Manufacturing in America

8/13/2019 Manufacturing in America

1/90


2/90

MANUFACTURINGINAMERICA

A Comprehensive Strategy to Address

the Challenges to U.S. Manufacturers

U.S. Department of Commerce

Washington, D.C.

January 2004


3/90

ISBN 016068028X

For sale by the

U.S. Government Printing Office,

Superintendent of Documents

Internet: http://bookstore.gpo.gov

Telephone: (866) 5121800

Mail: Stop SSOP,Washington, DC 204020001

Stock number: 003009007321

Federal Recycling ProgramPrinted on recycled paper

January 2004


4/90

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

One

Competingand Winningin aGlobal Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Two

Challenges Facing American

Manufacturing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Three

Recommendations andNext Steps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Appendix

List of Manufacturing Roundtablesand Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

M A N U F A C T U R I N G I N A M E R I C A 3


5/90


6/90

President Bush is committed to making sure every American who wants to work can find ajob. In the third quarter of 2003, the U.S. economy grew at 8.2 percentthe strongestgrowth in nearly 20 years. Over the past five months, more than 250,000 new jobs havebeen created and the December 2003 unemployment rate of 5.7 percent was significantlybelow the 30-year average of 6.4 percent. Thanks to the Presidents pro-growth policies,Americas economy is strongand growing stronger.

The recent economic downturn hit the U.S. manufacturing sector particularly hard,but now our manufacturers are beginning to experience the benefits of the Presidents pro-growth policies. Factory activity is at its highest level in 20 years and new orders are at thehighest level since 1950.

Strengthening American manufacturing is a top priority for the President. America'smanufacturers provide our nation and our people with good jobs, a better quality of life,and inventions that have established our national identity. Manufacturing is the backboneof our economy and the muscle behind our national security.

To make sure the administration is doing everything possible to help American man-ufacturers, last year I ordered a comprehensive review of our manufacturing sector. Ourgoal is to help the American manufacturers compete and win in the 21st century. Throughthe Manufacturing Initiative, we will redouble the administrations efforts on behalf of themillions of Americans who work in the manufacturing sector.

The Initiative organized over 20 public roundtables to solicit input from Americanmanufacturers. Our question was simple: How can government help manufacturerscompete?

This report includes a series of recommendations aimed at unleashing the full potentialof American manufacturers. It is an important first step toward strengthening Americanmanufacturing and creating new jobs. In the coming weeks and months, the Department of Commerce will continue to work with manufacturers, other state and federal agencies, andCongress to help U.S. manufacturers become more competitive in the global marketplace.

American manufacturing has a rich history. After traveling the country and meetingwith hundreds of factory workers, executives, and experts, I am confident it will have anequally rich future.

Donald L. EvansSecretary of Commerce


Message from the Secretary of Commerce


7/90


8/90


9/90


10/90

Manufacturers Association, Motor andEquipment Manufacturers Association,Aerospace Industries Association, Associa-tion of Equipment Manufacturers, Ameri-can Foundry Society, American ForestProducts Association, and others.

The following report is divided intothree chapters. The first chapter providesan overview of the domestic and interna-tional economic issues facing Americanmanufacturing and identifies the power-ful trends shaping the environment inwhich U.S. manufacturers compete today.

The second chapter draws on the ex-perience of U.S. manufacturers themselvesin identifying the challenges governmentmust tackle. Small, medium-sized, andlarge manufacturers all stated that the firstpriority should always be to eliminate gov-ernment policies and practices that hinderU.S. competitiveness. They identified im-mediate priorities such as spurring highereconomic growth and creating incentivesfor investment, including research and de-velopment, as well as long-term effortssuch as the reliability of energy supplies,reducing healthcare costs, and tort reformneeded to reduce the indirect costs im-posed on manufacturers by governmentaction or inaction.

On the international front, manufac-turers stressed the importance of breakingdown the barriers that other governmentserect against U.S. exporters and eliminat-ing the practices that distort trade and in-vestment. With respect to both financeand trade, manufacturers stressed that thegoal of U.S. foreign economic policyshould be to ensure that competition isfree and fair. They also emphasized theneed to reinforce U.S. trade promotion ef-

forts in markets opened by recent tradeagreements, particularly in China.

Manufacturers also emphasized theimportance of looking to the future andinvesting in activities that have givenU.S. manufacturers their competitiveedge. In practical terms, that means en-suring that government does not impede

space, auto and auto parts, biotechnology,semiconductor, chemical, pharmaceutical,plastics, and tool and die industries,among others. The manufacturers attend-ing the roundtables represented a broadmix of small, medium-sized, and large

companies, as well as minority-owned andwomen-owned enterprises.

To demonstrate Secretary Evanscommitment to meeting the challengesfacing the manufacturing sector, theCommerce Departments senior managersled the roundtables, 3 with help from theCommerce Departments local Export As-sistance Centers and private sector Dis-trict Export Councils. Commerce Depart-ment industry specialists attended theroundtables to listen to and report on thediscussions to Commerce Departmentleaders, thus ensuring follow-up actionwith any companies needing informationor assistance.

In addition, the Commerce Depart-ment set up a Web site to gather and dis-seminate information regarding the ini-tiative as broadly as possible. This Website www.export.gov/manufacturing wasused to provide information on eventsand activities, and to encourage thosewho could not attend the roundtables tocontact the Commerce Department re-garding manufacturing issues.

The process also benefited from dis-cussions with industry association repre-sentatives who reflected a broad cross-section of the American manufacturingcommunity. The Commerce Departmentreceived considerable help from both thepersonnel and member companies of theNational Association of Manufacturers,Manufacturers Alliance/MAPI, Association

for Manufacturing Technology, Society of Plastics Industries, Alliance of AutomobileManufacturers, National Tooling and Ma-chining Association, American Forest andPaper Association, American Furniture



11/90

with manufacturers across the country, toaddress the challenges identified, and tohelp set immediate priorities that willbenefit American manufacturing.

In the meantime, the challengesconfronting American manufacturers and

manufacturing workers are urgent, andPresident Bush has already taken action.He has implemented a jobs and growthagenda and outlined a six-point plan:

1. To make healthcare costs moreaffordable.

2. To reduce the lawsuit burden on theU.S. economy.

3. To ensure an affordable, reliableenergy supply.

4. To streamline regulations and report-

ing requirements.5. To open markets for Americanproducts.

6. To enable families and businesses toplan for the future with confidence.

The necessity of acting on these re-forms was reflected in the roundtable dis-cussions: each proposal would improvethe U.S. manufacturing sectors competi-tiveness in the years and decades to come.

One final point deserves emphasis.Despite the challenges faced by Americanmanufacturing, there is one fundamentalreason for optimism about the future of American manufacturing: the talent andmotivation of the men and women whowork in and manage Americas manufac-turing companies. More than anythingelse, manufacturers participating in theCommerce Departments roundtables ex-pressed their commitment to roll up theirsleeves and address the challenges theyface in doing business in an increasinglyglobal and competitive environment.American manufacturers are enthusiasticabout meeting the competition, but theyneed a fair international playing field anda domestic environment free from imped-iments to investment and growth. This

the development of new technologiesthat will create the industries and jobs of the future, as well as improving the com-petitiveness of Americas existing manu-facturing base. Manufacturers stated thatthis effort would require government re-

search and development funding and thecreation of a highly educated and moti-vated workforce.

The third chapter of this report setsout a series of recommendations designedto address the challenges identified byU.S. manufacturers. The recommenda-tions represent a first step toward craftingthe comprehensive strategy SecretaryEvans called for in March 2003.

The recommendations respond tothe call by U.S. manufacturers for agreater focus within the federal govern-ment on manufacturing competitiveness,including the creation of an Assistant Sec-

retary of Commerce forManufacturing and Services.President Bush announcedon Labor Day 2003 that thecreation of this positionwould help keep the federalgovernment focused on is-sues relating to manufactur-ing and would drive theManufacturing Initiativeforward. The recommenda-tions also address the chal-lenges identified by U.S.

manufacturers on both the domestic andinternational front, as well as reinforcingAmerican manufacturings competitiveedge in the development of new tech-nologies and a workforce that can meetthe needs of modern manufacturing.

These recommendations represent

the start of a process, not the end. Fromthe outset, Secretary Evans has viewedthis report and its recommendations asan opportunity to work closely with U.S.manufacturers to develop a sound strat-egy for American competitiveness inmanufacturing. The Commerce Depart-ment intends to review these proposals

10 U. S. D E P A R T M E N T O F C O M M E R C E

American manufacturers are

enthusiastic about meeting the

competition, but they need a fair

international playing field and

a domestic environment free

from impediments to

investment and growth


12/90

3 They included Secretary Donald Evans; Deputy

Secretary Samuel Bodman; Under Secretaries Grant

Aldonas, Philip Bond, and Kathleen Cooper; Assistant

Secretaries Linda Conlin, Bruce Mehlman, and David

Sampson; Directors Arden Bement, Ronald Langston,

and John Maxon Ackerly; and Deputy Assistant Secre-

taries Joseph Bogosian, Kevin Murphy, and Michelle

ONeill. Officials of the U.S. Department of Labor (in-

cluding Assistant Secretary Emily DeRocco) co-hosted

a roundtable focused specifically on workforce, educa-

tion, and training issues, to which the U.S. Depart-

ment of Education contributed as well.

report and its recommendations representa commitment on the part of the Bushadministration to foster an environmentfor the continuing success of Americanmanufacturing.

