Economic Security is Now National Security
The U.S. needs to upgrade its innovation system so that it supports advanced manufacturing, but political priorities lie elsewhere.
China is radically re-engineering what is sometimes termed the “innovation chain” linking underlying invention to manufacturing output and all the steps in between. To do this, it is building new institutions and providing multiple new financing tools. China is becoming an “accelerator state,” fostering the growth of small and medium enterprises in technologically advanced sectors.
Premier Li Qiang, in his recent “Report on the Work of the Government” delivered at the National People’s Congress in March, laid out the major tasks for 2024. Task number one was labeled: “Striving to modernize the industrial system and developing new quality productive forces at a faster pace.”
We should give full rein to the leading role of innovation, spur industrial innovation by making innovations in science and technology and press ahead with new industrialization. We will launch industrial innovation projects, improve the industrial ecosystem, expand application of innovations, and promote integrated and clustered development of strategic emerging industries.
Xi Jinping, China’s president, is attempting to get China out of its current economic slump through expanded and improved manufacturing. Annual investment in Xi’s plan for “new productive forces” is now $1.6 trillion—twice its level five years ago, which will pump up China’s manufacturing output by 75 percent or more by 2030 in some key industrial sectors.
“Expanding domestic demand,” the go to and sometimes only macroeconomic solution offered by Western economists, and their primary recommendation for how China should best address its economic problems, was a distant task number three of the Central Committee.
The Biden administration has introduced major industrial-innovation policies of its own.
The CHIPS and Science Act and the Inflation Reduction Act represent a sea change from past practice. But they aren’t nearly as comprehensive as China’s efforts. More to the point, they don’t involve a wholesale re-organization of the U.S. innovation, manufacturing, and financial support systems. They are targeted to just a few sectors.
Modernizing the overall U.S. industrial system and its underlying innovation chain is not government task number one as in China, even if it gets a lot of lip service. Political priorities lie elsewhere. The task lacks Wall Street financing and buy-in. There is no lobby to support industries which don’t exist. The standard wisdom among economists is that industrial policy doesn’t work and that manufacturing is no more important than any other sector. China hawks may want to compete with China, but rebuilding advanced manufacturing is much harder than banning TikTok. And for the “American street,” meaning the progressive protests roiling campuses and cities and dominating public discussions, it is a non-issue.
There are technical challenges to reviving U.S. manufacturing which go beyond the piecemeal Biden approach. There are historical weaknesses that require addressing. Unlike China, the U.S. has a broken innovation chain. Invention is the technology discovery moment. Innovation is much bigger: the implementation of invention, often a group of related inventions, at scale to create a significant impact on the economy.
The U.S. is still strong in invention because it retains strong research but its weakened production system too often fails to implement and scale it. For example, drone technology originated in the U.S., but China now dominates drone production. What is invented here isn’t manufactured here. The U.S. lacks the right financing tools to support capital-intensive industries and the scale-up of hardware innovations. There are missing collaborative government, academic, and industry institutions which could improve manufacturing techniques and share related new technologies.
Fixing the innovation chain to support advanced manufacturing will require more widespread knowledge of the issue—and more robust political support.
World War II and the Development of the U.S. Innovation System
The U.S. innovation chain worked superbly—at the end of World War II when America dominated global manufacturing. After all, its competitors’ manufacturing capabilities had just been destroyed.
America’s post war science and innovation system, which is still in place today, was largely laid out in the 1945 report, “Science—the Endless Frontier,” by President Roosevelt’s science advisor Vannevar Bush. This report conceived of innovation as a linear pipeline. The federal government would fund research and development (R&D) both at government labs and universities. It was assumed industry would develop these inventions further, moving them along the innovation chain until they reached mass production.
“The Endless Frontier” report doesn’t contemplate that innovation could occur anywhere along the chain, or that new technologies could transform manufacturing processes themselves. Instead, America’s innovation system, as developed by Vannevar Bush, simply didn’t have a focus on manufacturing—the word manufacturing only occurs once.
