Free trade and globalization have failed to live up to their promises to raise living standards for everyone. Instead, they decimated the manufacturing economy and failed to account for other concomitant disruptions brought by technology and automation that have simply left us with fewer jobs concentrated in fewer places.
During this pandemic, we learned of a medical mask manufacturer, Prestige Ameritech, which expanded its business in 2009 to meet a surge in government demand due to H1N1 concerns, only to watch the next round of bidding go overseas. How can this happen? For too long, both private industry and government policymakers have often sacrificed long-term planning in order to prioritize lower costs or higher profits across many industries rather than rewarding companies that produce domestically.
However, as a result of the pandemic and armed with a better understanding of the costs of free trade, there is finally a sense of urgency, such that a growing consensus across the nation has the will to change course and create the necessary incentives to curtail outsourcing and, more importantly, bring thousands of jobs home to the U.S. or create new ones here.
I propose that the government create something tangible, such as a “Presidential Seal of Approval” or a “Golden American Eagle,” that can be awarded to companies that meet certain requirements. First and foremost, this will include a requirement to manufacture a high percentage of products here in the U.S., but it could include other valued criteria, such as employee benefits, diversity or sustainability.
The objective is to capitalize on current American patriotic sentiment and the anti-outsourcing movement to encourage a fundamental shift that creates a groundswell of manufacturing repatriation. This will start with a focus on critical areas such as defense, medical and technology industries, but it should be designed to entice companies from all sectors of the economy. The goal is to establish a system that permanently favors domestic goods over imported goods. A multinational company like 3M should lose market share to Prestige Ameritech, which committed itself to expanding its domestic capabilities and production. This might require imposing tariffs, but there are other methods if one is thinking long term.
For many companies, it will take more than just recognition to prompt a return home, so other incentives will undoubtedly play a prominent role, such as matching foreign rewards that lure companies abroad to waiving certain taxes for a period of time. Fortunately, some incentives are already in place. The Tax Cuts and Jobs Act of 2017 included the Investing in Opportunity Act, which resulted in the Qualified Opportunity Zone Tax Incentive. This measure created 8,700 Opportunity Zones across the U.S., which were nominated by state governors and certified by the Treasury to identify low-income communities that met certain criteria.
Encouraging companies to repatriate their production to these Opportunity Zones would create jobs where they are needed most and reward firms with existing incentives, such as the ability to defer and lower capital gains that are invested within these designated areas or eliminate taxes on profitable new investments. This initiative would halt ongoing community disruption and utilize dormant factories and fallow land.
It is also time to drop the fear of government intervention or “picking winners” so that we can level an uneven playing field. How is it that we innovate so easily, such as creating photovoltaic technology, yet at one point allowing more than 90% of that product to be produced abroad? Without manufacturing the product domestically, we lose the ability to innovate any further as research and development follow factories overseas (semiconductors, laptops, smartphones, and batteries are additional examples).
The U.S. government needs to create strong incentives for companies to maintain domestic production and R&D spending, as well as to ensure that all parties – government, industry and academia – continue to collaborate. We have already seen evidence of some companies, including iconic firms such as Polaris, Intel, Caterpillar, GE, Dow and DuPont, returning home to take advantage of narrowing cost differentials, the educated workforce and America’s reliable legal structure, but greater government involvement is necessary in other key industries.
The timing could not be more perfect. This initiative (whatever you call it: #GoldenAmericanEagle; #GreatAmericanRestock; #MakeItHere) would give the current administration and President Trump the opportunity to focus on recovery, resurgence and renewal. By offering up something that would likely receive bipartisan support during an election year, there is a chance to transition the conversation surrounding the pandemic and capitalize on current patriotic sentiment. Given that we are already on a war footing and new policies are being announced nearly every day, President Trump could push this forward very quickly, even without all the details ironed out.
This would not be without precedent. Japan just allocated more than $2 billion of its own economic stimulus to help Japanese companies move production away from China. The U.S. could also offer assistance, targeting industries with a variety of methods over a specific period or by expanding the Qualified Opportunity Zone Tax Incentive to better meet this objective.
In addition, during the recent trade war with China, Trump threatened to use the International Emergency Economic Powers Act (IEEPA) to force companies home. This act was passed in 1977 in order to address “unusual and extraordinary threat to the national security, foreign policy, or economy of the United States.” Although this extreme measure must be used very selectively, the current pandemic shows that there could be a place for it. Let’s start by analyzing our strategic defense and medical needs; let’s stop our myopic focus on cost and start addressing risk.
With every passing year, economic factors such as automation and online retailing are cutting deeper into the fabric of local economies. With every recession, more companies, especially small businesses, are forced to cut costs to survive, and the detrimental effects of free trade and globalization are being felt everywhere.
Small rural communities are losing vitality and creating diseases of despair when they should be thriving as technology makes it possible to work from anywhere. The coronavirus pandemic has accelerated this trend. A recent poll shows more than two-thirds of small businesses expect to close if the restrictions continue for six months. A re-opening of the economy will help them today, but without a long-term domestic growth agenda, many are on borrowed time.
Encouraging large businesses to repatriate overseas production or create satellite offices in Opportunity Zones would reverse these trends immediately. Creating better-paying jobs for laid off or marginalized workers would usher in a new period of economic resurgence, and it would likely spark an inflationary period of true prosperity as the multiplier effect stimulates the economy with unparalleled growth and industrial activity.