Notes1 See Total GDP 2002, World Development In-

dicators database, World Bank, July 2003.2 Jeff Werling, The Future of Manufacturing in a

Global Economy, December 2003.



13/90

Abbreviations and AcronymsFDA Food and Drug Administration

GATT General Agreement on Tariffs and Trade

GDP gross domestic product

HSA health saving account

IRC Internal Revenue Code

ITA International Trade Administration

ITC International Trade Commission

MEP Manufacturing Extension Partnership

NAFTA North American Free Trade Agreement

NAM National Association of Manufacturers

NIST National Institute of Standards and Technology

NTMA National Tooling and Machining Association

OECD Organization for Economic Cooperation and Development

OEM original equipment manufacturer

OMB Office of Management and Budget

ONR Office of Naval Research

OSTP Office of Science and Technology Policy

PCAST Presidents Council of Advisors for Science and Technology

R&D research and development

R&E research and experimentation

SBA Small Business Administration

SBIR Small Business Innovation Research

STTR Small Business Technology Transfer

TRIPS Agreement on Trade-related Aspects of Intellectual Property

TPCC Trade Promotion Coordinating Committee

TPSC Trade Policy Staff Committee

USPTO U.S. Patent and Trademark Office

USTR Office of the U.S. Trade Representative

WTO World Trade Organization



14/90

T in mid-2000, before the overall economytook a downward turn. Although rapidmonetary and fiscal responses kept the re-cession in check, the cyclical changesflowing from the recession hit the manu-facturing sector with unusual force.In fact, the general economic down-turn that first appeared in the manufac-turing sector in mid-2000 may havemasked the far more powerful underlyingstructural changes affecting manufactur-ing. With rapid advancements in technol-ogy, lower barriers to trade, and the entry

of significant new competitors into globalmarkets, the past five to 10 years havebeen marked by rapid change for Amer-icas manufacturers, even as they continueto adapt to the global market.

Importance of Manufacturing to the Economy

Manufacturing is crucial to the U.S.economy. Every individual and industry

depends on manufactured goods. In addi-tion, innovations and productivity gainsin the manufacturing sector provide bene-fits far beyond the products themselves.

There is no dispute over the signifi-cant contribution that manufacturing

The following discussion sets out a frame-

work for understanding the challengesidentified by U.S. manufacturers. Thischapter highlights the critical contribu-tion manufacturing makes to the U.S.economy and details the many underlyingstrengths of the manufacturing sector.

The manufacturing sectors rapidlyrising productivity is its greatest strengthand a major contributor to the growth of the U.S. economy. Higher productivity of-fers multiple benefits: stronger competi-tiveness in manufacturing and other sec-

tors of the economy, higher real wages,and a rising standard of living. That sameproductivity growth, however, has alsobeen largely responsible for the gradualdecline in employment in manufacturing:manufacturing employment has declinedeven as U.S. manufacturers have becomemore efficient both in absolute terms andrelative to other sectors in the economy.

The manufacturing sectors overallperformance in the past 25 years has beenvery strong, despite difficult periods of ad-justment through the 1970s and 1980s. Itremained strong despite shocks to theworld economy, including those in someof the strongest U.S. export markets dur-ing the Asian financial crisis of 1997.

However, the manufacturing sectorwas hit by a particularly harsh recession


One

Competingand

Winningin a GlobalEconomy


15/90

as a whole. For example, improvements incotton harvesting equipment, manufac-tured in the Midwest, help improve theproductivity of cotton growers in Califor-nia and Texas. And expanding the powerof computers makes on-line banking and

other financial services possible.A recent study by the National Insti-

tute of Standards and Technology rein-forces how the benefits of improved man-ufacturing productivity extend to othersectors in the economy. The NIST studydetailed the service sectors reliance onU.S. manufacturers for the goods andtechnology that spur service sectorgrowth. It emphasized the substantial de-pendency of services on manufacturingfirms for technology and the criticalrole manufacturing plays in stimulatinggrowth in the services sector, which nowmakes up more than 70 percent of theU.S. economy. 5

From the perspective of the averageAmerican worker, rising productivity trans-lates into higher real wages and a broaderrange of higher-quality, lower-cost goods,meaning each additional dollar earnedgoes further. This makes it is easier to buya home, save for a childs college educa-tion, or set aside money for retirement.

The manufacturing sector has gener-ated many of the innovations that haveled to significant productivity gains overthe past 25 years in manufacturing andthroughout the economy. Increases inmanufacturing productivity have consis-tently outpaced other sectors of the U.S.economy. From 1977 to 2002, productiv-ity in the overall economy increased 53percent, while manufacturing sector pro-ductivity rose 109 percent. The greater

than 50-percent increase in overall pro-ductivity represents a tremendous gain inthe U.S. standard of living, and the morethan 100-percent increase in manufactur-ing productivity is a remarkable achieve-ment. As Figure 1 reflects, labor productiv-ity in manufacturing has doubled since1977. The rate of change has increased

makes to the U.S. economy and to Amer-icas standard of living. The sector contin-ues to account for 14 percent of U.S. GDPand 11 percent of total U.S. employment.

Those statistics, however, do not ade-quately convey the importance of the

manufacturing sector to the U.S. economyand to Americas future. Manufacturing isan integral part of a web of inter-industryrelationships that create a stronger econ-omy. Manufacturing sells goods to othersectors in the economy and, in turn, buysproducts and services from them.

Manufacturing spurs demand foreverything from raw materials to interme-diate components to software to finan-cial, legal, health, accounting, transporta-tion, and other services in the course of doing business. According to the Bureauof Economic Analysis, every $1 of finaldemand spent for a manufactured goodgenerates $0.55 of GDP in the manufac-turing sector and $0.45 of GDP in non-manufacturing sectors. 1

The automotive sector provides agood example. The production of automo-biles stimulates the demand for every-thing from raw materials in the form of coal and iron to manufactured goods inthe form of robots to the purchase of serv-ices in the form of health insurance forthe automobile companies employees.

A healthy manufacturing sector iscritical to Americas economic future forother reasons as wellinnovation andproductivity. 2 Innovation holds the key torising productivity, and productivity gainsare the key to both economic growth anda rising standard of living. 3 As one leadingeconomist put it:

A nations standard of living in the long term

depends on its ability to attain a high and rising level of productivity in the industries inwhich its firms compete. 4

Rising productivity is the key to main-taining U.S. competitiveness in manufac-turing, but the benefits of rising manufac-turing productivity extend to the economy



16/90

over time, with productivity growingfaster (14.2 percent) in the past two and ahalf years, since the beginning of the lastrecession, than in any two-and-a-half-yearperiod in the past 50 years.

Further, U.S. productivity strongly ex-

ceeds that of Americas principal tradingpartners (Figure 2). The United Statesleads all countries in the absolute level of labor productivity, both per hour and peremployee. This position has enabled theUnited States to maintain its labor costadvantage over these trade competitorsdespite the higher wages and benefits paidto American workers. The recentlystronger performance of U.S. manufactur-ing in raising its productivity representsone of the causes for optimism for thesectors ability to adjust to rising levels of competition at home and abroad. Theability to raise productivity, even in themidst of recession and recovery, reflectsthat U.S. manufacturers have madechanges in their operations and produc-tion methods to put themselves in astronger position than manufacturers inother industrialized nations.

The growth in productivity has alsohad a profound effect on the U.S. stan-dard of living. The 31-percent productiv-ity advantage of the U.S. economy overOECD members accounts for three-quar-ters of the per capita income difference. 6

One important vehicle for the risingproductivity in manufacturing has beentechnological innovation. In manufactur-ing, technological innovation comes intwo forms. First, new inventions provide aleap forward in technology. Consider thefirst integrated circuits and the astonish-ing array of products that are directly re-

lated to its development. Many of thoseinventions derive from large investmentsin research and development in the man-ufacturing sector: manufacturing firmsfund 60 percent of the $193 billion thatthe U.S. private sector invests annually inR&D. 7 Those technologies are absorbed bythe much larger service sector and drive


0.5

1.0

1.5

2.0

2.5

Manufacturing Sector

Total Economy*

200019951990198519801977

Figure 1. Productivity in Manufacturing and the TotalU.S. Economy, 19772002

* Excludes government and agricultural sectors.Index: 1977 = 1.0Source: U.S. Department of Labor, Bureau of Labor Statistics.

