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Current Trade Deficit:    
Presidential Technology Panel Warns of Impending Disaster
William R. Hawkins
Friday, October 10, 2003
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William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.
More evidence of the short-sighted nature of the “penny wise, pound foolish” practice of outsourcing manufacturing was provided by the President’s Council of Advisors on Science and Technology last week.  PCAST’s Subcommittee on Information Technology Manufacturing and Competitiveness issued its “Preliminary Draft Findings and Observations” on October 3.

President George W. Bush created PCAST on September 30, 2001 by executive order, re-establishing a body formed by his father when he was president in 1990.  Members of the this particular subcommittee include chairman George Scalise, president of the Semiconductor Industry Association; Michael Dell, CEO of Dell Computer Corp.; Bobbie Kilberg, president of the Northern Virginia Technology Council; Gordon Moore, chairman emeritus of Intel; Steve Papermaster, chairman of Powershift Ventures; and Luis Proenza, president of the University of Akron.  

PCAST's draft warns that U.S. technological preeminence is not assured because as manufacturing is moving overseas, research and development is following, risking a shift in future innovation which could leave America behind the technology curve.  Global R&D centers are emerging around manufacturing in India and Asia (especially in China) where labor costs for R&D design capabilities are one-third to one-tenth what they are in the United States.  Companies are deciding to locate near strong R&D centers and “clusters of innovation.” Confidence in the quality of foreign design capabilities is slowly growing, as is the management of global design systems.

Foreign government subsidies of all types are wide and varied and include tax rebates, tax holidays, stock options (with no capital gains taxes), science-based industrial parks, direct subsidies and worker training programs.  “We are not just competing against foreign companies but foreign countries,” concludes the PCAST paper.  

PCAST considers R&D and manufacturing as the two basic anchors of the modern economy.  R&D is coupled with manufacturing in an “innovation ecosystem” that drives successful innovation, new  products, and improved productivity.  With manufacturing leaving the country, the United States runs the risk of losing the strength of its innovation infrastructure of design, research and development and the creation of new products and whole industries.  One aspect of the de-industrialization problem that is often overlooked is that it is manufacturing that  generates the revenue that supports R&D and innovation.  Loss of American high-tech leadership in both production and technology would have serious implications for the nation's economic vitality, living standards, and national security.  

PCAST’s findings, though alarming, are not new.  In the late 1980s and early 1990s the Berkeley Roundtable on the International Economy, a group of economists and business experts at the University of California at Berkeley, predicted this would happen.  The BRIE philosophy is laid out in detail in the 1992 book The Highest Stakes: The Economic Foundations of the Next Security System.  Trade and industrial policies affect a nation's “trajectory” towards the future.  Losing key industrial sectors can sidetrack an entire economy, making it dependent on others for critical inputs and future developments.  One of the BRIE’s mantras was that a nation “cannot control what it cannot produce.” It then becomes a follower rather than a leader.  

The BRIE warned, “U.S. military success in the Persian Gulf rests on past industrial strength, it is not a reliable indicator of future capabilities.  Even American weapons mastery rests on electronic components and subsystems largely designed in an era when U.S. industry dominated the civilian computer and semiconductor industries.  That era is fading fast.” A decade later, it has nearly faded away, as defense prime contractors now argue that they cannot produce more than half of the components of major weapons systems in the United States in opposition to legislation passed by the U.S. House mandating that 65 percent of weapons be manufactured in domestic plants.  Without a major change in national policy, the next generation of American military systems slated to be built over the next 10-15 years will have large slices of foreign dependency built into them, reflecting the loss of both manufacturing and R&D capabilities in the United States.

There was a moment of hope that America would rally and take corrective measures when newly elected President Bill Clinton appointed BRIE Director of Research Laura D’Andrea Tyson first to his Council of Economic Advisors and then as head of the National Economic Council, which was supposed to design a strategy for American competitiveness.  Unfortunately, Ms. Tyson proved no match for the administration’s “New Democrat” allies on Wall Street and  U.S. multinational corporations, and the Clinton administration, including Tyson, quickly adopted the same destructive “free trade” notions that have repeatedly crippled Republican economic policy.   Nor did Clinton or his cronies care about national security and the defense industry, which declined precipitously during the 1990s.

PCAST committee member Bobbie Kilberg has recounted a discussion she had with an executive from a major high-tech firm.  He told her that by 2010, 90 percent of his company's R&D, design, and manufacturing will be conducted either in China or India.  “What can we do about that?” Kilberg asked.  The executive answered, “Not much.  We are not coming back.  Unless the government prohibits us from going, we are gone.” Neither tax incentives nor tort reform (centerpieces of the Bush economic program) will keep his company in the United States, and there is little the United States can do to compete with low-cost and highly trained labor in India and China.

The indisputable fact is that “market” solutions, even tweaked with tax breaks and other reform policies, are not going to reconstitute our world-leading manufacturing and technology base, which has provided such a high standard of living for the American people.  The time of trivializing the issue with talk of “level playing fields” and vaguely racist slogans about “the American worker out-competing all others if given a fair chance” must end.  The stakes are too high and policy is in full throttle in the wrong direction (though it is more correct to consider “free trade” an anti-policy, explicitly rejecting any concern for national advantage).  To prevent the loss of R&D and future technological leadership, manufacturing must be kept at home to provide the anchor for national economic progress.  That means preventing the displacement of domestic production by imports through a government system of trade restrictions.  

William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.