After decades of looking away as America’s supply chains migrated overseas, policymakers are finally facing the reality that dependence on foreign producers has weakened America’s resilience, security, and economy.
The COVID-19 pandemic has cast a harsh spotlight on this failure, leaving the nation unacceptably exposed, our capacity depleted, and our essential workers turning to China for equipment. “This pandemic has reaffirmed the importance of keeping vital supply chains at home,” President Donald Trump explained at an April press briefing. “We cannot outsource our independence. We cannot be reliant on foreign nations.”
But the effects of offshoring extend well beyond medical shortages during a public health crisis. When factories leave our shores, not only the jobs but also the suppliers, the customers, the expertise, and the innovation go with them. When productivity growth and innovation are needed, they are nowhere to be found. When we lose ground to rival nations, we lack the capacities required to regain the lead.
Our contest with China is perhaps the clearest example of how the United States has suffered from offshoring our industrial capacity. America invented the core technologies of the digital revolution—semiconductors, LCDs, LEDs, and more—but today we produce only 7% of the world’s share of high-tech exports; China produces nearly 4 times as much. An analysis of 36 indicators of national innovation has shown that China is catching up to the U.S., and in some areas like 5G, mobile payments, and drones, it is already ahead. (RELATED: The Fight To Reshore US Pharmaceuticals)
As David P. Goldman observes in his foreword to “Moving the Chains,” the recent American Compass symposium on reshoring supply chains, the loss of industrial leadership has been a national disaster:
American manufacturing employment fell to about 11.4 million from almost 20 million in 1980. We also have a chronic trade deficit in manufactured goods, an accumulating foreign debt, a chronically low savings rate, an excessively consumption-based economy, and stagnant labor productivity. To paraphrase Leon Trotsky, you may not be interested in supply chains, but supply chains are interested in you.
The concept of reshoring supply chains provides a strong guiding principle for strengthening the American economy’s foundations, reviving innovation and productivity growth, and delivering widespread prosperity for American workers, their families, and their communities. But accomplishing it is not just a matter of “winning a trade war” with China—supply chains can run through Vietnam instead—or cajoling a high-profile manufacturer to open a new plant. In an ideal world, conservatives could count on the market to drive the needed the progress, but in this case it as no interest in doing so. To the contrary, the market has shown clearly that, left to its own devices, it will eagerly push supply chains abroad. Regaining the advantages that we so causally cast aside will require a clear national strategy and focused attention across many areas of public policy.
Three priorities should guide policymakers’ efforts to retake the lead in industry and innovation. First, we must invest in the basics by committing public funding to the building blocks of our innovation-based economy. Second, we should make America the best place to build by creating incentives and opportunities for private investment. Third, we must defend against foreign distortions by addressing the harmful policies of our economic rivals and reclaiming the full benefits of free trade.
Investing in the Basics
The United States must invest in itself, beginning with its basic infrastructure. In 2017, even before passage of the Tax Cuts and Jobs Act, manufacturing and supply-chain professionals ranked “investment in U.S. infrastructure” as their top policy priority, choosing it by almost two-to-one over “tax reform.” That same year, the American Society of Civil Engineers graded our systems a D+. State and local governments have historically provided two-thirds of the nation’s infrastructure spending, but the COVID-19 pandemic has crippled their finances and created a funding gap that could be impossible to bridge without private-sector support. BlackRock’s Terrence Keeley argues that the United States should create a national development bank to attract private capital into infrastructure projects, closing the funding gap and improving project outcomes. Such banks, already standard features in most national and regional economies, can operate with little to no taxpayer capital, while using the guarantee of public backing to attract enormous private-sector commitments.
Alongside infrastructure, the nation also needs to expand its investment in research and development. We already spend massive sums on “basic research” in university and government laboratories, but vital to our manufacturing prowess is the intermediate step that brings breakthroughs from the lab into the marketplace. One of the most effective ways to do this, and one that the United States has used in the past to great effect, is called a “pre-competitive partnership.” As Harvard Business School’s Willy Shih explains, pre-competitive partnerships allow private-sector firms to collaborate in the development of platform technologies that they can all then build from and compete with. Such a partnership helped to establish American leadership in airplane engines and semiconductors.
The United States has lost not only its supply chains, but also the skilled workforce and embedded industry expertise to support them. Our lack of active labor market policies compounds this problem; workers cast out of disrupted jobs get little support in connecting to new ones. The U.S. spends about 0.10% of GDP on programs that actively encourage labor force participation, the lowest of any OECD country after Mexico. The Niskanen Center’s Samuel Hammond argues that policymakers should begin by reforming Trade Adjustment Assistance (TAA), America’s largest employment and training program. It is woefully outdated and under-inclusive, failing to support even most trade-displaced workers. TAA should instead provide training to people unemployed for any reason and help them navigate the path back to productive work. “Reshoring strategies … will only go so far,” Hammond notes, “if at the end of the day, our shiny new factories have ‘help wanted’ signs on the door.” (RELATED: Coronavirus Shows Why America Needs An Industrial Policy)
Making America the Best Place to Build
The most straightforward way to encourage domestic investment is to make it cheaper, by providing a tax credit. The U.S. tax code once encouraged and supported American companies to invest in productivity-enhancing projects like R&D, but today we are a laggard in such tax incentives. The U.S. abolished its investment tax credit in 1986 and since then has fallen behind 25 other OECD nations in R&D tax incentives. American policymakers should revisit our anemic R&D tax credit and consider further reducing the effective tax rate for companies that invest in R&D, capital equipment, and workforce training. The Information Technology and Innovation Foundation’s Rob Atkinson proposes an American Innovation and Competitiveness Tax Credit that would reduce a firm’s tax liability by 30% of spending in those areas, rewarding investment and catching up with our rivals that offer more generous incentives.
