Following the 2008 global financial crisis, the U.S. government acknowledged that the explosive growth of the financial sector and weakened competitiveness of manufacturing threatened the whole economic system and failed to contribute to creating quality jobs. In this context, the Obama administration introduced a number of policies to enhance manufacturing competitiveness with particular emphasis on high-tech and high value-added. The recent U.S. policies to strengthen the manufacturing sector will consequently influence Korea’s manufacturing and export performance as well as the global production network. Based on the analysis of the U.S. government’s efforts to revitalize manufacturing competitiveness since 2009, this report is intended to provide recommendations for relevant policies of Korea.
U.S. manufacturing, which accounted for over 30 percent of global manufacturing production in the 1990s, now contributes only 18 percent. Hence, the share of U.S. manufacturing value-added to domestic GDP fell sharply from mid-20 percent in the 1970s, then 15 percent in the early 2000s and to 11.9 percent recently in 2009. In order to examine the causes behind the recent trend of weakening U.S. manufacturing and whether this trend has changed since the Obama administration took office, relevant indicators such as TFP, TSI, input-output and value-added are reviewed. First of all, the Total Factor Productivity(TFP) of U.S. manufacturing recorded significant increases until the late 1990s, driven by remarkable development of information technology, but TFP began to grow at a slower rate after the IT bubble burst and recently reported a minus growth rate for 2 consecutive years since the 2008 financial crisis. Although the growth rate of the TFP between 2009 and 2012 still remained nearly half (0.6 percent) of the average rate for the last 24 years, or 1.2 percent, it is worth noting that the declining trend in the TFP growth rate came to an end after the Obama administration took office. In terms of Trade Specification Index(TSI), the fact that TSI in steel, chemical, general machine, scientific·medical equipments, semiconductor and so on fell both before and after 2009 indicates that Obama’s manufacturing policies has not yet made significant impact on international competitiveness of several manufacturing sub-sectors. Meanwhile, analysis of the international input-output tables in this report confirms the shrinking share of U.S. manufacturing in global production network after the early 2000s, and a review of value-added shows that most of the U.S. trade deficits resulted from the manufacturing sector.
Increasing unemployment triggered by the global financial crisis as well as worsening productivity and global competitiveness of U.S. manufacturing encouraged the U.S. government to pursue policies for revitalizing the manufacturing sector to increase exports and creating jobs. Therefore, from its early tenure, the Obama administration has highlighted the importance of advanced manufacturing in terms of its potential for innovation, export enhancement and greater economic and social spill-over effects than other industries. Other factors such as decreasing energy costs led by rising production of shale gas in North America, sharply increasing labor cost in developing countries, increasing awareness of intellectual property rights and increasing international transportation costs also contributed to the government’s actions to reinvent manufacturing.
The Obama administration chose to pursue a more proactive and practical policies to achieve its goal of enhancing the U.S. manufacturing sector. In particular, support for advanced manufacturing and tax incentives for reshoring firms are at the core of recent U.S. manufacturing polices. The specific policy measures include promoting exporting of manufactured products, encouraging R&D and PPP in advanced manufacturing, training skilled labor and incentivizing firms to move production bases back to the U.S.. Especially, the government is aiming to establish the ‘National Network for Manufacturing Innovation (NNMI)’, an initiative to promote commercialization of cutting-edge high technology, process and product innovation; and consequently nurture the high value-added manufacturing sector. With joint participation and cooperation among government, industry and universities, the NNMI initiative is designed to build up to 40 manufacturing innovation institutes in the U.S.. Meanwhile, the ultimate goals of policies to promote reshoring include not only reducing the U.S. firms’ operation costs but also reinforcing U.S. manufacturing competitiveness through innovation. There are an increasing number of U.S. companies moving their production facilities from overseas back to the U.S. in order to facilitate innovation in the production process and develop advanced technologies.
It is difficult to estimate the effect of the package in support of U.S. manufacturing by the Obama administration due to the short span of time since the implementation of the package. However, the qualitative, long-term effect of the package could be analyzed through the lens of the industry dynamics model, which represents the key features of U.S. manufacturing. In particular, the model, which features process innovation by incumbent firms and product innovation by entrant firms, allows us to analyze the aggregate effects of the policies related to process innovation and product innovation separately. The main lesson from the analysis of the model is that the policy that supports process innovation by incumbent firms would have a greater contribution to future GDP growth than the one that supports product innovation by entrant firms in a well-functioning, competitive market. The main mechanism is market selection: a surviving firm is more productive than the one that cannot survive in a competitive market. The policy that supports process innovation by incumbents forces the least productive firms to exit and reallocates resources from the less productive to the more productive firms. As a result, the policy would contribute to the aggregate productivity and output growth in that labor and capital would be utilized effectively by the more effective, surviving firms. On the other hand, entrant firms have not been tested by market and it is costly to examine their value added in advance. Without carefully analyzing the value of entrants, however, the policy that supports product innovation might have two opposing effects, e.g. the policy might introduce the new value added to an economy but it might also allocate resources to the less productive entrant firms. The model predicts that two opposing effects would cancel out and therefore the policy which supports product innovation would have less significant aggregate effects than the policy which supports process innovation by incumbents. The Obama administration's package in favor of manufacturing, e.g. tariff benefit for imported raw materials, subsidy for R&D, and reducing energy costs by development of natural gas, tends to strengthen incumbent firms’ productivity. As the U.S. manufacturing industry is a relatively competitive market, the package is expected to have a positive, long-term effects on the U.S. economy.
This report also includes the review of three sub-sectors of manufacturing: automotive, clean energy and IT industry, in which the Obama administration has continually put great emphasis on. To rescue the domestic automotive industry once under the threat of bankruptcy during the recent global financial crisis, the Obama administration introduced emergency relief loans, reward program for used cars and so on. As a result, consumers experienced improved purchasing power, automotive producers benefited from direct assistance to recover and the industry as a whole was able to reverse downward sales trends. Even after overcoming the near-bankruptcy of the automotive industry, the government consistently provided support for environmental-friendly and energy efficient technologies to enhance value-added of and develop new competitiveness in the industry. Meanwhile, despite Republicans’ opposition from concerns about increasing burden for industry, the Obama administration has strategically expanded clean energy industry such as renewable energy, energy efficiency improvement and carbon capture and storage. According to the government’s analysis, it is expected that support for clean energy industry would contribute to improving competitiveness of other sub-sectors of manufacturing through improved energy efficiency as well as creating quality employment. Lastly, the government’s roadmap for strengthening IT competitiveness led to the introduction of, "A Strategy for American Innovation in 2009" and specific measures for extension of broadband and education infrastructure, training IT-specialized labor, appointment of a national Chief Technology Officer(CTO) and so on. In particular, the newly introduced IT industry policies such as establishment of the CTO position which bridges manufacturing and IT divisions within the government, are aimed at promoting the convergence of manufacturing, service and IT industries and ultimately improving innovation and competitiveness of U.S. manufacturing.