One of the most important aims of any government is to build a resilient economy capable of navigating domestic and foreign shocks and force majeure situations. Robustness comes from having a solid manufacturing base that satisfies both local needs and exports, creating a stable inflow of foreign currency.
The United States, the world’s largest economy, has become increasingly less resilient, importing more than it exports since the 1980s. The Trump administration’s efforts to promote domestic manufacturing largely focused on trade policy. During this period, the U.S. renegotiated the North American Free Trade Act, backed away from the Trans-Pacific Partnership trade agreement and introduced new tariffs and other barriers on imports, especially from China.
In contrast, the Biden administration takes a holistic approach to attracting manufacturing investment, using initiatives, executive orders and new laws to strengthen supply chains, promote local manufacturing and create quality jobs.
“This pandemic exposed economic vulnerabilities that we have yet to fully grapple with: Empty store shelves, shortage of basic medicines, supply chain bottlenecks from computer chips to advanced medical equipment,” said Brian Deese, White House Director of the National Economic Council, to the Atlantic Council in June 2021. Up to that point, he noted, America’s private sector and public policy approach to domestic production “prioritized short-term cost savings over security, sustainability, and resilience … In short, this was a wake-up call.”
However, some worry that policies protecting domestic manufacturers could stifle competition from abroad. That could stall innovation and negatively affect quality at home.
Emerging economies like Egypt’s share similar goals and similar challenges in building a manufacturing-driven economy. The U.S. government’s strategy for a supply chain-focused recovery may hold lessons adaptable to the Egyptian experience.
A 21st-century strategy
In February 2021, a month after taking office, U.S. President Joe Biden signed Executive Order 14017, directing a multi-agency review to assess vulnerabilities and ways to strengthen the resilience of critical supply chains. “Resilient American supply chains will revitalize and rebuild domestic manufacturing capacity, maintain America’s competitive edge in research and development, and create well-paying jobs,” the order noted.
From that assessment emerged what Deese described as a “twenty-first-century American industrial strategy … to strengthen our supply chains [and] rebuild our industrial base across sectors, technologies, and regions of this country.” He explained, “This strategy needs to be built on five core pillars: supply-chain resilience, targeted public investment, public procurement, climate resilience, and equity.”
In June 2021, the White House convened the Supply Chain Disruptions Task Force to develop a national strategy to strengthen supply chains, focusing on six main sectors: energy, transportation, agriculture commodities and food products, public health and biological preparedness, information communications technology, and defense. That strategy has guided the administration’s legislative and regulatory agenda for the past two years.
The Bipartisan Infrastructure Law passed in November 2021 includes $550 billion in new federal investments in ports and all modes of transportation and core infrastructure, including power and broadband networks, clean water, and environmental resiliency. A February 2022 White House briefing document noted that these investments will help “move critical goods from ships to shelves faster and more affordably.”
The government is also directing $1 billion from the Small Business Opportunity Fund to expand independent meat processing capacity. Meanwhile, the U.S. Department of Agriculture (USDA) provides technical assistance for micro, small and medium enterprises. The American Rescue Plan (ARP) authorized that fund in March 2021 to provide cash grants and loans to stimulate the economy during COVID-19 lockdowns.
The federal government has made domestically produced critical minerals – including copper, nickel, lithium and other rare earth minerals used in many tech-based products – a priority. In February 2022, the administration announced plans to update mining regulations to reflect sustainability and called for a comprehensive reform of the 150-year-old mining law overseeing the sector.
That same month, the Department of Energy announced $44 million in funding for the Mining Innovations for Negative Emissions Resources (MINER) Program to fund “technology research that increases the mineral yield while decreasing the required energy, and subsequent emissions, to mine and extract these energy-relevant minerals.”
Other laws passed in the last two years focus on high-tech manufacturing. Biden signed the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act into law in August 2022, which earmarks $52 billion in subsidies to promote microchip manufacturing in the United States. According to a presidential executive order to implement the new law, the CHIPS Act “will make transformative investments [to] bolster United States technology leadership and reduce our dependence on critical technologies from China and other vulnerable or overly concentrated foreign supply chains.”
The Inflation Reduction Act, also passed in August 2022, includes tax incentives for U.S.-made components for clean energy products, such as windmill blades and electric vehicle batteries. “The act aims to catalyze investments in domestic manufacturing capacity [and] encourage procurement of critical supplies domestically,” said Justin Badlam, market intelligence leader at McKinsey & Company.
Trade officials for the European Union immediately raised concerns about those tax incentives and other parts of the Inflation Reduction Act, suggesting they violate international trade rules. France’s Finance Minister Bruno Le Maire told CNBC in November, “The level playing field is at the core of the trade relationship between the two continents and we don’t want to see any kind of decision that could harm this level playing field.”
The Buy American Act of 1933 requires the federal government to prefer domestic products in its purchasing processes. “The federal government is the largest buyer in the world, spending over $600 billion in contracts annually,” Deese said. “We need to think about how to leverage this purchasing power strategically to shape markets.
In March 2022, the administration announced new procurement rules to boost federal procurement of U.S.-made goods. Manufacturers that want to use the “Made in America” label must increase the percentage of domestic content to 60% in 2022, 65% in 2024, and 75% in 2029. A White House paper in March said the gradual rise will “allow businesses to onshore manufacturing and adjust their supply chains to increase the use of American-made components.”