The basic R&D focus in design made sense at the time, given America’s unchallenged supremacy in mass manufacturing. Also, there was no need to worry about scale-up financing tools given that the stock market rewarded capital-intensive manufacturing corporations. But the flaws of the U.S. system became apparent over time.
The U.S. experienced stagflation and a loss of manufacturing competitiveness in the 1970s. In contrast to the U.S. innovation paradigm, the Ministry of International Trade and Industry (MITI) in Japan funded research into production practices. Japan pioneered the quality production paradigm. Japanese car manufacturers pursued precision production, just-in-time production, quality built into all production stages (not just at the end), continuous improvements by the entire workforce, and collaborative labor practices—all of which led to dramatically increased efficiencies and quality.
Though the U.S. government countered with some industrial policies in the 1980s, such as SEMATECH to revive U.S. semiconductor manufacturing, the main response to American declining competitiveness was “neoliberalism.” This umbrella title of policies includes: financialization; offshoring; outsourcing; trade deficits; collapse of unions; precarious employment; mass unskilled immigration; and a capital-lite economic model centered on intellectual property (IP) rather than production.
This new economic approach proved successful in terms of stock market valuation. But the U.S. failed to keep up with the advanced manufacturing practices of Germany or Japan—and now China—and largely exited heavy industry. Though there is a new cottage industry blaming neoliberal policies for America’s economic turmoil, in many ways neoliberalism was a response to a problem, not the cause of it.
Today, the U.S. has a huge and accelerating trade deficit in manufactured goods of over $1.3 trillion in 2022. This is not just in lower-end commodity goods. Its deficit in advanced technology goods grew from $128 billion in 2019, to $195 billion in 2021, to $244 billion in 2022. In 2021, the United States accounted for 78 percent of the total trade deficit among industrial nations, while China accounted for 45 percent of the total trade surplus. Productivity in manufacturing in the United States, across most measures, has been declining.
China is doubling down on its advanced manufacturing, export-led strategy. What is the U.S. doing?
Biden’s Industrial‑Innovation Policy Initiatives
The Biden administration’s series of industrial policy initiatives included: the 2021 Infrastructure Act with $21 billion for energy technology demonstration projects; the 2022 Inflation Reduction Act (IRA) providing $400 billion largely for consumer and industry tax breaks for new energy technologies to meet climate goals; and the 2022 CHIPS and Science Act providing $52 billion in grants and $24 billion in investment tax credits for the semiconductor sector. (The science portion of that act created a new technology directorate at the National Science Foundation but has not been funded by Congress.)
These initiatives were focused on two sectors—energy and semiconductors—and there was only limited “industrial” in these industrial policies, with little attention to the longstanding gap in innovation in manufacturing. Industrial policies simply won’t translate to capturing manufacturing market share unless U.S. manufacturing is more competitive, which requires advanced manufacturing—innovation in production technologies and processes to raise efficiency and productivity. Scientists and engineers tell us these new technologies are increasingly at hand, through advances in digital production, new materials, 3D printing, robotics, data analytics, and AI. While China is spending trillions to implement them and to scale up its advanced production, the U.S. is spending about $200 million a year on R&D at 16 underfunded manufacturing institutes and lacks a mechanism for scale-up financing. The innovation chain still does not include manufacturing.
Technical Fixes
Fixing America’s broken innovation chain, and reforming America’s innovation system so that it better supports advanced manufacturing, requires a systematic overhaul that is broader than anything being contemplated by either party.
The Obama administration created 16 manufacturing innovation institutes, but these must be updated and given a new lease on life. They were modeled on the 70 German Fraunhofer Institutes that link Germany’s large companies to its “Mittelstand,” its famous small and midsized companies, and tie them to the country’s strong engineering schools. Together they develop and implement advanced manufacturing processes and technologies that have kept Germany a world manufacturing leader.
The U.S. manufacturing institutes are a pale comparison. They bring the right players together—industry, small and large, government, universities and community colleges. But they were term-limited, on the faulty assumption that a mere five years of modest federal seed funding could transform a manufacturing sector like robotics, digital production, or 3D printing—but that is a much longer-term problem. They have only limited funding. And the institutes can’t each be a separate stovepipe; they need to collaborate more closely with each other so they can package groups of new technologies for companies to pick up, and with support from state and local governments.
