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Congressman Ro Khanna

Representing the 17th District of California

How to help small manufacturers (and how not to)

February 23, 2017
Editorials
Ro Khanna and Jared Bernstein

When it comes to families and communities that have been hurt by global competition, a few things seem clear. Thanks, in part to the campaign of President Trump, their plight is finally very much out in the open. The problem, however, is not simply that he’s unlikely to actually help these communities. It’s also that his policies, and those of the Republican congressional majority, will hurt them. From the repeal of health-care reform to environmental degradation to wasteful, regressive tax cuts, it is increasingly clear that all that rhetoric was for the campaign, and Trump is a faux populist.

Suppose, however, policymakers really did want to help manufacturing communities. What might be the most effective policies to do so?

Standing up large tariffs, either directly or implicitly through a border adjusted tax that subsidizes exports, is the wrong way to go if the U.S. wants to boost manufacturing exports and jobs. Such efforts tend to raise the value of the dollar, making our goods less competitive in world markets. These tariffs also invite retaliation: We may let in fewer imports at the end of the day, but we’ll also sell fewer exports, and there will be little improvement in the trade balance.

Instead, the goals of such policies should include helping smaller manufacturers find their way into the global supply chain, leveling the international playing field for fair competition, investing in the human and physical capital of left-behind places, and making sure workers share in the productivity gains they’re helping to generate. Operationalizing these goals means expanding the Manufacturing Extension Partnership (or MEP, which Republicans foolishly want to terminate), pushing back on currency interventions and investing in new, high-demand industries.

The MEP is an agency within the Commerce Department whose mission is to “enhance the productivity and technological performance of U.S. manufacturing.” It does not provide direct financing, but it does provide guidance, by helping small manufacturing firms adopt new technologies, integrate into global supply chains, strengthen regional partnerships and connect with national labs. According to a 2014 report from the nonpartisan Congressional Research Service, the 30,000 companies served by the MEP “reported $2.5 billion in new sales, $4.2 billion in retained sales, $1.1 billion in cost savings, $2.7 billion in new client investment, the creation of 17,833 jobs and the retention of 46,069 jobs.”

The program costs $130 million annually, or 0.003 percent of federal government spending, yet the budget cuts that Trump is allegedly considering include eliminating the MEP. The president’s team likely knows little about this agency, but we strongly urge them to take a close look at what MEP is up to. In the interest of helping small manufacturers and boosting U.S. net exports, its funding should at least be doubled.

The Trump folks are correct to point out that our international competitors sometimes manage their currencies to raise the foreign-currency cost of our exports to them and lower the dollar cost of their exports to us. But, as noted, their ideas push the wrong way since it makes the dollar more expensive in international markets.

Instead, the U.S. should hit back on two fronts. First, the administration, through the Commerce Department, should be able to identify specific exports that are unfairly subsidized through currency manipulation and place countervailing duties on them. Right now, the federal government has no such power, as tweaking your currency is not considered a legitimate subsidy under existing law.

But we also need a more comprehensive way to push back on exchange-rate manipulation. One good way to do that would be if China were to buy dollars, the U.S. would be able to buy Chinese yuan, but that is not the case due to China’s extensive capital controls. The point of this intervention is “to neutralize the impact” that currency manipulators have in the foreign exchange markets. As Bernstein has argued, “This idea hits a sweet spot: It could be more effective against currency manipulation and wouldn’t interfere with trade flows and market-driven (versus orchestrated) moves in the dollar.”

Finally, while “industrial policy” — government support of a particular industry — is scoffed at by elites as “picking winners,” the fact is we already do a ton of such picking. But not with winners, and not based on trying to see around corners, but on who has the best lobbyists and the most campaign contributions.

A better example to consider is battery technology and the role it will play in renewable energy. Some country with foresight, advanced technology and smart researchers is likely to make a play for serious market share in this space. And we would like that country to be the United States.

That means investing in research hubs by creating and building on connections between university labs and factory floors (something the MEP can do). It means multilevel workforce investments, from research programs and scientists to engineers and manufacturers. And while we realize, given the disinvestment in communities that have lost manufacturers, that this is an ambitious proposition, we see no reason at least some of these investments could not be made in those parts of Ohio, Kentucky, Pennsylvania and West Virginia that have been left behind by globalization.

All told, relative to trade wars, tariffs, and border taxes — not to mention tweet-shaming — we believe this to be a much more positive agenda. It’s an agenda that builds up the country’s manufacturers’ competitiveness and helps them link with global supply chains, and thus increases, not diminishes, trade flows. In other words, it’s an agenda that doesn’t eschew globalization, but steers its benefits to American factories, their workers, and their communities.

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