20

40

60

80

100

United Kingdom

West Germany

France

United States

20001995199019851980197519701965196019551950

Figure 2. Per-Capita Manufacturing Output in Western EuropeRelative to the United States, 19502000

Index: U.S. level = 100Note: West Germany data are for West Germany throughout, even after 1990.Source: U.S. Department of Labor, Bureau of Labor Statistics; Groningen Growth and Development

Center, International Comparisons of Output and Productivity by Industry.


17/90

and manufacturing processes within majortechnology life cycles. Such improvementinvolves many less dramatic innovations,but collectively these innovations have asignificant effect. For example, incremen-tal improvements in the ability to etch a

higher number of functions on a micro-processor or to multiply the number of calls a fiber-optic cable can transmit havea remarkable effect over time. 8

Both major and incremental innova-tions improve the competitiveness of themanufacturing sector and the U.S. econ-omy as a whole. Because productivity hasrisen faster in manufacturing than in theservices sector, prices of manufacturedgoods have risen more slowly than pricesof services. At times, manufactured goodsprices have even declined. That pricingpressure helps keep production costs incheck for both the manufacturing sectorand other areas of the economy.

In the past 25 years, prices in theoverall economy have increased more than140 percent, while prices in manufacturinghave increased only slightly more than 60percent (Figure 3). That also explains whymanufacturings share of nominal privateoutput has declined from around 27 per-cent in 1977 to around 16 percent at pres-ent, even while the sectors contribution toreal private output growth has remainedroughly the same since 1977.

Real manufacturing output, adjustedfor changes in prices, provides the bestrepresentation of manufacturing outputover the past 25 years relative to the restof the economy. Real manufacturing out-put since 1977 has grown nearly as fast asreal output of the private economy as awhole (Figure 4).

Another way of measuring the simi-larity between manufacturings growth inreal terms and that of the broader econ-omy is to look at the sectors contributionto the growth of real private output. Mea-sured that way, the manufacturing sectorscontribution has remained roughly steadyat 0.6 percentage points for each 10-year

the increasing rates of innovation andproductivity growth in that sector.

The other form of innovation comesfrom the steady improvement in products


1.0

1.4

1.2

2.0

1.8

1.6

2.6

2.4

2.2

0.8


Total Economy

200019951990198519801977

Figure 3. Prices in Manufacturing and the Total U.S. Economy,19772002

Index: 1977 = 1.0Sources: Total economy: U.S. Department of Commerce, Bureau of Economic Analysis;

manufacturing sector: U.S. Department of Labor, Bureau of Labor Statistics.

0.8

1.0

1.6

1.4

1.2

2.0

1.8

2.4

2.2


Total Economy

200019951990198519801977

Figure 4. Output in Manufacturing and the TotalU.S. Economy, 19772002

Index: 1977 = 1.0Source: U.S. Department of Commerce, Bureau of Economic Analysis.


18/90

average annually from the 19771987 pe-riod to the most recent 19922002 period(Figure 5).

Compensation and EmploymentHistorically, the manufacturing sector

has had the reputation of providing a wayfor blue-collar workers to find good-pay-ing jobs. Even today, the average hourlytotal compensation of production workersin manufacturing is higher than the aver-age in all other sectors.

However, manufacturings advantagein total compensation is based on bene-fits, rather than higher hourly wages. Av-erage hourly earnings of production work-ers since 1967, when measured on aninflation-adjusted basis, suggest that man-

ufacturing as a sector has offered an aver-age, rather than high, hourly wage. Thereare, of course, specific sectors such asautos and steel that have offered wages farabove the average, but these are balancedby others that have offered below averagewages. In fact, the average hourly earn-ings in the wholesale trade, finance, andservice sectors have surpassed those inmanufacturing over the past 10 years;only retail trade remains lower.

The advantage of working in themanufacturing sector has derived, instead,from the higher level of average benefitsreceived ($8.89 per hour for manufactur-ing versus $5.94 for non-manufacturing).Manufacturers contribute an average of $0.81 per hour more for health insurance,$0.66 more for overtime and supplemen-tal pay, $0.62 more for leave, $0.29 morefor retirement, and $0.34 more for otherbenefits (Figure 6). 9

Because productivity gains in manu-

facturing have outstripped the growth indemand for manufactured goods, manu-facturing employment has been falling forthe past three decades. Manufacturingemployment was significantly lower in2002 than in 1977, falling from 22 per-cent of the non-farm economy to under12 percent. Partial data for 2003 indicate


0

1

2

3

4

5

Total real private outputManufacturing sector

20011999199719951993199119891987

Figure 5. Manufacturing as a Percentage of Average U.S. PrivateGDP Growth, 19872002 (Ten-Year Averages)

Note: Total real private output is the same as total real U.S. private GDPthat is , GDP minus thegovernment sector. The top bars show the 10-year growth of private GDP, annualized to single-year averages. The bottom bars show 10-year moving averages: for a given year, contribution toprivate GDP growth by the manufacturing sector for that year is averaged with the previous nineyears.

Source: U.S. Department of Commerce, Bureau of Economic Analysis.

100

150

200

250

300

350

Benefits

Wages & Salaries

Compensation

20001995199019851980

Figure 6. Employment Cost Index, 19802002

Index: 1980 = 100Source: U.S. Department of Labor, Bureau of Labor Statistics.


19/90

that the share has fallen further to about11 percent (Figure 7).

Given that manufacturing represents astable part of the economy while enjoyingoutsized productivity gains, the gradual de-cline in manufacturing employment is not

surprising. Expressed another way, giventhe more rapid gains in labor productivity,manufacturings share of total outputwould need to increase dramatically tomaintain a given level of employment.

While the number of U.S. manufac-turing jobs has fallen since 1979, otheradvanced economies have experiencedthe same trend. In the 1990s, manufactur-ings share of employment fell at least asfast, if not faster, in Western Europe thanin the United States (Figure 8).

On average, U.S. manufacturing em-ployment has fallen 0.4 percent annuallyover the past 35 years. But that averagerate of decline masks large fluctuations.Manufacturing employment rises andfalls sharply in each business cycle. Witheach recession, manufacturing employ-ment falls slightly lower than the previ-ous trough. When the business cycleturns up and manufacturing firms beginhiring again, manufacturing employmentrises, but it does not quite reach its previ-ous peak.

These trends provide a useful transi-tion to discuss the more recent develop-ments in manufacturing.

Cyclical Effects of Recessionand Recovery

After seeing prospects improve formore than a decade, American manufac-turers have, in the past five years, facedharsh economic conditions. Recessions are

typically hard in manufacturing. Of theeight recessions since 1950, real GDP hasdeclined, on average, about 2 percent,whereas manufacturing output has de-clined 7 percent.

By the standard of overall output,the recession of 2001 was relatively mild;


0.8

0

1.0

1.6

1.4

1.2

1.8


Total Economy

200019951990198519801977

0

15

20

24

14

19

23

13

18

22

12

1716

21

P e r c e n t

200019951990198519801977

Manufacturing Shareof Total Employment

Figure 7. Total Employment Growth and Manufacturing Employ-ment Decline, 19772002

Source: U.S. Department of Labor, Bureau of Labor Statistics.

Index: 1977 = 1.0Source: U.S. Department of Labor, Bureau of Labor Statistics.


20/90


21/90

further than the average for the manufac-turing sector as a whole.

The drop-off in high-tech spendingthat led the decline affected the high-techsector worldwide. Data on global semicon-ductor sales, for example, indicate a sizable

drop beginning in late 2000 and continu-ing for the next year as businesses spentconsiderably less on communications andcomputing technology (Figure 11).

Two manufacturing sectors that expe-rienced among the largest percentage jobdeclines were precisely those industriesmost affected by the decline in high-techspending. Employment in computers andelectronics fell 24 percent from the fourthquarter of 2000 to the third quarter of 2003, and the decline in employment inelectrical equipment was of similar magni-tude23 percent. Both decreases werelarger than the 18-percent average formanufacturing as a whole.

The second feature of the recessionthat deserves attention was the sharp dropin inventories that accompanied thedownturn. Inventory imbalances are typi-cal for recessionary periods. Demand falls,and excess inventory is left on theshelves. Businesses respond by cuttingback orders, shipments, and productionuntil demand returns.

In the most recent recession, busi-nesses reacted to a modest increase in in-ventory-to-sales ratios during 2000 bycutting back production in 2001 to getsupply under control. The extent of theresulting relatively drastic inventory liq-uidation was much more severe in the2001 recession than it was in the19901991 recession.

The third feature of the recession

worth noting is the uncertainty caused bythe events of September 11, 2001, whichdepressed investment and demand. In ad-dition to the direct effects on demand formanufactured goods, the decline in thedemand for services such as tourism hadsubsequent effects on other manufactur-ing sectors such as autos and aircraft.