Another new rule allows the government to apply enhanced price preferences to select critical products and components, noted the March White House paper. If the lowest offer is not from a domestic supplier, the price preference mechanism marks up the foreign offer by a percentage for the bid comparison – making local products look more favorable. The enhanced price preference would increase that percentage for eligible contracts.
The Biden administration also wants to include more small disadvantaged businesses in the procurement system. In 2020, less than 10% of all contracting dollars went to minority-owned businesses. The administration wants to increase that to 15% by 2025.
In his speech introducing the new industrial strategy, Deese anticipated the concerns of international trade partners: “Resilience does not mean closing ourselves to the rest of the world. Partnerships with our allies that promote more stable access to key inputs while improving environmental sustainability and workers’ rights is essential.”
Access to financing is a vital part of growing the manufacturing sector, particularly for small businesses. “Too many American manufacturers — especially small and medium ones — struggle to obtain the financing they need to expand their operations and compete for global sales,” noted the White House February briefing document.
According to the White House, the ARP’s $10 billion Small Business Opportunity Fund, established to expand small business credit initiatives, can be “leveraged into more than $70 billion in additional lending and investment for small businesses, including small manufacturers.”
The Department of the Treasury and Small Business Administration (SBA) are also activating programs to “unlock tens of billions of dollars for small manufacturers.” The SBA also will “promote and prioritize licenses for Small Business Investment Companies (SBICs).” The February White House paper said SBICs invested $14 billion since 2012 to encourage manufacturing. Meanwhile, the SBA hosted a Seed Fund Start-up Expo in 2021 to financially support Small Business Innovation Research winners.
Manufacturing 4.0
For industry policy to be effective, it must address increasingly pressing topics. “Any reinvigoration of … manufacturing will … require reinvention,” said Tyler Carr of McKinsey’s Detroit office in an August paper. “Around the world, companies are taking a fresh look at the paradigms that have dominated industry’s evolution for decades.”
Carr said industrial policies should not support industries that use fossil fuels. “The energy transition … offers significant opportunities for U.S. manufacturers. Demand for new renewable-energy generation equipment is set to skyrocket … by 2050.” The Bipartisan Infrastructure Law, for example, has the potential to “trigger $5 billion in investment in new charging infrastructure for electric vehicles.”
Another consideration is manufacturers’ expanding their use of digital technologies. “Around the world, manufacturers are ramping up their investment in key technology areas, seeking to overcome existing pain points in their operations,” wrote Carr. Those technologies include “artificial intelligence, machine learning, and [other] advanced technologies.”
Industry policies also should prioritize the creation of a more skilled workforce. “Solutions from the past aren’t likely to work [as] digital processes have changed profoundly … Manufacturers will need a sharp focus on their employees’ skills,” said Carr. “Digitization often creates new roles faster than workforce training has historically been able to keep up.”
The final dimension of industrial policy is ensuring resilience. That puts traditional manufacturing destinations under pressure. “Automation, digitization, and the drive for greater sustainability are changing how manufacturers produce their products,” said Carr. “These factors are also encouraging CEOs to take a fresh look at where manufacturing is done.”
Win-win?
Having a strong domestic industry is always a sign of a sustainable economy. The authors of “Producing Prosperity: Why America Needs a Manufacturing Renaissance” explain how “offshoring production hinders the … ability to innovate, as manufacturing know-how is lost.”
A robust manufacturing ecosystem can be a matter of national security. Edward Alden, a senior fellow at Bernard L. Schwartz Communication Institute in New York, explained in a blog on the Council on Foreign Relations (CFR) website, “A country could determine that it needs to domestically produce critical goods, such as medical supplies or military equipment, for national security reasons.”
Strong manufacturing can stabilize a society, said Oren Cass, executive director of American Compass, a think tank. “Manufacturing industries provide broad societal benefits, such as stable, well-paid employment,” he said on the CFR site.
On the flip side, protecting local industry can backfire. Having an industrial policy “inevitably distorts the free market and rewards companies, not for the quality of their products and services, but for their skill at lobbying lawmakers,” said Anshu Siripurapu, an economics writer and editor for the CFR, in November. “It gets to the heart of a deeper, long-standing controversy over the role of free markets and the role of the government in the economy.”
The result might be weaker companies and a more fragile, less investor-friendly economy. Scott Lincicome, director of general economics at Cato Institute, told CFR, “The government is worse at identifying successful firms than the free market.” It also “leads to crony capitalism, where politically well-connected companies benefit at the expense of their competitors.”
Another concern is the rise of monopolies. Matt Stoller, director of research at the American Economic Liberties Project, wrote in a 2020 blog on ProMarket, a University of Chicago-based publication, noted that this “greater concentration of corporate power … would stifle innovation and harm national security.”
Making it work
For industrial policies to work, there are prerequisites. The first is untangling existing regulations to simplify compliance and make loopholes easier to detect. Malanga, the George M. Yeager Fellow, noted, “For years, manufacturers have argued that a thickening regulatory tangle makes it more expensive to hire workers, delays the opening of projects … and requires considerable outlays to comply with government mandates.”
Smart industrial policy also is a factor. Robert Atkinson, president of the Information Technology and Innovation Foundation, told CFR that policy “should focus on high-value industries that compete internationally … and are difficult to retrieve once lost.” He cited the semiconductor industry.
Finally, industrial policies work when incentives and protections are “complemented by measures to link productivity improvements with incomes,” the ILO said. “Continued slow growth of median incomes relative to productivity is a recipe for further financial crises and a lost decade or two.”
Analysis by Tamer Hafez
