Monday, May 26, 2003

U.S. manufacturing needs policy help, now. Low exports and a surge of imports have left the sector vulnerable, endangering future economic progress and hollowing out our defense industrial base.

Our trade deficits for goods with Mexico, Germany, Japan and China are huge and getting bigger. Last year, the U.S. deficit with just China was $103 billion. We have an imbalance of $111 billion in motor vehicles alone. The imbalance is actually greater than even we can quantify, because there is no way to measure the amount of foreign parts in U.S.- exported goods.

U.S. firms clearly don’t do enough exporting. It’s not that they don’t want to. There are simply too many bureaucratic obstacles for many of them to overcome. Compared to almost 34 percent for the European Union and 26 percent for China, U.S. exports pale ,with only 11 percent of total gross domestic product. Almost half of all import shipments come from foreign affiliates, captive suppliers and U.S. subsidiaries.

The peril is apparent: When the manufacturing sector disappears, the effects go beyond lost jobs. Replacement parts become unavailable. Product re-orders take weeks rather than days. Do we really want to depend on old friends abroad for the rapid supply of manufactures critical to national security?

Manufacturing migration affects innovation and market responsiveness. By staying close to market and using emerging technologies in new products, companies gain experience and boost performance. When production is moved offshore, the rapid-response capability to market demands is dulled. A good example is what is happening with the SARS virus and its impact on global supply chains. The April 22, 2003 issue of Investor’s Business Daily states “the threat of supply chain disruptions from China, Taiwan, Singapore and Indonesia is real … Computer, electronics, apparel and other firms are edgy about supply-chain troubles as their Asian partners send thousands of workers home and shut assembly lines.”

When manufacturing firms close up shop, file for bankruptcy protection or move operations overseas, it’s Americans who lose. We lose local expertise and strong competition. The once-demanding customers for American made products now become demanding customers for foreign-made goods.

Moving manufacturing overseas will also have other long-term consequences. A study at Temple University has found that the creation of new technology is a painstaking learning process of continual adjustment as new productive methods are tested. It is the small and medium manufacturers that create 55 percent of workplace innovations. The shifts abroad may eradicate technology and design and process advantages, placing U.S. firms and the country at further, future disadvantage.

Long-term economic adjustment does little for the unemployed overwhelmed by immediate needs. We don’t think the answer is more legislation against countries and industries that account for substantial imbalances. That substitutes government judgment for market direction, which is not a very successful and sustainable replacement. Typically, prices rise disproportionately, consumers are deprived of desirable goods and firms find their ability to export undermined.

Policy must encourage existing market activities. Firms seeking export assistance should be supported by one personal export officer (PEXO), regardless of which agency handles the details. At our suggestion, the administration recently created an interagency training program to improve trade facilitation services for small businesses bewildered by the process and number of government forms, agencies, and participants. The Trade Promotion Coordinating Committee, composed of the 19 federal agencies that facilitate trade, conducted the first interagency seminar for PEXOs in January 2003.

There also needs to be more support for the fusion of goods, services and global networks. Consider how the automotive industry has combined airbags, the global positioning system and car telephones. Car manufacturers offer a new level of passenger assistance that can independently notify emergency services in case of an accident. Such fusions of readily available products are crucial to innovation.

Regulators should consider global implications. U.S. export control rules need to be precise and targeted, but not needlessly inhibiting to firms. Likewise, if a U.S. export order requires inspection by foreign buyers, visa regulations should flexibly accommodate the need for a brief visit.

But who pays for the adjustments? Currently, there is no link between governmental market openings and benefits obtained by an industry. Trade negotiations results in winners and losers, but winners have no incentive to share their bounty. The beneficiaries of protective measures do not show how they have used their revenues to help the transition of workers and communities. This must change. Private-sector winners must supplement the federal Trade Adjustment Assistance programs to help fund the cost of adjustment and become an essential engine for further trade liberalization. After all, even free trade has its price.

Rep. Donald A. Manzullo, Illinois Republican, is chairman of the House Committee on Small Business. Michael R. Czinkota served in trade policy positions under Presidents Reagan and George H.W. Bush.

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