Table 1. Net Change in Manufacturing Employment, Fourth Quarter2000 to Third Quarter 2003

Percent Number of Jobs

Total Manufacturing -15.1 -2,599,000Food -1.8 -29,000

Beverage and Tobacco -6.7 -14,000Textile Mills -29.5 -109,000Textile Product Mills -15.8 -34,000Apparel -37.4 -178,000Leather and Products -34.1 -22,000Wood Products -9.6 -57,000Paper -12.3 -74,000Printing -14.0 -113,000Petroleum/Coal Products -3.9 -5,000Chemicals -6.3 -62,000Plastics/Rubber -11.9 -112,000Nonmetallic Minerals -9.4 -52,000

Primary Metals -22.7 -140,000Fabricated Metals -16.6 -293,000Machinery -19.6 -285,000Computers and Electronics -25.1 -467,000Electrical Equipment -21.3 -125,000Transportation -12.8 -260,000Furniture -15.5 -105,000Miscellaneous -8.6 -63,000

Source: U.S. Department of Labor, Bureau of Labor Statistics.

0

10

20

30

40

50

60

70

80

P e r c e n t c h a n g e

f r o m

y e a r a g o

20032002200120001999199819971996

Percent Change

0

100

200

300

400

500

600

700

800

Index Level

I n d e x

l e v e

l

Figure 10. High-Tech Industrial Production, 19962003

Notes: High-tech industries are defined for this analysis as computers, communication equipment,and semiconductors.

Source: Board of Governors of the Federal Reserve System.


22/90

A fourth feature of the recession isthe extent to which slower growth athome was compounded by the effects of slower growth abroad, particularly thedramatic drop in U.S. manufacturing ex-ports to our principal export markets.

Stronger growth abroad helps cushion theeffects of recession at home.

Unfortunately, although they haveshown recent signs of growth, both Eu-rope and Japan have grown considerablyslower than the United States since thebeginning of the recovery. Slower growthamong the industrial economies has mag-nified the effect of slower growth inemerging economies in Asia since theonset of the Asian financial crisis in mid-1997. Although several Asian economieshave recovered, the regions growth, withthe principal exception of China, has yetto approach the levels reached before tothe financial crisis.

Continued slow economic growthabroad produces less demand for U.S.manufactured goods than would other-wise be the case. Figure 12 covers a periodthat includes the last three U.S. recessions:in 1982, 1991, and 2001. The pattern of the most recent recession resembles thatof the 1982 recession, which was markedby stagnation among Americas majortrading partners.

What the trend lines reflect is thatthe U.S. economy in general, and themanufacturing sector in particular, re-ceived little support from growth amongmajor U.S. trading partners over the pasttwo years.

However, the U.S. economy as awhole has responded to both monetaryand fiscal stimulus in the past year. The

economy grew at an annual rate of 8.2percent in the third quarter of 2003,which translates into stronger demand forall goods and services, including manufac-tures. In addition, there are signs of grow-ing strength in a number of marketsabroad. That stronger growth, combinedwith the continued competitiveness of the


10

11

12

13

9

8

15

14

16

17

19

18

20

B i l l i o n s o

f d o

l l a r s

20032002200120001999199819971996

Figure 11. Worldwide Semiconductor Sales, 19962003(Billions of Dollars)

Notes: Data are based on a three-month moving average, wherein each months sales figure is anaverage of its total sales and those of the subsequent two months. Data for 2003 are throughOctober.

Source: Semiconductor Industry Association.

-3

-2

-1

0

1

2

3

4

5

6

7

8

United States

World

2004200220001998199619941992199019881986198419821980

Figure 12. Economic Growth: History and Forecast, 19802004(Percent Change)

Sources: World: International Monetary Fund; United States: U.S. Department of Commerce, Bureauof Economic Analysis.


23/90

reduction in barriers to trade, particularlywith respect to trade in manufacturedgoods. The third is the end to political di-visions that have segmented markets formore than 70 years and the correspondingemergence of Russia, China, and other

countries in the world trading system.Each of these trends has significant impli-cations for U.S. manufacturing, both inthe form of new market opportunities aswell as stronger competition.

Role of TechnologyGlobal manufacturing has been fun-

damentally reshaped by the remarkableimprovements in computing, communica-tions, and distribution. Each factor, stand-ing alone, would have greatly expanded

the opportunities for trade, investment,and global production. Taken in combina-tion, however, the rapid changes in allthree influence many of the trends thathave most reshaped manufacturing fromthe shop floor to the loading dock to thefinal customer. What these factors havealso done is raise the bar to compete intodays manufacturing environment.

In 1987, in a review of the book Man-ufacturing Matters , Nobel Prize-winningeconomist Robert Solow famously ob-served, You can see the computer every-where but in the productivity statistics. 10

In the latter part of the 1990s, however,the evidence of the computers effect onproductivity finally surfaced. Comparedwith the relatively slow rates of productiv-ity growth experienced between 1973 and1995, labor productivity grew roughly1.2 percentage points [faster] a year from1995 through 2000, a rise of more than80 percent above the previous trend

line.11

Investments in information tech-nology are estimated to account for 60percent of that increase in productivity. 12

The dramatic expansion of comput-ing power and its application to an evergreater range of tasks in the business en-vironment is without a doubt the singlemost powerful technological change

U.S economy, has improved the prospectsfor exports of U.S. manufactured goods.

The manufacturing sector has re-cently begun to participate in the broaderrecovery under way in the U.S. economy.The Institute of Supply Managements

Purchasing Managers Index has remainedabove 50 (indicating continuing growthin future orders for manufactured goods)since August 2003.

Furthermore, rising productivity re-mains a bright light. Since the end of therecession, productivity in manufacturingis up 9.7 percent. Measuring from the pe-riod immediately before the recession,productivity is up 14.2 percent.

Those increases in productivity speakto the ability of American manufacturingto meet the competitive challenges andmake a contribution to the rising stan-dards of living in the economy. What themanufacturing sector can controlto in-vent, to innovate, and to combine re-sources to produce quality merchandiseit does quite well.

Structural Changes Shaping the Competitive Environment

With renewed growth in the U.S.

economy, rising production numbers inthe manufacturing sector, and significantgains in productivity even in the face of the recent recession, the manufacturingsector is poised for what could be a strongrecovery. Nevertheless, the cyclical effectsof the recession and the strengthening re-covery are only part of the manufacturingstory. In some respects, the recent reces-sion has obscured the more fundamentalstructural changes under way in the man-ufacturing sector globally.

Over the past two decades, three sepa-rate, powerful trends have reshaped themanufacturing sector globally. The first isthe revolution in technology that has beenunder way for two decades, raising produc-tivity in manufacturing and reducing costsworldwide. The second is the significant



24/90

Similarly, new communicationstechnologies allow engineers to conductreal-time product development discus-sions with colleagues around the world.In addition to the videoconferencing ca-pability, communications technologies

use operating systems that allow anyoneparticipating in the discussion to manip-ulate the same computer-generated de-sign on the screen.

The revolution in communicationshas fundamentally changed the way man-ufacturers do business. Wireless communi-cation means that a cellularphone and a laptop com-puter can replace a salesper-sons office. Not only doesthe cellular phone allow forgreater contact and consul-tation with customers abouttheir needs, but it also con-tains the necessary functions to place anorder and begin the manufacturingprocess directly from the point of sale.

The communications revolution hasalso significantly changed the delivery of finished goods to customers. For instance,in trucking, the combination of a globalpositioning system transmitter and a cellu-lar phone has meant less waste, greater ef-ficiency, and a lower cost to manufactur-ing customers. New communicationsdevices also ease the distribution of goodsby creating an interface with governmentagencies that may require information forsecurity or regulatory reasons. By reducingthe costs of distribution, new communica-tions technologies have reduced the costof the end products.

The application of technology hasalso transformed the distribution of man-

ufactured goods and reduced the costs of transportation. Obviously, air travel hascontributed much to making the competi-tive marketplace for manufactured goodsa single market. In addition, significantchanges in shipping since World War II,such as the rise of containerization and

affecting manufacturing today. MooresLawthat computing power will doubleevery 18 monthsstill prevails and islikely to continue for some time to come.One useful way to think about the explo-sion in computing power is the fact that

the microchip in todays talking greetingcards contains more computing powerthan existed worldwide in 1945. 13

Even skeptics of the contribution of information technology to productivitygains, such as Robert Gordon, generallyhave conceded its impact on manufactur-ing. 14 The increase in computing powertouches every part of the manufacturingprocess. It has revolutionized product de-sign by introducing computer-assisted de-sign that allows much of the product de-velopment and testing to be done at a farlower cost in a virtual environment. Com-puting power has revolutionized manufac-turing by creating a whole new family of multiple-axis machine tools that offer un-matched precision, quality, and efficiency.

