How U.S. Firms Can Be Competitive in the Global Economy

U.S. manufacturers remain among the most productive in the world.¹ However, much of the competitiveness of U.S. firms hinges on policies beyond their control, chiefly health care policy and the value of the dollar relative to foreign currencies. Reform in both these areas is crucial not only to domestic manufacturers but to the viability of the U.S. economy as a whole.

It’s hard to say which of the two is more urgent. The trade deficit can be rebalanced relatively quickly compared to the time that will be needed to lower health care costs. But in the long run, health care costs may prove to be more damaging to the economy as a whole. A longer discussion of health care policy and its ramifications for the economy is included in Chapter 2.

Usually when we hear concerns about the federal budget deficit, the impact of the U.S foreign trade deficit isn’t mentioned. But in fact, running a large trade deficit worsens the budget deficit, because it puts pressure on U.S. employers to pay lower wages to remain competitive with overseas companies. This in turn means that government expenditures to help low-income workers increase—and the budget deficit increases. As the trade deficit soared between 2000 and 2007, an additional 5 million families filed for the Earned Income Tax Credit (EITC), which cost the U.S. government an additional $16 billion.² The increase in recipients was not because a larger percentage of eligible taxpayers decided to file for the credit—it was because increasing numbers of families became eligible. Another example is the increased federal spending on nutrition programs over the same period—the additional $22 billion was mainly for the 9 million new people receiving food stamps (renamed SNAP in 2008).³

There are certainly ways to support U.S. manufacturers with positive policies, but the automatic response of tariffs on imports is not one of these ways. Tariffs harm everyone, especially consumers who must pay more. They punish foreign competitors and protect U.S. producers rather than encouraging them to perform to a higher standard. It’s an easy “fix,” but it is counterproductive; there are better alternatives.

Many U.S. firms have realized that investments to increase productivity, such as for new equipment and additional employee training, allow them to achieve more and retain their U.S. workforce. Firms who take the “high road” are willing to share these productivity gains with their workers. There are ways for the U.S. government to actively support this kind of firm. For example, the Manufacturing Extension Partnership (MEP), a program run by the Department of Commerce, supports small manufacturing firms in the same way that agricultural extension agents through the Department of Agriculture (USDA) work with farmers to increase their productivity. MEP specialists have helped firms achieve an average 5 percent increase in productivity—and in some case, the gains have been as high as 50 percent.⁴

Manufacturing, which employs 10 percent of the U.S. workforce and produces 14 percent of Gross Domestic Product (GDP), receives less than a third of the funds allotted to extension services for agriculture, which employs 1.9 percent of the workforce and produces 0.7 percent of GDP.⁵ In 2008, Susan Helper, an economist who specializes in the manufacturing sector, estimated that a $300 million investment in MEP, which would put overall funding on par with USDA’s agricultural extension budget, could save up to 50,000 U.S. manufacturing jobs. Less than 6 percent of small firms now receive assistance through MEP, ⁶ but this would change with the passage of Sen. Brown’s IMPACT Act, which raises MEP funding levels by $1.5 billion. That is good news for U.S. manufacturers.⁷

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