High-tech manufacturing hindered by government policies from deficit to tariffs
Politicians love to talk about "bringing back" U.S. manufacturing jobs, but federal policies are actively destroying the ones that are already here.
The U.S. manufacturing sector is largely moving on from "old tech" industries like textiles and steel to high-tech fields like advanced optics, custom semiconductors, pharmaceuticals, aerospace products and precision electronics. Under free trade with the rest of the world, these industries would grow even more because they take advantage of our abundant skilled labor and scientific research capabilities.
But the U.S. government can’t stop hobbling our natural comparative advantage in advanced manufacturing.
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The biggest issue right now is the real exchange rate. Adjusted for inflation, the dollar is now roughly the strongest it has been in the last two decades, relative to our biggest trading partners.
Construction equipment prepares the site for two new chip factories at Intel Corporation's Ocotillo campus in Chandler, Arizona in September 2021. The project price tag of $20 billion constitutes the largest private-sector investment in Arizona history. (Intel Corporation)
This matters because our high-tech manufacturers export their products to foreign markets, competing against their producers. The stronger the dollar, the more expensive American products, since U.S. manufacturers have to pay for materials and labor in strong dollars but sell in weak euros, yen, and yuan.
The budget deficit and monetary policy affect the value of the dollar. Peacetime budget deficits are just about the biggest in history, and monetary policy is tight. Combined, they drive up the real exchange rate. Tight monetary policy has cut inflation, which has been a good and necessary thing.
But loose fiscal policy raises demand for dollars to buy U.S. debt. If Donald Trump and President Joe Biden were serious about helping American manufacturers compete internationally, they would promise to slash federal spending to close the budget deficit.
Next issue: tariffs. These taxes on imported materials harm advanced manufacturers directly. Steel and aluminum tariffs levied by the Trump administration and kept in place by the Biden administration raise the costs of the materials our advanced manufacturers use as inputs, damaging their international competitiveness.
Several studies find that these tariffs caused a net decrease in U.S. manufacturing employment. I’ve spoken to executives at U.S. advanced manufacturing companies, and they list tariffs and trade compliance in general as one of their biggest headaches.
Trade barriers in the rest of the economy also hurt our high-tech sector indirectly by propping up inefficient industries, preventing them from releasing land, labor and capital to our growing export industries.
The Democrats’ Inflation Reduction Act and the bipartisan CHIPS Act were supposed to bring back "good manufacturing jobs" through industrial policy, which is another way of saying the federal government picks winners and losers. Not a single subsidized chip fab has opened its doors yet, and manufacturing production is down slightly.
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Even center-left economist Noah Smith, an industrial policy fan, is losing heart. He notes that billions in subsidies were meant for electric vehicle chargers, but not one has been built yet. Meanwhile, the private sector is building tens of thousands of chargers without subsidies.
If Donald Trump and President Joe Biden were serious about helping American manufacturers compete internationally, they would cut spending to close the federal deficit. (Chip Somodevilla, Julia Nikhinson/Bloomberg via Getty Images)
The problem is that the federal government larded down its huge subsidies with red tape and giveaways to special interests, which Bloomberg editors described as, "an array of new government rules and pointed suggestions, meant to advantage labor unions, favored demographics, ‘empowered community partners’ and the like."
To anyone who knows anything about politics, this failure was predictable. Politicians win when they give special goodies to an organized interest. Growing the future of our high-tech sector isn’t yet the vote-winner it should be.
The U.S. government has attacked our high-tech manufacturing sector with budget deficits that drove the dollar too high, tariffs and industrial policy. It’s high time they try something else.
The Democrats’ Inflation Reduction Act and the bipartisan CHIPS Act were supposed to bring back "good manufacturing jobs" through industrial policy, which is another way of saying the federal government picks winners and losers.
The states that are attracting manufacturing investment point the way. Over the last five years, states like Nebraska, Utah, Arizona, Florida and Arkansas have grown their manufacturing sectors the fastest. These states feature flexible labor regulations, educated workforces and pro-growth land-use rules.
Instead of hampering our advanced manufacturing sector with failed policies, the federal government should cut deficits, tariffs and red tape. States can help by reforming their education systems to cultivate scientific genius rather than teaching to the lowest-common denominator. These policies will help grow the industries of the future, not the inefficient producers of the past.
Jason Sorens is an economist with the American Institute for Economic Research. He has taught at Yale, Dartmouth, Saint Anselm College and the University at Buffalo.
