How to triage US industries in the economic emergency room

How to triage US industries in the economic emergency room
© Bonnie Cash

The global recession that the coronavirus pandemic is already triggering brings into sharp focus how vulnerable the United States is in certain strategic industries where it lacks adequate production capabilities of its own. For example, America depends on China for protective face masks, but China is mandating that virtually all production — including by U.S. companies that operate there — must be used in China, which is leading to a shortage of masks in the United States. In response, White House economic advisor Peter Navarro has called for strengthening so-called “Buy American” laws to make federal agencies purchase American-made drugs and medical devices.

But that is not the only type of critical industry the federal government should be concerned about. It also must protect technologically sophisticated, traded-sector industries such as aerospace, semiconductors, advanced machinery and equipment, biopharmaceuticals, and software — because, if we lose those, we are unlikely to ever get them back.

For example, commercial aircraft maker Boeing was already facing a dire financial crisis before the coronavirus-driven collapse of the air-travel market due to design flaws in its 737 MAX jets, and now it is seeking federal loans or related support to tide it over until the airline sector is back on its feet. Lawmakers should not hesitate to help (Full disclosure: Boeing provides some financial support to my organization.)

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Some hardcore, free-market globalists will say there is little worry as things will go back to normal after the pandemic, so we can plan on importing whatever we need from China and other nations as before. On the other side of the argument, hardcore anti-China hawks will use the crisis to pursue their radical agenda of decoupling U.S. production, not just from China, but from much of the world. For them, America should make everything it needs and import virtually nothing.

Neither approach makes sense. The globalists need to realize that some industries are more important than others, and the United States cannot afford to be indifferent to its industrial production capacity. In other words, to bat down an old economic canard, computer chips are very different than potato chips: Advanced technology industries and firms contribute far more to our balance of trade and produce much higher-paying jobs, not to mention being essential for our national defense capabilities. At the same time, hardcore decouplers need to realize that it is not feasible for America to produce everything it needs — and if it tried, it would lead other nations to go down the same path, which would limit the market size U.S. advanced technology firms need to succeed.

As such, the United States needs a more nuanced and strategic approach to thinking about its critical, traded-sector industries.

The most important step is to distinguish between industries that are relatively easy to “reshore” and ramp up and those that aren’t. Making masks is frankly not all that difficult — and neither, for that matter, is making active pharmaceutical ingredients (APIs), the commoditized inputs for complicated and sophisticated drugs that we now get mostly from China. Compared with making an advanced biotech cancer treatment, neither the product nor the production technology necessary to make masks or APIs is overly complicated. Existing companies in the United States could get the requisite production facilities up and running, especially with the right financial incentives. It might take time we don’t have to spare in a crisis like this one, but it certainly could be done for the future.

In contrast, if the United States were to lose production capacity in its most technologically advanced traded-sector industries, it would be almost impossible to recreate, regardless of how urgent the crisis or how much money government throws at the problem.

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Take the commercial aerospace industry. It is composed of original equipment makers (principally Boeing), which manufacture some of the most technologically complex products in history, alongside a network of tens of thousands of specialized parts and component suppliers, including advanced jet-engine makers, avionics providers, and composite parts makers. This advanced-technology ecosystem is supported in turn by a robust U.S. network of specialized business service providers; educational institutions that produce skilled workers and knowledge; and testing labs, standards, and other innovation infrastructures — all knit together in a complex web of ongoing interactions and relationships. Losing a company like Boeing to bankruptcy would mean an end to the U.S. industry.

Even if the United States later decided it needed a commercial aerospace industry again, any new or resurrected company would have to recreate all the talent that was lost, not just in individual workers, but in the collective knowledge embedded in the entire supply-chain of parts suppliers. This wouldn’t be possible, because many of those basic resources would have vanished.

So, it’s time for economists, pundits, and political leaders to acknowledge there is a set of industries that are “too critical to fail.”

Whatever the cost, America must maintain robust innovation and production capabilities in these industries. If we lose them, then we are sunk and dependent; just as we are now for foreign 5G telecom equipment.

In the short term, we can hope that Washington will provide stopgap support, ideally in the form repayable loans or guarantees for critical companies like Boeing to continue operating during the current demand and liquidity crisis.

But crisis mode is no way to run a government over the long term. This is particularly true because after the coronavirus epidemic is under control, key U.S. industries will continue to face perhaps an even more pressing threat in China’s predatory brand of innovation mercantilism, which is designed to gain global dominance in an array of advanced technology industries. To meet that challenge, Washington needs to put in place a robust, well-funded industrial strategy focusing on America’s advanced technology sectors. That will shore up the U.S. economy for the decades ahead and generate good jobs and opportunities for millions of Americans.

Robert D. Atkinson (@RobAtkinsonITIF) is president of the Information Technology and Innovation Foundation, the leading think tank for science and technology policy.