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How Can the U.S. Come Back as an Exporting Power? Germany Holds Lessons on Manufacturing Striving to bring back the U.S. from economic slump and recover from an opposition victory in recent Congressional elections, President Barack Obama has put his political capital behind the idea that the U.S. can rebound economically by pushing innovation and thus increasing exports. That sounds good as far as its goes: there are plenty of precedents for this formula in the U.S. and also in Europe. But is this a full remedy for “winning the future,” as Obama put it in his State of the Union speech? Or is there a major missing link? The case for a better understanding of how prosperity is actually won and sustained in a globalizing world is well argued in a timely new book “Making It In America” by Andrew Liveris. His thesis is that innovation alone is not sufficient as a basis for a durable leading-edge economy and that the American economy cannot be lifted out of decline by innovation alone. As Liveris explains it, the U.S. has an underlying problem -- the crisis in its manufacturing sector that means, practically speaking, that America doesn’t make things anymore. Beyond the obvious truism that a country cannot increase exports if it does not make things to export, Liveris argues a less well-understood dimension of the challenge, explaining that a country that innovates products and then hands off the production to another country to manufacture will wind up seeing the next generation of innovation come from the country that does the manufacturing. In his words, neither innovation nor exports cannot be sustained for long by a country such as the U.S. that “does innovation and then off-shores the actual production process.” This analysis is not necessarily what would be expected from an author such as Liveris, who is CEO of a major multi-national corporation, The Dow Chemical. For years, this multinational has benefited big time from the globalization game, regularly moving manufacturing, R&D and other operations from one country to another to cut costs, find a less restrictive environment or gain political pay-offs. But Liveris – an Australian-born American of Greek origin – is one of those leaders clever enough to keep two contradictory ideas in his head at the same time. But then Andrew Liveris is no ordinary American CEO. As head of The Dow Chemical Company, a Fortune 50 company with workers in 37 different countries, he is a member of the President’s Export Council, this American industrialist believes that America needs a manufacturing revival as the vital precondition for an American – and global -- global recovery. In his interesting take, he champions the efficiency of smart off-shoring while at the same time he also rails against conditions in the U.S. that he says are driving corporations to go off shore. He describes changes that need to be made for the U.S. to keep key sectors of manufacturing (and innovation) at home. With a revival of manufacturing of the right sort, Liveris warns, a permanent and irreversible decline in the American way of life is inevitable. So, he concludes, the White House needs to concentrate not just on R&D in campus and commercial labs but also on business-related reforms aimed at clearing out the undergrowth stifling industrial employment and manufacturing in the U.S. In making his case, he documents a decline of manufacturing in the U.S. that is downright scary. Taking the long view, Liveris notes that manufacturing accounted for 28 percent of GDP in the 1950s in the U.S., and now it has plunged to 11.5 percent. Recent trends are even sharper: between 2001 and 2010, U.S. corporations more than 42,000 factories in the U.S. and abolished one-third of American manufacturing jobs -- 5.5 million in all . What does this mean in global competitive terms? Worldwide in 2008, 1.2 billion cell phones were sold. Not one was built in the U.S. A killer example is the Kindle, the electronic book-reader sold by Amazon: the ideas and innovation that made possible were developed in the U.S., but there was no capability to manufacture it in the U.S. So Kindles are built in Taiwan, with the result that every Kindle purchased by an American consumer adds to the U.S. trade deficit. The same is true for the iPad: invented in the U.S., the product is made exclusively abroad. Same sad story for most of the parts of the wildly popular iPhone: according to a recent Asian Development Bank study, the success of this device – invented in the U.S.A. but not “made in the U.S.A,”.contributed $1.9 billion to the country’s trade deficit with China in 2009. Liveris take on the “crisis-deniers,” including Democrats such as former labor secretary Robert Reich who claim that the decline in manufacturing is not alarming because (1) the U.S. is evolving into a “service economy,” and (2) much of the decline in manufacturing jobs is due to productivity increases which permit fewer people to make even more products. Liveris says “phooey” to both points. On productivity, he notes that productivity increased 3.8 percent annually between 1989 and 2000 but manufacturing employment remained stable. But between 2000 and 2007, prior to the