest concentration (14.5%) of health science workers out of the top fifty US labor markets because Cleveland is a node in the global life science economy.[11]  In addition, approximately 40% of downtown Cleveland residents work in healthcare or professional, technological, or scientific services. [12]

Investments in growing fields, such as health and medical research, have helped make Buffalo and Pittsburgh attractive to recent college graduates.[13]  Buffalo built a new $375 million Buffalo Niagara Medical Campus,[14] boosting employment from 12,000 to 17,000 over six years.[15]  Pittsburgh Health Data Alliance, a collaboration among Carnegie Mellon University, the University of Pittsburgh and University of Pittsburgh Medical Center, is working to drive data-intensive healthcare innovation, companies, and jobs.[16]

Reconsider No Pain, No Gain

Expanding health insurance coverage of alternative pain management programs, such as physical therapy, meditation, and acupuncture, would help avoid further declines  in labor force participation rates due to opioid addiction.  Almost half of prime age men who are not in the labor force take pain medication daily, of which, nearly two-thirds take prescription pain medication daily.[17]  The increase in opioid prescriptions may generate 20% and 25% of the reduction in the respective male and female labor force participation rates 1999-2015.[18]

Go Beyond Kindergarten, Hotdogs, and Christmas Trees

German Americans brought the US kindergartens,[19] hotdogs,[20] and Christmas trees.[21]  Let’s ensure that the factors making Germany a manufacturing powerhouse[22] become just as ingrained in the US.

Germans reduce unit labor costs by increasing worker skills and increasing firm profitability by focusing on high-quality and high-value goods.[23]  The US should emulate German practices of aligning universities with manufacturers through apprenticeships, training students,[24] and technology transfer.[25]

Emulating Fraunhofer-Gesellschaft, a network of 69 institutes and research units throughout Germany focused on applied research,[26] the Obama administration established a network of Manufacturing USA institutes in 2014.  The Fraunhofer-Gesellschaft, averaging two patents per day, contributes to Germany’s competitiveness.[27]  The Trump administration should continue to support this German-inspired program.

Not Your Father’s Manufacturing

Digitization, artificial intelligence, and other emerging technologies affect all industries.  3D printers, sensors, and high-speed microcomputers are transforming manufacturing and creating opportunities for startups to compete with large firms.[28]  Corporations increasingly seek out collaborations with innovative startups through shared work spaces or investments.[29]

Rather than simply encouraging corporations to save manufacturing jobs in the Rust Belt, the Trump administration should encourage corporations to establish R&D centers that drive manufacturing entrepreneurship in, and attract talent to, the Rust Belt.  Detroit and Grand Rapids, Michigan, have been recognized as two of the top five cities in the country for advanced manufacturing jobs due to corporate investment.[30]  University of Michigan, Michigan State University, and Wayne State University (the Michigan University Research Corridor) graduates have started or acquired businesses at twice the national rate for college graduates since 1996.[31]  Driven in part by the Goodyear Polymer Center, Akron, Ohio is home to an increasing number of polymer and other advanced manufacturing startups.[32]

President Trump should include military R&D centers in the Rust Belt in the defense budget.  After all, military applications for human enhancements, such as upgrading soldiers’ bodies through exoskeletons or implants,[33] and military applications for robotics,[34] are major drivers of science and technology.[35]

Once R&D yields major breakthroughs, that R&D should be better protected against theft by global competitors through stronger cybersecurity.  The Trump administration should also consider the extent to which that R&D should be shared with key national industries, rather than with our global competitors. In China, R&D breakthroughs are rapidly shared across state-owned enterprises.  By contrast, in the US, an R&D breakthrough is allowed to be sold cheaply to global competitors. This is difference is naturally a result of structural differences between the US and Chinese economies; it also has implications for the rate at which innovation cascades through our industries.

Conclusion

Protectionism won’t work.  While the East Asian economies of Japan, Hong Kong, Singapore, Korea, and Taiwan maintained significant tariff and nontariff barriers through much of their initial rapid growth periods (1950s and 1960s for Japan, 1960s and 1970s for Korea), the export promotion and selective import barriers that were central to the East Asian economic miracle also led to some costly mistakes.[36]  Moreover, these approaches are not permitted by current international trade agreements and could lead to retaliation by trading partners. [37]  With the sensible policy solutions of investing in growing fields and tradable economies, fighting the opioid epidemic, aligning industry and academia, and encouraging manufacturing innovation, displaced manufacturing workers and cities hit by the decline of manufacturing will again flourish.

Bhakti Mirchandani is a Senior Vice President at an alternative investment management firm.  Most recently, Bhakti served as Global Relationship Director at Barclays for multilaterals, non-profits, and government agencies focused on international development.  Previously, Bhakti was a Vice President at Unitus Capital, a firm that seeks to open global capital markets for the poor, and worked in corporate strategy and investment management at Barclays Capital/Lehman Brothers, where she was also the firm’s microfinance specialist.  Bhakti co-founded the Global Microentrepreneurship Awards (later Citi Microentrepreneurship Awards) and was a consultant to Women’s World Banking.  Bhakti holds a BA, MBA, and MPA  from Harvard.  Bhakti is a Term Member at the Council on Foreign Relations and an advisor to multiple social enterprises and impact investors.  JPR Status: Opinion

[1] Marc Levinson.  “US Manufacturing in International Perspective,” Congressional Research Service.  January 18, 2017.

