Back in 2011, we briefly discussed the fact that German reliance on offshoring to central and eastern Europe has been a boon to German productivity, just as U.S. integration in global supply chains that extend to Mexico and China and points beyond has contributed to U.S. productivity. According to economist Dalia Marin, Germany’s integration in a trans-central-European supply chain “has been more important for Germany’s lower unit labour costs than German workers’ wage restraint.” This came to mind as I read John Deutch and Edward Steinfeld on President Obama’s new industrial policy initiatives:
The strength of the president’s initiative is that it recognizes the importance of manufacturing to innovation. But for many high-tech products such as photovoltaics, innovation and manufacturing take place as part of a global manufacturing ecosystem that spans the Americas, Asia and Europe.
U.S. innovators would be severely impeded if removed from such systems. The administration should explain how its manufacturing initiative accommodates those areas in which cross-border commercial interactions and technology cooperation are critical. A step in this direction is the U.S. government’s recent filing of a case at the World Trade Organization that challenged—as a violation of global trade rules—the domestic content requirement for India’s national solar program.
If done right, advances achieved from the U.S. program will benefit firms around the world and create better products and more jobs in the U.S. and elsewhere. Technology transfers with other firms—whether in China, Japan, Germany or Canada—is important for U.S. firms that operate globally.
Moreover, it is important to encourage other countries in Europe and Asia to mount similar advanced technology programs and to assure that U.S. firms have access to these efforts. In a world economy that depends on innovation and production, the U.S. must encourage technology transfer and the opportunity to invest and trade globally. [Emphasis added]
Deutch and Steinfeld’s argument complements Amar Bhidé’s critique of “techno-nationalism,” i.e., his argument that rather than obsess over the upstream development of new products and technologies, we should care more about downstream consumption and use. The fact that Tim Berners-Lee developed the World Wide Web at the CERN lab in Switzerland didn’t impair America’s ability to take advantage of it. If anything, the superior “absorptive capacity” of the U.S. — our greater ability to take advantage of and rapidly deploy new products and technologies, including those developed elsewhere — is our main economic advantage. And so instead of fixating on upstream development, the U.S. needs to think hard about how to maintain and increase our “absorptive capacity.” One straightforward way to do this would be to lower the barriers to entry by new firms that might be more willing to put new products and technologies to use than incumbents. But just as the Obama administration pledges to increase funding on various industrial policy initiatives, it champions regulations and tax policies that (arguably) raise barriers to entry.
One alternative to the Obama administration strategy, albeit one that doesn’t necessarily fit our political moment, is to think about how the U.S. might strengthen economic relationships with Canada and Mexico, to build on existing regional supply chains. The U.S. is indeed part of a global manufacturing ecosystem. Yet deepening our regional manufacturing ecosystem, in and around the Great Lakes, the Pacific Northwest, and the U.S.-Mexican border, is a source of low-hanging economic fruit, as Robert Pastor argues in a new Council on Foreign Relations Policy Innovation Memorandum:
The Obama administration has made it a priority to complete the Trans-Pacific Partnership (TPP) with Asia and has announced its intention to launch a new U.S.-European Union Transatlantic Trade and Investment Partnership. But the administration has neglected its two neighbors despite the fact that their combined product is more than six times that of other TPP countries and that U.S. exports to them exceed those to the EU. Mexico and Canada are already the United States’ two largest export markets, its two largest sources of energy imports, and in the case of Mexico, the largest source of immigrants. The three countries also make products together. Unlike U.S. trade with most other countries, roughly 25 to 40 percent of the value of U.S. imports from Canada and Mexico comes from components made in the United States, and then assembled into finished goods in one of the two countries. Closer integration would translate into a more efficient supply chain and improved competitiveness. With labor costs in China rising to those in Mexico, and the cost of transportation across the Pacific increasing, a North American supply chain is not only more efficient than an Asian route, but it could also become a strong export platform to Asia.
Though I’m skeptical of Pastor’s references to “competitiveness,” his specific proposals — negotiating a common external tariff to facilitate the movement of products, building new trade corridors, and, perhaps, freeing labor migration between the U.S. and Canada — would likely do far more good than the president’s “Advanced Manufacturing Technologies” initiative. To understand why, check out Chris Anderson’s recent op-ed on “quicksourcing” and the fast-evolving manufacturing agglomeration that spans San Diego and Tijuana: “As any entrepreneur can tell you, the shorter and more nimble a supply chain is, the better.”