recession, productivity continued to increase at 3.7 percent yet 3.5 million jobs disappeared. This shows, QED, that productivity does not necessarily cause the abolition of jobs. Liveris makes an even more compelling case that the US cannot survive as a purely service industry economy. Services are important, but many result in transfer of money from one pocket to another without, as manufacturing does, actually adding value and increasing wealth. When a company hires a lawyer -- a service -- money changes hands, but when a factory converts sand to silicon chips – a manufacture – money also changes hands but in addition value has been added. Also, he notes, manufacturing has more “drag-along” jobs such as construction, transportation and, yes, services. Nor can the U.S. sustain itself on its vaunted ability to innovate and generate new ideas. Liveris says that long term, R&D will follow manufacturing, and he documents examples that show this already happing on a significant scale. There is of course a widely-held opposing view which holds that R&D follows consumer markets, i.e. smart multinationals put their R&D centers in places populated by early adapters and consumers. In that way, this theory hold, designers and engineers get early guidance about what people want and that helps them move in smart directions in deciding how to invest in new products that will sell well. It’s an argument that Liveris challenges with the idea that real innovation – buildable and sellable – often comes out of the manufacturing process in which the engineers in the production process spawn improvements and even breakthroughs thanks to their hands-on manufacturing know-how. In this view, innovation cannot be divorced from a strong manufacturing base. And that is eroding direly in the U.S. – a point often made by trade unions in their complaints about off-shoring but now made by one of the industrialists who is deeply engaged in the process – and unhappy about the outcome. The evidence is in and it “is overwhelming” claims Liveris, who states that “the manufacturing sector is in a severe decline and things are just getting worse.” Trying to replace lost manufacturing jobs with service-sector jobs – long an American mantra – will not work and will not create the kind of wealth needed to grow the U.S. economy, he finds. His conclusion is stark: “If we do nothing, we will be left with nothing.” A country that has done something, he says, is Germany. A highly developed economy with a high wage structure, it nonetheless has a flourishing manufacturing sector that constitutes 20 percent of German GDP and has created a trade surplus of $267 billion. Germany now employs over one million people in the renewable energy industry and has a strong or leading global market share of wind towers and turbines and solar panels. One key to German success, which Liveris recommends to the U.S., is to seize leadership in the renewable energy sector. Germany has mandated a so-called “feed-in” tariff, a government-subsidized program that allows producers of renewable energy to sell power into the electric grid at four times the market rates. The program has been a smashing success: one result is that Germany now accounts for half of the installed solar panels in the world. In ways such as this, Liveris says, government needs to have a role in U.S. recovery. He is not advocating state ownership and control on the mercantilist sort practiced by China and Singapore. What Liveris wants is something else – something between laissez-faire capitalism and state control. Concretely, Liveris says that the U.S. government and its agencies need to develop a strategy for manufacturing renaissance, focused on encouragement and support of new industries such as clean energy and other high–tech sectors. Other fixes could be relatively easy in eliminating barriers that have made the U.S. uncompetitive, says Liveris. He cites the now-familiar business lament about the misguided U.S. immigration policies that exclude high tech experts and expel foreign engineers when they complete graduate studies in American universities. He advocates cuts in corporate taxes; regulatory policy changes to shift the culture away from entitlement toward initiative and empowerment; smarter approaches to international commerce such as sound, mutually beneficial free-trade agreements that open up to new markets and reduce the trade deficit. In this vein, Obama himself mentioned the word “reorganization” of government in his State of the Union speech, but without specifics. The idea has been floated of creating a cabinet-level “department of competitiveness” -- an idea that Liveris would likely support. (See interesting piece on government reorg in Government Executive Magazine.) Certainly, Liveris’ suggestions for revival sound worth trying in the light of his chilling crisis narrative. Of course, they are not the lead-pipe cinch Liveris tries to make them. Overall, in fact, Liveris’ book, certainly unintentionally, makes a much more convincing case for the fact of crisis than for the ability to emerge from crisis. But a vital prerequisite for revival is a more widespread recognition of the problem, and Liveris make a signal contribution to that end.