Computers have also made possiblemost of the revolutions in businessprocesses as well. In the absence of thecomputing power available today, con-cepts such as just-in-time productionand demand-pull manufacturingprocesses could not exist in their currentforms. 15 The dramatic increase in com-puting power has created an ever morepowerful tool for developing new prod-ucts, lowering production costs, raisingquality, measuring performance, andmanaging business.

Communications technologies are es-sential to running high-performance man-ufacturing operations. New communica-tions technologies create the ability to

manage just-in-time inventories and de-mand-pull manufacturing. Real-time com-munication is critical to feeding informa-tion back into a system that is designed toyield zero defects. Interoperable commu-nications systems provide opportunitiesfor manufacturers and their customers tocollaborate in product development.


manufacturing has been funda-

mentally reshaped by the remark-

able improvements in computing,

communications, and distribution


25/90

The post-World War II investment inR&D paid enormous dividends in theform of new products, new industries, andimproved growth and competitiveness of U.S. manufacturing. But, increasingly, it isprivate industry that is making the invest-

ments driving innovation. By 1980, indus-try had become the lead investor in U.S.R&D activities, investing more than thefederal government for the first time.Today, robust private sector investment inR&D outpaces federal R&D funding by aratio of more than two to one, effectivelyreversing the ratio that prevailed through-out the Cold War and the space race.

The lesson that the post-World War IIrevolution in science and engineering inthe United States flowed from investmentsin R&D was not lost on foreign nations.Today, nations everywhere recognize thelink between technology, economicgrowth, and job creation. They are, as aconsequence, increasingly establishing re-search institutes and key technology pro-grams; creating incentives for partnershipsamong industry, academia, and govern-ment; and boosting training for scientistsand engineers.

That dynamic is reflected in thesharp decline in the U.S. share of totalworld R&D spending. Through the 1960s,the U.S. share of global R&D ranged be-tween 60 and 70 percent. Today, by con-trast, the U.S. share is 30 percent.

Equally important is the proportionof a nations output that is reinvested inR&D, as this ratio is an indicator of aneconomys commitment to competing onthe basis of new technology in the fu-ture. In this regard, the R&D intensity of the U.S. economy has remained essen-

tially constant for 40 years, during whichtime the surge in foreign R&D invest-ment has occurred.

The change in R&D funding patternsin technology has led to the broad disper-sion of technology worldwide. The in-crease in foreign direct investment bymany global firms has reinforced that

roll-on/roll-off cargo allow for a smoothtransition from container ship to rail totruck and dramatically increase efficiency.Distribution is also aided by new cargohandling facilities operated by express de-livery services. For example, this enables

computer manufacturers to operateovernight repair facilities and deliver re-paired computers to their owners in fewerthan 24 hours.

The combination of the trends incomputing, communications, and trans-portation has generated a new service of door-to-door logistics. Logistics has be-come essential to meet the demands of

the market and has been fundamental inlowering the costs of manufacturing to re-main competitive. The competitive envi-ronment has been reshaped by such ad-vances, which grew out of post-World WarII defense research. 16 The Office of NavalResearch funded the research of a numberof engineering professors at the nations

premier research institutions. Those pro-fessors had been instrumental in solving awide range of practical technical problemsattendant to the war effort during WorldWar II and continued to receive ONRfunds after the end of the war in 1945.



26/90

eliminated tariffs and many non-tariff bar-riers applicable to the largest three-waytrade in the world.

The value of world trade has grownenormously as a result. Since the creationof the GATT system, world

exports grew from $58 bil-lion in 1948 to $5.98 trillionin 2001. According to datacompiled by the WTO, thevolume of world exports in-creased at a compound an-nual rate of 5.8 percent inthe past 25 years alone, a pace that wasmore than twice as fast as growth in theworld economy as a whole. 18

Most of the growth in world tradehas been in manufactured goods. The sec-tor now accounts for approximately three-fourths of all trade in goods and 60 per-cent of all trade, in goods and servicescombined. 19 One reason for the predomi-nance of manufacuring trade is that theUnited States and its trading partnershave reduced barriers to trade in manufac-tured goods further and faster than inother sectors. While trade in agriculturalgoods, for example, has grown at a rela-tively strong annual rate of 3 percent overthe last 20 years, exports of manufacturedgoods advanced at nearly twice that rate,averaging 5.7 percent per year.

The growth in trade over the past 50years, fueled by falling trade barriers, hascontributed directly to the most rapid,sustained economic growth in U.S. his-tory. Output in the United States in-creased fivefold and real GDP tripled. U.S.real GDP, expressed in 2000 dollars, grewfrom $11,672 in 1950 to $34,934 in 2002.

Trade continues to contribute signifi-

cantly to U.S. economic growth. In thepast decade alonewhich included thecreation of NAFTA, the conclusion of theUruguay Round of GATT talks, and thecreation of the WTOworld trade grewby 87 percent. 20 Between 1990 and 2000,U.S. exports were up 98 percent and theshare of world trade represented by U.S.

trend. Advanced, state-of-the-art manufac-turing facilities capable of producinghigh-quality, low-cost goods are nowavailable worldwide. American manufac-turers face competition not only frommanufacturers of low-cost commodity

products, but also from manufacturers of sophisticated products and the tools tomake them.

Thus, U.S. manufacturers will faceconstant pressure not only to lower prices,but also to increase the value that they addto their products. Competition from low-cost producers creates an incentive tomove up the value chain in the directionof higher-margin goods, where the condi-tions of competition are not based on pricealone. Increasingly, success in manufactur-ing will depend on the ability to integratenew technologies rapidly into both prod-ucts and operations. That ability puts a pre-mium on continuing R&D as the primarymeans of gaining a competitive edge.

Lowering Barriers to TradeThe second trend reshaping the envi-

ronment in which U.S. manufacturerscompete is the significant reduction in tar-iff and non-tariff barriers to trade in manu-factured goods globally. Successive roundsof multilateral trade negotiations under theGeneral Agreement on Tariffs and Tradeand its successor, the World Trade Organi-zation, for example, have cut the averagetariff on manufactured goods worldwide by30 percent. For industrialized countries theresults are even more remarkable. Accord-ing to a 1999 study published by the Orga-nization for Economic Cooperation andDevelopment, the average tariff rate forOECD countries, which was 40 percent at

the end of World War II, is now 4 percent.17

The more recent creation of free tradeagreements, such as the North AmericanFree Trade Agreement between the UnitedStates, Canada, and Mexico, has reinforcedthe trend. Over the past 10 years, NAFTA


U.S. manufacturers face

considerably higher compliance

costs than do many of Americas

trading partners


27/90

The benefits from import competi-tion are not limited to the final consumer.Access to the highest-quality, lowest-costcomponents is an essential element of theU.S. manufacturing sectors competitive-ness. Imports stimulate competition and

spur American manufacturing to increaseits own quality and productivity. It isworth underscoring that during the pastdecade, while trade was expanding signifi-cantly, the U.S. manufacturing sector wasgrowing faster and in more dynamic waysthan it had in decades.

None of those results are surprisingin economic terms. A more open econ-omy has moved the United States towardthe position of its greatest comparativeadvantage. This openness has broughtabout increasing returns and a more effi-cient use of resources. Both are consistentwith stronger economic performance. In-deed, some of the latest research suggeststhat the broad engagement of the UnitedStates in the world economyparticularlythe adjustment of the U.S. economy to-ward a more competitive statehas actu-ally helped retain employment in themanufacturing sector that would haveotherwise been lost. 28

In fact, to the extent that other coun-tries are currently examining the health of their own manufacturing sectors, theyhave identified the United States as themodel. In its recent study of manufactur-ing in the United Kingdom, for example,the British government essentially bench-marked the U.S. manufacturing sector asthe best measure of its own progress andpolicies. 29 Similarly, the European Unionarticulated a vision of aerospace manufac-turing that expressly contrasted the devel-

opment of their aerospace industry withthat of the United States. 30 Many develop-ing countries also use the United States asa model.

