Making lemonade out of the lemons of the COVID-19 pandemic
Ironically, globalization may be at the heart of the problem. With heavy reliance on global supply chains and foreign producers, the pandemic has interrupted the shipping of products, parts, and materials to nearly 75 percent of U.S. companies. It is my belief that the real impact is not even close to being realized!
Decades of “offshoring” domestic manufacturing has damaged the nation’s industrial base, creating increased income inequality and stagnation in our living standards. Hopefully now, there will be a more accurate focus on the current crisis and many of its roots, at the same time to take appropriate steps to rest our global positioning.
After World War II, U.S. policies promoted more liberal international trade, reducing tariffs, and encouraging globalized manufacturing. The process accelerated in the 1980s when the production of consumer electronics, vehicle parts, packaged semiconductors, and other goods was transferred to Mexico, Taiwan, Malaysia, and other low-wage countries. When China opened in 1978, its low-cost manufacturing proved irresistible to many American companies. From 2000 to 2019, direct investment in manufacturing from the United States to China jumped from $7 billion to more than $54 billion! Today, that number continues to rise.
Adding to the shift was the rising importance of shareholder profits in corporate decisions, considered as the only way to remain competitive. The U.S. economy shifted from manufacturing to marketing, branding, and research and development. With far fewer factories and factory jobs, the nation moved to a post-industrial “knowledge economy” driven by information technology, software, advanced communication, and cutting-edge research.
Three widely embraced, egregious misconceptions have resulted in policymakers favoring a “knowledge” economy over a “production” economy: research, results, and inventions are sufficient to create jobs and raise living standards.
Within the United States, we have built a world-leading research base, led by universities and national laboratories, that receives approximately $150 billion in federal funding each year. Under the current system, many important innovations conceived on American soil are then manufactured overseas. We are creating millions of factory jobs in other countries, while hurting U.S. manufacturers.
These products are then imported back, e.g., cellphones, rechargeable lithium batteries, solar cells, drones, vehicle components, and much more.
The economic benefits for American workers are, at best, minimal. Instead of high-wage factory jobs, these imports create jobs in warehousing, distribution, and sales that pay too little to support adequate living standards.
A national commitment to domestic manufacturing from Research & Development investments would generate high-paying jobs and produce valuable technology experts that would also reduce the massive U.S. trade deficit. But for now, our current industrial policy is incompatible with American capitalism.
Across the globe, a range of industrial policies and government actions foster the development of specific industries, usually in support of strategic national goals. In the past, the United States has intervened to develop strong manufacturing in the aerospace, nuclear power, telecommunications, and semiconductor industries, among others. Continued government support for military priorities has been a key factor in why aerospace has remained one of the few sectors in the U.S. with a trade surplus.
Since the Reagan administration, our country has been reluctant to pursue industrial policies that have brought success to other manufacturing economies, such as Germany and the Asian Tigers, e.g., Hong Kong, Singapore, Korea, Taiwan, and China.
With a smarter industrial policy, the U.S. could become a world leader in such sectors as clean energy products, power storage, and electric cars. But we must reinvest in our labor force through educational training, along with the development of relevant manufacturing facilities!
U.S.-based multinational companies are in business to make money, with cost-cutting as a go-to market strategy. Moving factories to low-wage countries has become a default decision, despite negative impacts on the skilled workforce, suppliers, and overall job numbers. It has devastated domestic manufacturing, while boosting corporate profits and executive salaries. The cost has been especially high during this pandemic: Supply shortages have cost peoples’ lives.
A National Response is NeededThe pandemic has revealed the urgent need for an effective national response that re-establishes our country’s ability to manufacture everything from small components to complex machines.
Policies favoring domestic production of essential products would create large numbers of well-paid jobs for skilled, innovative workers who can provide resiliency in a crisis. Identification of and support for critical industries and technologies, financial incentives to build U.S. factories, and strict “Buy American” requirements for government purchases are examples of strategies.
Manufacturing is critical to innovation and job creation. We have recommended how to increase and regain industrial leadership through manufacturing. Among these recommendations are rebuilding domestic supply chains, supporting local production of innovations emerging from U.S. research, creating manufacturing investment funds, and growing domestic engineering and technical talent.
Some of these ideas are gaining traction in Washington, with at least four bills, including the Endless Frontier Act and the American Manufacturing Leadership Act, introduced into the House and Senate.
Provisions would bolster domestic manufacturing and competitiveness with increased funding for advanced technology development. They would also provide technical training and apprenticeships to strengthen the workforce and help small- and medium-sized manufacturers upgrade equipment.
If the products created through taxpayer-funded research were manufactured in U.S. factories, both workers and the economy would benefit. Creation of a new federal agency focused on national manufacturing strategies and a coordinated implementation would help maintain commitment to a strong manufacturing sector. A Cabinet-level voice and sufficient, sustained funding would ensure the nation responds effectively to the industrial shortcomings revealed by the current pandemic.
With the right steps, the COVID-19 crises could be a the right recipe for converting those lemons of our time to the lemonade, woefully needed. This global event can become a positive tipping point to empower employment with livable wages. It could create a stronger, wealthier nation better prepared to confront the next crisis thrown our way.
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Jeffrey Garza Walker is Senior Vice President in Cresa’s Phoenix office who focuses on expanding Cresa’s capabilities in global portfolio services through key industrial clients with requirements in Latin America.