I gotta hand it to the Brookings Institution. It’s been putting out some genuinely valuable research on domestic manufacturing – and I’m not just saying that because Brookings scholars share my view that American industry remains in struggle, not renaissance mode. Two aspects of its newest manufacturing report are especially worth highlighting: the sectors it includes in its definition of “advanced industries,” and its recognition that industries running global trade deficits are industries in trouble.
Brookings isn’t the only outfit that tries to define advanced manufacturing. For example, the U.S. government has tracked trade in “advanced technology products” since 1989, and most analysts – and everyday Americans – would probably rattle off very similar lists of such sectors if asked. Nearly everyone would include information technology hardware, and the sharper you are, the likelier you’ll be to include industries like pharmaceuticals and aerospace and advanced materials.
But Brookings’ list is so broad and unconventional that it looks like those in my import penetration reports – including steel and autos and home appliances and chemicals and electrical equipment and industrial machinery. These and many others are typically and sneeringly dismissed by the economic conventional wisdom as “smokestack.” But they require lots of capital as well as research and development, engineering, and product design in order to compete successfully. In fact, Brookings includes several sectors that I’ve left out, either because of small size or my sense that they simply were not capital- and technology-intensive enough – like consumer electronics and lighting equipment and shipbuilding and the big miscellaneous manufacturing category. I’ll need to reexamine them at some point.
Just as surprising is Brookings’ emphasis on trade balances as measures of an industry’s health. Most economists will tell you that economy-wide trade balances don’t really matter or, as is the case with the current U.S. administration and all of its recent predecessors, simply ignore any trade-related data except on exports. Worrying about trade balances on the industry level is considered a hallmark of neanderthalism.
But the Brookings study actually turns the conventional wisdom on its head, contending that the economic damage done by trade shortfalls in individual industries should be less controversial than the damage done by broader deficits. It specifies that these deficits “can symbolize lagging competitiveness or they can stem from the distortionary economic policies of competing nations.” And it warns:
“Regardless of their origins, advanced industry trade deficits pose a serious threat to the country’s long-term prosperity. Because most innovation builds on existing technologies and is evolutionary in nature, the concentration of advanced industrial activity and know-how outside of the United States puts the nation’s ability to own the next-generation of critical technologies into question. Reducing the trade deficit in advanced industries is essential to slow the erosion of U.S. innovative capacity.”
Moreover, some of the statistics it presented surprised even me – especially for those service sectors I don’t track closely. For example, did you know that in 2012, the United States ran only a modest trade surplus in telecommunications services, and deficits in R&D and computer services? And that American trade in software was only roughly balanced? I sure didn’t.
Most of the Brookings study’s recommendations for strengthening advanced U.S. industries center on domestic reforms. But the authors do insist that “The United States should seek not only multilateral trade agreements but also true market openings and regulatory harmonizations that reduce both tariff and nontariff barriers that advanced industry exporters face in foreign markets. Countries that engage in unfair trade practices should be held accountable.”
This description of the Brookings findings doesn’t begin to do them justice. Especially fascinating are the numbers on the geography of manufacturing activity in the United States down to the level of small and medium-sized cities. But with Congress debating the future of U.S. trade policy “even as we speak,” the study’s reminder that trade deficits matter and can threaten the nation’s industrial and technological leadership are the points that policymakers today most urgently need to hear.