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06.10

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06.10

Should the U.S. Have an Industrial Policy?

By George F. McClure

The purpose of industrial policy is to guide an economy in directions deemed beneficial to the state, in terms of both overall financial growth and the well-being of the citizenry. Some small economies use industrial policy to channel scarce resources in directions seen as most productive. For emerging nations, this may include foreign direct investment.

The problem with industrial policy is strategic — some agency must direct the policy, and it is not always clear that the best direction has been chosen.

While the United States lacks an official industrial policy, government actions in the past have achieved some goals akin to industrial policy, usually motivated by defense concerns.

In 1919, as a young Army officer, Dwight Eisenhower participated in a Transcontinental Motor Convoy, intended to demonstrate the need for better highways the U.S. would face in the event of another mobilization such as occurred in support of World War I. It took two months to cross the country. Eisenhower looked at the need for a highway network that would connect defense installations, factories, and military bases. As Supreme Allied Commander in Europe in World War II, Eisenhower noted the advantages of the autobahn highways pioneered by the Germans. When he became president in 1950, Eisenhower pushed for his plan, which was enacted in 1956 as the Federal-Aid Highway Act. It was the largest public works project in history, up to that time, costing $25 billion, for 41,000 miles of limited-access highways.

A similar improvement was an electronic network linking defense research centers and universities, called the ARPANET, after its chief proponent, the Advanced Research Projects Agency. The ARPANET, using a packet-switched protocol (X-25) went live in 1969, connecting two nodes initially — UCLA and the Stanford Research Institute. By 1981, there were 213 hosts, and a new one being added about every 20 days. Other packet-switched networks had different protocols, so an internetworking protocol permitted interoperability among networks by 1974, giving rise to the Internet by 1982. [1]

The aircraft jet engine developed for military use was also applied, with many variations, to a commercial passenger version of the in-flight refueling tanker, the KC-135, resulting in the Boeing 707 that helped promote commercial jet aviation when it was introduced by Pan American World Airways, entering transoceanic service in 1958. Boeing invested $16 million in private development and testing of the commercial variant of the military platform.

There was another program that did not turn out as well — the supersonic transport, or SST. Although President Kennedy committed in 1963 to build an SST, the program was canceled in 1971 with a vote against further federal funding. While the U.S. decided not to make a priority of its SST initiative, based on analyses that showed it could not be profitable, the British and the French did pursue development of an SST, called the Concorde. A Soviet SST, the TU-144, was similar to Concorde in design but with a higher speed. The Concorde was entirely a public sector project. It was expensive to fly and required 14 hours of ground maintenance for every hour in the air. While sales of 280 were estimated at one time, only 14 entered service and only the two national airlines, British Airways and Air France, operated them. [2]

The SST flew from 1969 to 2003. [3]

Who Picks the Winners?

Japan used its Ministry of International Trade and Industry (MITI), which had such success for a while that the label, “Japan, Inc.,” was applied while Japan garnered the major role in consumer electronics and supporting software, augmented by a strong quality program. Ten-year vision documents laid out the plan for the future, but had to steer a course between dependence on public works and dependence on market forces. The new vision document aims for a third way — demand-led growth in environmental, health, and tourism industries. By 2020, it would create a new Free Trade Area for Asia-Pacific and achieve 50 percent self-sufficiency in food production. [4]

Protectionism of its chosen goals has been charged, in effect picking winners and losers. It remains to be seen whether the new strategy can avoid this.

South Africa has articulated an industrial policy action plan that it hopes will balance production sectors with consumption ones. There are four major tenets:

Improved financing for targeted goals
Streamlined procurement legislation, simplifying repeat buys while retaining competition
More strategic trade policies, fraud reduction, better technical infrastructure
Target anti-competitive practices

See http://www.info.gov.za/speeches/2010/10021909551001.htm and http://www.oecd.org/dataoecd/58/32/40959551.pdf

On a larger scale, the recent election in the UK featured policy issues. The Labour Party Manifesto featured advances in broadband, high speed rail and wind turbines. [5]

The Strategic Investment Fund supports important new investment in the nuclear and renewables industries. Incentives were promised for companies to invest through R&D tax credits, and protect and increase the size of capital allowances that help to grow key sectors such as manufacturing. A competitive regime was to be assured through protections for intellectual property and a lower rate of corporation tax to encourage UK-based innovation — supporting the UK’s strengths in new industries and sectors. Capital would be provided for small and medium-sized enterprises (SMEs). The Conservatives won, but with a less articulated technology policy.

The Developmental Model

Two good examples of the developmental state are Taiwan and Korea. A characteristic is the “triple alliance” among the state, business, and the banking sector. Both have been transformed into powerful IT nations within a short time. Taiwan had the needed flexibility that Korea had to develop to adapt to a changing environment. In the 1960s, Korea emphasized light manufacturing and export. By the 1970s the focus had shifted to heavy chemical industry, but there was overinvestment and overproduction that resulted in a move by the government to shift its previous industrial policy toward a more neutral and functional approach based on R&D criteria beginning in the 1980s. A targeting policy or subsidies have been prohibited by international trade norms since the 1980s.

