In 1987, two economists issued a prophetic warning: “If high-tech is to sustain a scale of activity sufficient to matter to the prosperity of our economy…America must control the production of those high-tech products it invents and designs. Production is where the lion’s share of the value added is realized.”
Even as trade tensions with China have deepened, many U.S. leaders continue to believe that offshoring is not only profitable but also sound national economic strategy. Manufacturing in China is cheaper, quicker and more flexible, they argue. With China’s networks of suppliers, engineers and production experts growing larger and more sophisticated, many believe that locating production there is a better bet in terms of quality and efficiency. Instead of manufacturing domestically, the thinking goes, U.S. firms should focus on higher-value work: “innovate here, manufacture there.”
Today many are rightly questioning this perspective. There is a growing recognition that we can no longer afford the outsourcing paradigm. Once manufacturing departs from a country’s shores, engineering and production know-how leave as well, and innovation ultimately follows, writes The Wall Street Journal (Nov. 16-17, 2019). It’s become increasingly clear that “manufacture there” now also means “innovate there.” A 2015 study found that U.S. companies have been moving R&D to China to be closer to production, suppliers and engineering talent—not just to reap lower costs and more dynamic markets. An estimated 50% of overseas-backed R&D centers in China have been established by U.S. companies.
American manufacturers have learned that the applied research and engineering necessary to introduce new products, enhance existing designs and improve production processes are best done near the factories themselves. As more engineering and design work has shifted to China, many U.S. companies have a diminished capability to perform those tasks here. The solution? It’s time for the U.S. to adopt an industrial policy for the century ahead.
Classroom discussion questions:
- What should the new industrial policy encompass?
- Which theory do you agree with–“innovate here, manufacture there” or “manufacture there, innovate there”?