Innovation Cannot Sustain the Economy

In their push to knock down American trade barriers and usher in the era of globalization, free trade proponents often claimed that the lack of impediments to international trade would allow the nation to remain the leader in the 21st Century economy, providing the U.S. with the opportunity to focus on more highly specialized fields like research and development.

That, however, according NYU professor Ralph Gomory is simply not possible.  Writing in the Huffington Post, he says that it is a mistaken belief to think that America can remain economically competitive without producing products in the U.S.
 
“Balancing trade on ideas and R&D simply cannot be done,” he writes.  “The most elementary analysis shows that the scale is entirely wrong.” 

According to Gomory, with any economic good, there are four choices: go without, produce it yourself, trade it for another product or import it and pay for it at a later date.  Since the era of globalization, America has been doing too much of the latter.  Allowing China to become America’s factory has put the nation deeply in debt through trade imbalances, which is unsustainable in the long-run.
   
“When our trading partners, especially China, no longer want to loan us hundreds of billions of dollars a year to be paid later, we will have little productive capacity left and we will be a poor nation,” he writes.

The idea that America can remain an economic powerhouse without its manufacturing base, by simply innovating, is ill-conceived.  According to the Alliance for American Manufacturing, the sector generates $1.6 trillion annually, or 12 percent of gross domestic product, nearly three-fourths of the nation’s research and development investment, two-thirds of the nation’s total export of goods and services and employs over 20 million Americans. America’s industrial base is also instrumental in supporting the nation’s national security apparatus.

But, American trade policies, modeled on the idea that trade will create opportunities in other industries, are killing the nation’s once-thriving sector.  According to The American Prospect, since 2000, the U.S. has lost 5.5 million manufacturing jobs, with 2.1 million jobs lost in the past two years.

The American Prospect also estimates that, since 2001, 42,400 American factories have closed their doors, with roughly three-fourths of those employing over 500 people while they were in operation.

Oftentimes, those factories move to China, India or Mexico, taking their R&D with them.  Manufacturing and R&D are intertwined, and many American companies are moving both overseas.

Gomory’s view is that the only way to reverse this devastating trend is by drastically reducing American’s trade deficit by providing manufacturers with incentives to produce domestically.

“We need to do more than produce exciting new ideas; we must also be able to compete in large productive industries,” he writes.  “This requires us to both balance trade and to motivate our corporations not only to innovate, but also to produce in this country.”