Korea has a heavy manufacturing and electronic products emphasis while Taiwan focuses on electronic chips and light manufacturing, as mostly small-medium enterprises (SMEs). [6]

The title of most-wired nation is in contention between Korea and Singapore. [7] [8]

Public-Private Partnerships

Examples of partnerships include the National Institute of Standards and Technology’s Office of Technology Partnerships. NIST's Office of Technology Partnerships (OTP) works with regional, state and local economic development organizations, technology incubation centers, public-private business development initiatives and other organizations and partnerships to facilitate the transfer of technologies developed within NIST laboratories to the private and nonprofit sectors through licensing and/or collaboration. NIST scientists conduct research, create technologies and make discoveries in nearly every scientific and technological field. OTP encourages the commercialization of these results through the following services and programs:

Cooperative Research and Development Agreements (CRADA)
Material Transfer Agreements (MTA)
Facility Use Agreements
NIST Associates and Guest Researchers
Intellectual property (inventions, patents, licenses, trademarks)
Small Business Innovation Research (SBIR) Program

NIST’s Manufacturing Extension Partnership Program (MEP) is a national network with thousands of specialists who understand the needs of manufacturers and small businesses.

For the past 20 years, MEP has worked with manufacturing clients to realize cost savings, new sales, and retained sales — over $1.4 billion in cost savings annually and $9.1 billion in increased or retained sales in one year. MEP provides companies with services and access to public and private resources that enhance growth, improve productivity, and expand capacity. [9]

Where does the United States fit?

While the U.S. does not have an industrial policy, per se, government influences the direction industry takes, through subsidies and legislation. There is a perennial call for making the R&D tax credit permanent, but it garners only temporary extensions. For years, the engineering societies have held Hill visits in which members argue for more government support for basic research that leads to product innovation. Product development cycles typically take several years, while basic research can consume decades — meaning it is not economic for commercial investment. Sometimes the outcome cannot even be forecast at the outset. The development of the transistor by Bell Labs is a case in point.

For several years, beginning in 1993, the Department of Energy provided financial support to U.S. manufacturers after the Clinton Administration announced a government initiative called the Partnership for a New Generation of Vehicles (PNGV). In the program, the government worked with the American auto industry to develop a clean car that could operate at up to 80 miles per gallon. Several years and a billion dollars later, the PNGV emerged with three prototypes for their 80 mpg car. Every prototype was a hybrid. However, the first hybrids available commercially in the U.S. were from Japanese makers Honda and Toyota. DoE then shifted its support to developing hydrogen and fuel cell-based vehicles. [10]

Honda is pessimistic about the future of the electric car, citing its limited range as a major drawback. [11]

Medical research has been the recipient of increased appropriations that doubled its funding over five years. Congress doubled the budget for the National Institutes of Health, from $13.6 billion in FY1998 to $27.1 billion in FY2003, but more recently budgets have strained to keep even with inflation. [12]

The Office of Technology Assessment (OTA) assisted the United States Congress from 1972 to 1995. OTA's purpose was to provide Congressional members and committees with objective and authoritative analysis of the complex scientific and technical issues of the late 20th century.

Congress created the Office of Technology Assessment in 1972, Public Law 92-484. It was governed by a twelve-member board, comprising six members of Congress from each party, half from the Senate and half from the House of Representatives. During its twenty-four-year life it produced about 750 studies on a wide range of topics, including acid rain, health care, global climate change, and polygraphs.

OTA was abolished (technically "de-funded") in the "Contract with America" period of Newt Gingrich's Republican ascendancy in Congress.

At the time that 104th Congress withdrew funding for OTA, it had a full-time staff of 143 people and an annual budget of $21.9 million. The Office of Technology Assessment closed on September 29, 1995. [13]

Stimulus not Policy?

The American Recovery and Reinvestment Act of 2009 included grants for energy efficiency and for infrastructure that could be considered under the heading of policy. [14]

While the bill passed with a $787 billion price tag, the Congressional Budget Office calculates the cost at $862 billion. Included was $8 billion to help with 13 projects to push high-speed rail development. Some questioned whether economic value or jobs creation was the major driver. [15]

Although not expounding industrial policy, the U.S. federal government today is the world’s biggest venture capitalist by far. According to The Wall Street Journal, the U.S. Department of Energy (DOE) alone is planning to spend more than $40 billion in loans and grants to encourage private firms to develop green technologies, such as electric cars, new batteries, wind turbines, and solar panels. During the first three quarters of 2009, private venture capital firms invested less than $3 billion combined in this sector. The DOE invested $13 billion. [16]

Fair trade or free trade?

The World Trade Organization (WTO), operating since 1995, is the only international body dealing with the rules of trade between nations. One of its high-profile disputes is charges between Boeing and Airbus that commercial airplane development has been unfairly subsidized. Boeing points to $200 billion in illegal subsidies for Airbus models, from the European Union, while Airbus claims that Boeing’s work on defense contracts has given it a leg up in commercial airplane development. A WTO ruling in March, affirming some improper Airbus aid, won’t be made public for several months. [17] Still pending is the counterclaim of improper subsidies for Boeing.

References

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George F. McClure is Technology Policy editor for IEEE-USA Today’s Engineer and the IEEE Vehicular Technology Society's representative to IEEE-USA's Committee on Transportation and Aerospace policy.

Comments may be submitted to todaysengineer@ieee.org.