[2] Marc Levinson.  “US Manufacturing in International Perspective,” Congressional Research Service.  January 18, 2017.

[3] Marc Levinson.  “US Manufacturing in International Perspective,” Congressional Research Service.  January 18, 2017.

[4] https://greenbook-waysandmeans.house.gov/sites/greenbook.waysandmeans.house.gov/files/2012/documents/RS20210_gb_0.pdf as of 12/20/2017

[5] https://doleta.gov/tradeact/factsheet.cfm as of 12/20/2017

[6] https://www.pbs.org/newshour/economy/column-help-workers-laid-low-trade-havent as of 12/20/2017

[7] https://www.pbs.org/newshour/economy/column-help-workers-laid-low-trade-havent as of 12/20/2017

[8] https://www.csmonitor.com/USA/Society/2017/0501/Can-the-Rust-Belt-become-the-Brain-Belt as of 12/20/2017

[9] https://www.economist.com/news/business/21693944-new-businesses-are-breathing-life-some-americas-old-industrial-cities-rust-belt as of 12/20/2017

[10] https://www.economist.com/news/business/21693944-new-businesses-are-breathing-life-some-americas-old-industrial-cities-rust-belt as of 12/20/2017

[11] https://www.huffingtonpost.com/entry/the-rust-belt-comeback-to-what_us_5890e681e4b080b3dad6fc81 as of 12/20/2017

[12] https://www.huffingtonpost.com/entry/the-rust-belt-comeback-to-what_us_5890e681e4b080b3dad6fc81 as of 12/20/2017

[13] https://www.usnews.com/news/articles/2014/09/02/an-urban-revival-in-the-rust-belt as of 12/20/2017

[14] https://bnmc.org/ub-break-ground-new-medical-school-bnmc/ as of 12/20/2017

[15] https://www.ci.buffalo.ny.us/Home/Leadership/City_Comptroller/economy as of 12/20/2017

[16] http://www.upmc.com/media/NewsReleases/2015/Pages/health-data-alliance.aspx as of 12/20/2017

[17] https://www.brookings.edu/wp-content/uploads/2017/09/1_krueger.pdf as of 12/20/2017

[18] https://www.brookings.edu/wp-content/uploads/2017/09/1_krueger.pdf as of 12/20/2017

[19] http://digitalcommons.fiu.edu/cgi/viewcontent.cgi?article=1110&context=sferc as of 12/20/2017

[20] http://www.history.com/news/hungry-history/break-out-the-buns-the-history-of-the-hot-dog as of 12/20/2017

[21] http://www.realchristmastrees.org/dnn/Education/History-of-Christmas-Trees as of 12/20/2017

[22] https://www.foreignaffairs.com/articles/germany/2011-06-16/secrets-germanys-success as of 12/20/2017

[23]https://dc.mit.edu/sites/default/files/pdf/Roundtable%20The%20Future%20of%20Manufacturing%20Innovation.pdf as of 12/20/2017

[24] http://blogs.wgbh.org/on-campus/2017/6/14/germany3/ as of 12/20/2017

[25] https://www.research-in-germany.org/en/research-landscape/research-organisations/companies-industrial-research.html as of 12/20/2017

[26] https://www.fraunhofer.de/en/about-fraunhofer/profile-structure/facts-and-figures.html as of 12/20/2017

[27] https://www.germaninnovation.org/shared/content/documents/60YearsofFraunhoferGesellschaft.pdf as of 12/20/2017

[28] http://disruptcyprus.com/events/innovation-events-cyprus/972-workshop-on-industry-4-0-how-startups-are-transforming-the-manufacturing-industry as of 12/20/2017

[29] https://foundry.unilever.com/documents/12788/92070/The+State+of+Innovation/7c946425-8316-4323-8ed3-8011f9d3dfef as of 12/20/2017

[30] https://industrytoday.com/article/from-rust-belt-to-high-tech-how-employment-rebounded-in-michigan/ as of 12/20/2017

[31] http://michigantoday.umich.edu/state-of-entrepreneurship/ as of 12/20/2017

[32] https://www.csmonitor.com/USA/Society/2017/0501/Can-the-Rust-Belt-become-the-Brain-Belt as of 12/20/2017

[33] https://www.theatlantic.com/technology/archive/2012/02/more-than-human-the-ethics-of-biologically-enhancing-soldiers/253217/ as of 12/20/2017

[34] https://www.army.mil/article/127583/Evolving_Innovation/ as of 12/20/2017

[35] https://www.theatlantic.com/technology/archive/2013/01/could-human-enhancement-turn-soldiers-into-weapons-that-violate-international-law-yes/266732/ as of 12/20/2017

[36] http://www.frbsf.org/economic-research/publications/economic-letter/1997/july/government-intervention-and-the-east-asian-miracle/ as of 12/20/2017

[37] http://www.frbsf.org/economic-research/publications/economic-letter/1997/july/government-intervention-and-the-east-asian-miracle/ as of 12/20/2017