The institutes can help generate new later-stage technologies, but where will the early-stage advances come from? The U.S. still has a strong research system, but we need to aim that system at manufacturing. Our R&D agencies like the National Science Foundation (NSF) have historically shunned research on manufacturing technologies—that’s been viewed as industry’s purview. Manufacturing technologies need to become a subject of significant research at university engineering centers and government labs, then plugged into the institutes for applications and implementation. Let’s put the innovation system onto the innovation problems.
The biggest problem is around scale-up. China has 35 percent of world manufacturing output; the U.S. is down to 16 percent. The two countries have literally traded places. To compete in manufacturing the U.S. must turn around its manufacturing productivity which has been stagnating for fifteen years. It will have to innovate in manufacturing to do so. Venture capital (VC) is the U.S. source for financing U.S. innovation, but VC is overwhelmingly focused on software, biotech, and services; hardware is too long term and risky and is less than 5 percent of annual VC investment.
If the United States is to shift to advanced manufacturing, it will need scale-up financing tools to support it. In contrast to the United States, China has long provided massive manufacturing scale-up assistance to its firms—amounting to the equivalent in U.S. dollars of over $400 billion a year. It also has private sector managed Guidance Funds with over a trillion dollars in authorized financing for manufacturing scale-up—the funds pursue government-set critical technology priorities with equity financing. The U.S. has nothing like these programs. China’s scale-up support system accounts for much of its dominance of world manufacturing output; the U.S. is not even in the game. While some direct subsidies may be needed in critical areas like semiconductors, the real issue is a new “hardtech” financing system which can be private sector led with the right public sector incentives.
Finally, we need to fix workforce education. The United States has a broken workforce-education system, with a deep disconnect between the education system and workplaces. Support is needed for community colleges to introduce advanced manufacturing curricula, sponsor apprenticeship programs with employers, create short programs more adapted to “upskilling” workers already in the workforce, establish certificates around particular skills, and turn around low completion rates. U.S. advanced manufacturing will not happen unless there is a workforce ready to implement it.
Political Fixes
A decade after the U.S. lost one-third of its manufacturing jobs largely to competition from Asia and China, both parties are talking about the importance of manufacturing. But neither has articulated a serious agenda for doing something about it.
Republicans need to realize that fixing the innovation chain requires much more than just tariffs. Democrats, looking at the polling numbers, increasingly see the necessity to reconnect with the party’s working-class roots. Biden’s IRA aims to spend money on U.S. manufacturing but that won’t work well unless the underlying manufacturing system is fixed. A serious agenda developing and implementing the new manufacturing technologies needed for the U.S. to compete, and the ability to politically articulate that agenda, are still missing from both parties.
Re-industrializing the U.S. should have political appeal. It is both patriotic and will lead to prosperity. “Jobs and the economy” is consistently rated as among the most important issues for voters (in contrast Gaza barely registers). Yet progress has been slow. The public appeal offered by re-industrialization hasn’t translated into many concrete policies. A new policy approach, with a political strategy attached, is required.
A recent legislative example is offered by the TikTok ban, which was supported by a broad coalition of lawmakers because of the national security risks posed by TikTok and the data bases it accesses. Upgrading the U.S. manufacturing innovation system—framed in the context of the very real competition with China—could generate similar bi-partisan support. The reasons go beyond just national security. Re-industrializing the U.S. is necessary for America’s economic security. And economic security is now national security.
David Adler is a contributing editor at American Affairs. Bill Bonvillian is a lecturer on science and technology policy at MIT. Adler and Bonvillian previously co-wrote the American Affairs article, “America’s Advanced Manufacturing Problem—and How to Fix It.”
It might make sense to take this prose and turn it into an action plan. Perhaps 12 bullet points in chronological order of what needs to happen first, etc. I don't see a post like this going into a politician's brain and turning into action.