These developments point to thebasic benefits to the U.S. economy, and toits manufacturing sector in particular,from participating in an increasingly open

exports actually grew from 11.4 to 12.2percent. 21 In other words, rather than hav-ing a negative impact on the U.S. econ-omy and manufacturing sector, the mostrecent round of trade agreements appearsto have allowed U.S. exports to grow at a

faster pace than world trade overall.The U.S. economy grew rapidly over

those same years, exceeding the pace of most other industrialized nations. From1990 to 2002, the economy expanded ata 3-percent annual rate: the economygrew from $7 trillion in 1990 to $10 tril-lion in 2002. 22 During that time, thegrowth in U.S. exports accounted for one-sixth of all growth in the U.S. economy. 23

In sectors such as machinery, computersand electronics, and transportation equip-ment, exports now make up between 50and 60 percent of all sales. 24 In one-thirdof U.S. manufacturing industries, exportsaccount for one in every five manufactur-ing sales. According to the most recentfigures available, exports now supportmore than 12 million jobs, and thosejobs pay between 13 and 18 percenthigher than the average U.S. wage. 25

The benefits of trade, of course, flowfrom imports as well as exports. Reduc-tions in tariffs on imports into the United

States represent acut in regressivetaxes. This cut of-fers significantlyhigher benefits tolow-incomehouseholds thanto those withhigher incomes.By some esti-mates, NAFTA

and the UruguayRound agreements raised the average an-nual income of an American family of fourby $1,300 to $2,000. 26 A further reductionin global barriers by just one-third wouldincrease that familys annual average in-come by an additional $2,500 a year. 27



28/90

The United States has led the way inreducing trade barriers worldwide andhas, in past negotiations, proved willingto cut its tariffs and limit other forms of its own intervention in the market to agreater extent than a number of Amer-

icas trading partners. While noting thatthere are significant excep-tions, including in the manu-facturing sector, the averageU.S. tariffs on a trade-weightedbasis are now less than 1.7 per-cent. 31 While many major in-dustrial trading partners have also re-duced their tariffs to comparable rates, inother parts of the world U.S. exportersstill face heavy tariffs. In addition, theUnited States is far less likely to subsidizeits manufacturers directly than is the casein many other countries.

Wholly apart from the basic regula-tion of trade or the imposition of specificprotective barriers lies the question of costs imposed by government. U.S. manu-facturers face considerably higher compli-ance costs in labor, environmental, andother regulatory areas than do many of Americas trading partners, particularly inthe developing world. 32 But there is littledoubt that the disparities in certainhighly visible areas drive the perception of unfairness that permeates many of theconcerns of U.S. manufacturers about thecurrent trade rules.

In todays global economy, a policyof protection simply does not work. Agood example is the tool and die industry.While the U.S. tool and die industry hassought protection from import competi-tion, particularly from China, the indus-try was also among the most vociferous

opponents of President Bushs impositionof tariffs on imports of steel into theUnited States in 2002. What the tool anddie industrys position reflects is that pro-tection invariably involves costs and caninjure other U.S. industries, includingmany manufacturers. Instead, what U.S.manufacturers seek is simply to ensure

trading system governed by a common setof rules. They also point to the benefitsthat can be derived, both for U.S. manu-facturers and for the country, from thecurrent effort to open markets throughtrade negotiations. Furthermore, vigorous

enforcement of agreements is needed toensure that U.S. manufacturers, togetherwith the nations farmers and serviceproviders, receive the benefit of the bar-gains negotiated.

Given the concerns expressedthroughout the U.S. manufacturing sectorabout the current trade rules, it is worthreiterating the extent to which the rulesadopted in recent trade agreements haveserved, rather than undercut, U.S. eco-nomic interests, including those of U.S.manufacturers. Reducing tariff barriers, im-proving investment rules, and developingstronger intellectual property protections,for example, mainly benefit the smallmanufacturers that were previously lockedout of foreign markets. While larger firmscan afford to invest behind the tariff wall and have the resources, in manycases, to develop strategies for protectingtheir intellectual property, smaller manu-facturers have generally had only two op-tions: either export directly or sell tosomeone who exports.

In the aggregate, macroeconomicforcesrates of growth and relativepriceshave the primary effect on ourtrade balance and help explain the tradedeficit. These forces, combined with inno-vation and productivity, underpin ourtrade position over the long term.

On the other hand, from the perspec-tive of individual firms, other factors canbe seen as important in global markets

and Americas trade position. Continuedtrade deficits, combined with the very vis-ible efforts by some countries to confer acompetitive advantage on their firms, leadsome U.S. manufacturers to question thefairness of our trade agreements and thebasic tenets of U.S. trade policy.


the United States has led the

way in reducing trade barriers

worldwide


29/90

onset of World War I. Even with the rapidchanges in technology and the reductionof tariff and non-tariff barriers to trade,the global economy would not be possibleif those divisions still existed.

The numbers bear this theme out.

While the so-called Asian tigers share of world trade grew rapidly over the past 20years, the biggest gains in share of worldtrade in manufactures were captured byChina. Chinas manufactured exports in-creased from only 0.8 percent of worldshipments in 1980 to 5.3 percent in 2001.With the onset of economic reforms in1979 and a heavier reliance on marketforces, China has rapidly expanded itstrade in manufactured goods. China nowranks fourth among exporters of manufac-tures worldwide.

It is worth underscoring that virtuallyall of the market share gains of China andother Asian nations have come at the ex-pense of Japan and Europe, while the U.S.share of world exports of manufacturedgoods actually increased marginally be-tween 1980 and 2001, from 13 percent to13.5 percent. 33 That increase, in turn, isdue to the ability of U.S. manufacturers toraise their productivity significantly overthe same period. At the same time, how-ever, U.S. manufacturers in a variety of sectors were seeing their share of the U.S.market eroded.

There is another side to the politicaland economic revolution that has takenplace over the past two decades; any formof economic restraint has the effect of cre-ating imbalances between demand andsupply. Consequently, when those re-straints are removed, capacity often ex-ceeds demand, and the markets must ad-

just to bring supply and demand backinto equilibrium.

The end of the Cold War and Chinasreentry into the world economy had asimilar effect. A recent study of trends inmanufacturing employment illustratesthis. The study showed that manufactur-

that the rules that apply to U.S. manufac-turers apply to their competitors as well,especially in the case of competition withcompanies that benefit from heavy stateintervention.

Overall, the U.S. economy has bene-

fited from import competition, which hashelped maintain the competitiveness of many manufacturing enterprises and hasdampened inflation considerably. At thesame time, however, stronger import com-petition has put extraordinary pressure onmanufacturing industries, including steel,furniture, tool and die, foundry products,textiles and apparel, and automotiveparts, while touching advanced technol-ogy sectors as well.

Increasingly, competi-tion in manufactured goodshas been driven by the evo-lution of low-cost competi-tors in emerging Asian mar-kets. In 1980, the UnitedStates, together with the Eu-ropean Community and

Japan, dominated trade in manufactures,accounting for nearly 75 percent of thevalue of world manufactures exports ac-cording to WTO statistics. By 2001, how-ever, that share had fallen by almost 15percentage points, to 60 percent.

Emergence of New CompetitorsThe third powerful trend affecting

the manufacturing sector globally is bothpolitical and economic. It involves theincreasing reliance of other countries,notably China and the nations of theformer Soviet Union, on market mecha-nisms, rather than government planning,as the principal means of structuring

their economies.Though not often thought of in tradeterms, the economic consequences of theend of the Cold War may have had themost profound effect of all. The end of the Cold War marked the end of politicaland economic divisions that had split theworld in one way or another since the


what U.S. manufacturers seek is

simply to ensure that the rules

that apply to U.S. manufacturers

apply to their competitors as well


30/90


31/90

goods were shipped from one manufacturing proces-

sor to another, or inputs from other sectors-agricul-

tural products into food manufacturing, crude petro-

leum into petroleum refining, and iron ore into steel

manufacturing, as well as contributions from the

transportation, financial, and business services sectors.2 Productivity is defined as the amount of goods

and services produced, adjusted for inflation, per hour

of work.3 See, for example,William J. Baumol, The Free-

Market Innovation MachineAnalyzing the Growth Mira-

cle of Capitalism (Princeton, N.J.: Princeton University

Press, 2002); see also Michael E. Porter, Building the

Microeconomic Foundations of Prosperity: Findings

from the Microeconomic Competitiveness Index in

The Global Competitiveness Report (Geneva: World Eco-

nomic Forum, 2003).4 Michael E. Porter, The Competitive Advantage of

Nations , 1st ed. (New York: The Free Press, 1990).5

Gregory C. Tassey, R&D and Long-Term Competi-tiveness: Manufacturings Central Role in a Knowledge-

Based Economy , Planning Report 02-2 (Gaithersburg,

Md.: National Institute of Standards and Technology,

February 2002).6 R. McGuckin and B. van Ark, Productivity, Em-

ployment, and Income in the Worlds Economies (New

York: The Conference Board, 2002).7 Thomas J. Duesterberg and Ernest H. Preeg, eds.,

U.S. Manufacturing: The Engine for Growth in a Global

Economy (Westport, Conn.: Praeger, 2003).8 Baumol, Free-Market Innovation Machine . Baumol

makes that point a central theme in his recent work

on the determinants of economic growth. He findsthat the social benefits contributed by the initial in-

novations are typically smaller than those provided by

the accumulation of subsequent incremental improve-

ments. Baumol points to the rapid improvement in

performance and reduction in the cost of computers,

which is largely attributable to the incremental im-

provements in production technology, rather than a

quantum leap in the form of an entirely new way of

computing.9 U.S. Department of Labor, Bureau of Labor Sta-

tistics, Employment Cost for Employee Compensa-

tion (Nov. 25, 2003).10 Robert Solow, review of Stephen Cohen and

John Zysman, Manufacturing Matters: The Myth of the

Post-industrial Economy in The New York Times Book Re-

view (July 12, 1987).11 Roger E. Alcaly, The New Economy (New York:

Farrar, Straus, and Giroux, 2003).12 Ibid.