Sometimes the obstacles to investment are the rules and procedures placed in its way. Environmental laws, for instance, have ratcheted continually tighter since they were enacted 50 years ago, and they specifically target efforts at expanding domestic industrial capacity. The result has been clean air and reduced pollution at the expense of American businesses. Environmental regulation has depressed new plant construction by 26–45%, with the greatest impacts on the largest firms. A 2017 survey by the Department of Commerce found that these regulations occupied the top nine spots on a list of the 20 most frequently cited regulatory issues that impact manufacturing. American Renewal’s Oren Cass proposes that policymakers remove the excessive hurdles to construction and expansion imposed by existing environmental regulation. Congress could amend the Clean Air Act and National Environmental Protection Act to allow the construction of new facilities on the same terms as existing ones as well as create more streamlined permitting processes.
In other places, however, the challenge stems from a failure to enforce existing laws strongly enough. Excessive concentration and market power have arguably discouraged domestic production, suppressed price signals, and helped state-backed Chinese firms dominate supply chains over the last few decades. This has caused national shortages in critical areas, such as the generic medicines, where the FDA has warned that shortages undermine doctors’ ability to deliver high standards of care. Matt Stoller recommends sector-specific analyses to identify anticompetitive practices that have undermined domestic production capacity. Surgical application of antitrust enforcement to these sectors could recreate both horizontal and vertical fragmentation within specific markets and allow domestic producers back into the game.
Defending Against Foreign Distortions
The promise of international trade was that countries would produce more for each other, but this has only half worked. While many domestic supply chains have migrated overseas, few have moved from elsewhere onto our shores. This is no accident, but rather a result of a total failure by policymakers to ensure that trading relationships are reciprocal. The WTO’s rules and procedures have failed to uphold this principle, but reform of the WTO itself now requires unanimity of its more than 160 members, which effectively blocks any attempt to create new rules for the modern economy or effectively punish countries that cheat. Last month, Republican Missouri Senator Josh Hawley argued that the U.S. should abandon the WTO entirely. But at the very least, argues Thomas Duesterberg of the Hudson Institute, we should insist upon institutional reform of the WTO in a way that creates a pathway to revising its rules, or else move beyond the WTO’s structure to reassert its own interests. (RELATED: Sen. Josh Hawley Says It’s Time To Abolish The World Trade Organization)
In some cases, it may make sense simply to mandate reshoring. Local content requirements (LCRs), for instance, require some or all of a final good’s inputs to be manufactured domestically. These are blunter measures than the technocratic reforms to cajole or incent but, as Michael Lind argues, LCRs directly and reliably achieve their stated purpose and allow policymakers to target particular supply chains of economic or strategic importance.
Finally, if the federal government is to design and executive a supply-chain strategy, it will need the capacity to do so. Right now, there is no single department or agency within the federal government whose core mission is to develop a comprehensive reshoring strategy and facilitate its execution. Instead, responsibility and authority are dispersed across a byzantine tangle of agencies. Vanderbilt Law School’s Ganesh Sitaraman argues for consolidating the Department of Commerce, U.S. Trade Representative, Small Business Administration, export promotion agencies, and economic sanctions authority into a new cabinet-level agency: the Department of Economic Resilience, which would feature divisions for trade, export promotion, economic security, industrial policy, and statistics. With a dedicated department, the United States could more effectively develop a national strategy, much like the State Department, and execute on the long-term priorities that reshoring will require
The Reshoring Imperative
The imperative to reshore our supply chains and rebuild our industrial capacity will not end when the COVID-19 pandemic recedes. It will take center stage in our generation-defining contest with China, and it will be integral to any effort to build a vibrant economy that supports all Americans and leads the world in the next wave of innovation. Meeting it will require policymakers to reexamine some of the basic assumptions of American economic policy of the last 40 years.
The policy proposals outlined here typify nine different strategic approaches to addressing the challenge of reshoring, greatly expanding upon the traditional “tax cuts and deregulation” formula that has characterized the conventional right-of-center policy playbook for decades. Free-market fundamentalism is incapable of retaking global leadership in industry and innovation.
It took a once-in-a-century pandemic to lay bare America’s vulnerable supply chains. Let’s hope it doesn’t take a similar cataclysm to realize that conventional policies won’t bring them back. It is time to move the chains.
Wells King is the research director at American Compass. This piece was adapted from “Moving the Chains: Nine Strategies for Retaking Global Leadership in Industry and Innovation,” a policy symposium organized by American Compass.
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