U.S. auto parts suppliers into head-to-head competition with parts suppliersworldwide. The possibility of relying onincreased auto sales in the United Statesthat automatically translate into increasedorders for parts and components for U.S.

suppliers simply no longer exists. Compe-tition now takes place on a global basis,and that fact will continue to shape theprospects for the manufacturing sector inthe future.

The Governments Role:Getting the Fundamentals

Right The changing nature of competition

requires, correspondingly, a different way

of looking at government policy. Thismeans fostering an economic environ-ment, both domestically and internation-ally, that encourages growth, rewardssound investment, controls costs, and fos-ters innovation and rising productivity. Italso means an aggressive internationaleconomic policy that ensures a level play-ing field by reducing barriers to trade andinvestment and vigorously enforcing thetrade rules when violated.

Competing in a global marketplace

puts a premium on government gettingthe economic fundamentals right to createan environment in which U.S. manufac-turing can flourish. It means examiningwhether the U.S. governments actionsand the structure of the U.S. market im-prove or hinder the ability of Americanfirms, in manufacturing and throughoutthe economy, to compete in an increas-ingly global marketplace.

Notes:1 Bureau of Economic Analysis, U.S. Department

of Commerce (2002). Calculations based on total re-

quirements matrix from the BEA Web site,

www.bea.doc.gov . Considered on an aggregate basis,

total manufacturing shipments in the most recent 12-

month period were $4 trillion, but only roughly 40

percent of this was value added in the manufacturing

sector. The rest was either duplicate shipments as



32/90

31 U.S. International Trade Commission calcula-

tions for all goods in 2002, including preferences. Ex-

amples of exceptions in the manufacturing sector in-

clude tariffs over 50 percent for certain footwear and

over 30 percent for certain apparel.32 Jeremy A. Leonard, How Structural Costs Im-

posed on U.S. Manufacturers Harm Workers and

Threaten Competitiveness, NAM/MAPI study, Decem-

ber 2003.33 World Trade Organization, International Trade

Statistics, 2002 .34 Joseph G. Carson in Alliance Capitals U.S.

Weekly Economic Update (October 2003).35 Ibid. Chinas manufacturing employment de-

clined by 15 percent from 1995 to 2002, while U.S.

manufacturing employment declined 11 percent over

the same period.

13 Diane Coyle, The Weightless World (Cambridge,

Mass.: MIT Press, 1998).14 Robert Gordon, Technology and Economic Per-

formance in the American Economy, National Bureau

of Economic Research Working Paper, no. 8771 (Feb-

ruary 2002).15 Economic Report of the President (January 2001).16 Ibid.17 Organization for Economic Cooperation and

Development, Post-Uruguay Round Tariff Regimes:

Achievements and Outlook (Paris: OECD, 1999).18 World Trade Organization, International Trade

Statistics (Geneva: World Trade Organization, various

editions).19 World Trade Organization, International Trade

Statistics 2002 (Geneva: World Trade Organization,

2002).20 International Monetary Fund, Direction of Trade

Statistics (Washington, D.C.: International Monetary

Fund, 19812002), data from various editions.21 Ibid.22 U.S. Department of Commerce, Bureau of Eco-

nomic Analysis.23 Ibid.24 Bureau of the Census, Annual Survey of Manu-

factures and foreign trade data in the FT 900 releases

for 2001and 2002.25 U.S. Department of Commerce, Economics and

Statistics Administration, U.S. Jobs Supported by

Goods and Services Exports, 198394, staff research

report, November 1996.26 Drusilla K. Brown, Alan V. Deardorff, and Robert

M. Stern, Computational Analysis of MultilateralTrade Liberalization in the Uruguay Round and Doha

Development Round, Discussion Paper no. 489 (Ann

Arbor, Mich.: Research Seminar in International Eco-

nomics, 2002).27 Idem, Multilateral, Regional, and Bilateral

Trade-Policy Options for the United States and Japan,

Discussion Paper no. 490 (Ann Arbor, Mich.: Research

in International Economics, 2002).28 Lori G. Kletzer, Imports, Exports, and Jobs:

What Does Trade Mean for Employment and Job

Loss? unpublished paper for the W.E. Upjohn Insti-

tute for Employment Research, December 2002.29 United Kingdom, Department of Trade and In-

dustry, Manufacturinga Sector Study; the Performance of

Manufacturing Companies within Benchmark Index

(Staffordshire, England: Benchmark Index, 2002).30 European Commission, Star21: Strategic Aero-

space Review for the 21st Century (Brussels: European

Commission Enterprise Publications, 2002).



33/90


34/90

T 1. Manufacturers perceived a lack of focus within government on manufactur-ing and its competitiveness. Manufactur-ers are looking for a commitment to un-derstanding the challenges that the sectorfaces in competing in a rapidly globaliz-ing economy. They want government totake the steps needed to foster the manu-facturing sectors ability to adjust to thatnew competitive reality.

2. Manufacturers want the govern-ment to focus on encouraging strongereconomic growth both at home and

abroad. There is a broad understandingthat the recent recession was led by asharp drop in business investment andthat both monetary policy and fiscal pol-icy have worked to set the economy onthe route to recovery. But there are stillsteps that manufacturers feel are necessaryto encourage business investment, and toreinforce the recovery under way in theeconomy as a whole and in the manufac-turing sector in particular.

3. Manufacturers see the need forgovernment to match the effort that theyhave made in controlling manufacturingcosts. As manufacturers have focused onreducing costs to improve productivityand ensure their competitiveness, theyoften find their efforts eroded by coststhey cannot controlcosts that result in

This chapter highlights the challenges fac-

ing the U.S. manufacturing sector, as ex-pressed by manufacturers themselvesthrough the Department of Commerceroundtables. It also seeks to capture thepriority issues that manufacturers believeneed to be addressed in a comprehensivestrategy to ensure the competitiveness of U.S. manufacturing. The views reflect acommon understanding of the trends out-lined in Chapter 1 that likely will shapethe competitive environment for manu-facturing. Manufacturers also recognized

the basic strengths of the U.S. manufac-turing sector as it meets the challenge of competing in a global economy.

If there was one underlying themethat emerged in the roundtables, it wasthe understanding that fundamental ad-justments are under way throughout theglobal manufacturing sector. Manufactur-ers asked for an increasing focus by gov-ernment on these adjustments andwanted to ensure that government wastaking the steps necessary to create aneconomic environment in which U.S.manufacturers could succeed.

Toward that end, manufacturers at-tending the Commerce Departmentsroundtables outlined six areas that requireimmediate attention:


Two

Identifying the

Challenges FacingAmericanManufacturing


35/90

fair. Many manufacturers expressedconcerns regarding China. What manufac-turers seek is not protection from compe-tition, but the ability to compete on equalterms. Toward that end, they stronglysupport leveling the playing field interna-

tionally by lowering barriers to trade andeliminating efforts by foreign govern-ments to confer unfair competitive advan-tages for their manufacturers.

The following discussion exploreseach of those themes.

Focusing on Manufacturing and Its Competitiveness

At every roundtable, U.S. manufactur-ers made the point that, although the

manufacturing sector represents a corner-stone of the U.S. economy, manufacturingreceives scant attention from the public orgovernment. To many manufacturersacross the country, it appears that the pub-lic and government have lost sight of asimple truth: you cannot have good jobs if you do not have strong businesses.

That thought was articulated by Phyl-lis Eisen of the National Association of Manufacturers at a roundtable held inWashington, D.C. She summed up her

conversations with teachers, educators atall levels, with kids from seventh gradethrough university, with their parents,with politicians, and with our own manu-facturers, with this statement:

The information we got is not good about manufacturing. It is invisible to most people.They dont equate the table and the spoonthey use and the glass they use . . . with thisextraordinary industrial strength that wevehad for so many years and that we have tomaintain.

Some roundtable participants wentfurther, describing what they saw as a per-vasive bias against manufacturing, basedon an old assembly-line image, causingthe best and the brightest to pursue ca-reers outside the manufacturing sector. Atthe roundtable in New Britain, Conn.,

part from government policy. Manufactur-ers seek a commitment on the part of gov-ernment to reduce those costs and, in theprocess, create an economic environmentthat is attractive to investment in manu-facturing within the United States.

4. Manufacturers emphasized that en-hancing Americas technological leader-ship was critical to their future. There iswidespread recognition that the UnitedStates remains the worlds leader for in-vestment in research and development,and that U.S. investments in technologyhave paid significant dividends in currentmanufacturing competitiveness. It is alsounderstood by U.S. manufacturers thattechnology is now more widely diffusedthroughout the world economy and thatthis trend risks eroding what has becomethe principal competitive advantage of the United States. What manufacturersseek is a commitment to encourage re-search and development and to ensurethat the government reinforces, ratherthan creates obstacles to, the process of bringing innovations to the marketplace.

5. Manufacturers regarded educationas crucial. Manufacturers are extremely in-terested in addressing the shortcomings of the U.S. educational system. Roundtableparticipants underscored that the evolvingnature of the manufacturing sector relieson individuals entering the workforce withgreater problem-solving abilities. Theseworkers must continually sharpen theirskills through lifelong learning. In addi-tion, roundtable participants expressedconcern that the United States risks losingan innovation infrastructure if the nationfails to produce scientists and engineers.Manufacturers seek a renewed emphasis

from all levels of government to invest ineducational and training institutions.

6. Manufacturers also focused on theneed for international trade and monetarypolicies that ensure that global competi-tion in manufacturing is free, open, and



36/90

efforts. While it is widely understood thatthe Commerce Department serves as theprincipal advocate for manufacturings in-terests, there is no office in the CommerceDepartment that is solely responsible forlooking out for the competitiveness of U.S.

manufacturing.Many roundtable participants thus

requested the establishment of a manufac-turing-related position within the Com-merce Department at the assistant secre-tary level or higher to focuson manufacturing competi-tiveness and the health of the manufacturing sector ingeneral. Manufacturers alsourged stronger coordinationboth within the federal gov-ernment and with state andlocal governments to fosterinvestment in manufacturing, as well asrequesting a regular dialogue betweengovernment and the manufacturing sectoron its competitive challenges.

The administration has thereforeproposed creating an assistant secretaryfor manufacturing and services whowould develop and implement a compre-hensive strategy on manufacturing. Whilemaintaining a focus on manufacturing,strategic planning must include the serv-ice sector, which both influences andbenefits from the manufacturing sectorscompetitiveness.

This new position would provide thefocus within the Commerce Departmentneeded to respond to manufacturers con-cerns. The assistant secretarys officewould be able to provide regulatory eco-nomic analysis essential to assessing thecosts and benefits of government action

on manufacturing competitiveness. Thisoffice would be charged with establishinga mechanism for coordinating manufac-turing-related initiatives among the vari-ous executive branch agencies and would

Bruce Thompson of Projects Incorporatednoted that manufacturing had evolved inways most people did not know or appre-ciate. He emphasized that people need toget out and see that its not a dirty, oily,old mess anymore. Its technicians run-

ning high-precision equipment.The roundtable participants attrib-

uted some of the publics misperceptionabout manufacturing to the lack of focusin government on manufacturing. Theypointed out that there was no single advo-cate for manufacturing within the execu-tive branch departments. I think theUnited States is the only country in theG8 which doesnt have a very-high leveldepartment of manufacturing, said BobBrunner of Illinois Tool Works at theRockford, Ill., roundtable. I think that[establishing such a department] would bea real positive development in terms of supporting us manufacturers.

Manufacturers expressed frustrationthat there was no focal point for themany programs that government supportsat the federal, state, and local levels to as-sist manufacturers. Bruce Thompsonpointed out that there was no seamlessinterface. What was needed, in his view,was a one-stop shopping mentality, sothat manufacturers do not have to call ona lot of different organizations to get theinformation and assistance that theyneed. As Von Hatley of the Louisiana De-partment of Economic Development putit at a roundtable in New Orleans, We re-ally need a concerted effort between fed-eral and state [governments] to do what ittakes to save manufacturing. To ensureaccountability, manufacturers sought theestablishment of a single office within

government with responsibility for imple-menting the Manufacturing Initiative.

Historically there has been little insti-tutional focus on manufacturing in thefederal government. Although variousagencies take into account elements of manufacturing competitiveness, in practicethere is no mechanism to coordinate these


manufacturers sought the

establishment of a single office

within government with

responsibility for implementing

the Manufacturing Initiative


37/90

Relief Reconciliation Act was a signifi-cant achievement, and the resulting re-covery in the U.S. economy would cre-ate sufficient or significant demand forinvestment in the industry to put themanufacturing sector on the right path.

Despite the reductions in capitalgains and dividend taxes, as well as ex-pensing provisions, many manufacturersbelieved that the recent tax cuts did notgo far enough. They underscored the needto create greater certainty under the taxcode to encourage business investment.They also emphasized their desire for gov-ernment to address longer-term issues:specifically, manufacturers highlighted theneed to reform the tax code to eliminatethe penalties they believe it imposes ontheir businesses, such as outmoded depre-ciation schedules and the overall impactof the alternative minimum tax.

They also sought simplification of the tax code, which in its present com-plexity raises the costs of complianceparticularly for smaller manufacturers.Manufacturers further focused on reformsin the tax code that they believe wouldyield a broader and deeper pool of invest-ment capital to the benefit of U.S. manu-facturers, particularly for small andmedium-sized businesses. Murry Gerber,former chair of NAMs Small and MediumManufacturers Group, explained the needat the New Britain, Conn., roundtable:

They [small and medium-sized manufactur-ers] havent kept up to date with new equip-ment, and you cant blame them. They havehad falling sales, their margins are deci-mated, they dont have the wherewithal. . . .

An offer of investment tax credits . . . would drive companies to put on this additional

equipment thats consistent with the high-tech manufacturing in the future.

There is little doubt that reducingcomplexity and making the recent tax

enhance the Commerce Departmentsability to ensure that focus on a govern-ment-wide basis.

The Need for Stronger Economic Growth at Homeand Abroad

Manufacturers attending the roundta-bles indicated that the single most impor-tant economic policy objective from theirperspective was encouraging economicgrowth. Stewart Dahlberg of J.D. Street &Co. described the reality of the global mar-ketplace at the St. Louis, Mo., roundtable:

The world is a very big place. There are lotsof customers out there and lots of niche cus-tomers to find. What we would . . . simply

ask [is] that every possible opportunity toopen up every single possible market be inves-tigated and called out anywhere you can.

Although many of the specific con-cerns raised by manufacturers focused on

the effect of indirect costs onthe supply side of the eco-nomic equation, no one dis-agreed with the notion thatthe first and most pressingissue was sufficient demand,domestically and globally, tostimulate purchases by con-sumers and businesses of the

goods that U.S. manufacturers produce.Manufacturers recognized that the

most recent recession was one driven by asharp decline in business investment,rather than a drop in consumer spending.They also understood that policies de-signed to encourage business investmentwere essential to any recovery in manu-facturing. Most manufacturers indicated

that recent efforts to stimulate the econ-omy were paying off, even though theyhad not fully filtered through to themanufacturing sector. As Mustafa Mo-hatarem of General Motors put it at theroundtable in Washington, D.C., the re-cent passage of the Jobs and Growth Tax


American manufacturers, both

large and small, understand the

value of promoting economic

growth worldwide and reducing

the barriers to global trade


38/90

monetary stability, reducing taxes, and re-ducing the costs and inflexibility of heavyregulations that impose limits on growth.Every country, including the United States,has room for improvement in terms of thesteps it could take to foster growth and a

rising standard of living.Another aspect of growth involves

trade liberalization. From the perspectiveof U.S. manufacturing, reducing trade bar-riers and opening markets abroad hasmanifold advantages. Liberalization pro-motes economic growth in foreign mar-kets, which raises the demand for manu-factured goods worldwide. It offers theprospect of higher exports, and the result-ing greater efficiencies for American man-ufacturers and exporters. It also eliminatesthe implicit subsidy that tariff protectionextends to foreign competitors.

Significantly, U.S. manufacturers con-tinue to stand behind the effort to openmarkets abroad at the negotiating table.That is true of virtually every industry andbusiness large and small. Matthew Coffey,of the National Tooling and MachiningAssociation, which represents many smalland medium-sized metalworking firmsacross the United States, put it this way inan NTMA policy paper:

The NTMA believes in the free-enterprise sys-tem . . . whether it is in the United States, the

Americas, or the world as a whole. That leadsus to the conclusion that competition should be open. The NTMA is in favor of open mar-kets and getting rid of trade barriers and tar-iffs and has, therefore, generally supported free trade initiatives as long as there was a

prospect of fairness over time .1

In short, American manufacturers,both large and small, understand thevalue of promoting economic growthworldwide and reducing the barriers toglobal trade. They are more than willingto compete in that environment as longas the competition is open and fair, andas long as the same rules governing com-petition apply equally to all.

cuts permanent would encourage busi-ness investment. Greater certainty as tothe tax treatment of earnings is one of the basic components in any firms in-vestment plans.

The other salient point re