26 BARRON’S October 12, 2020
duce America’s “overreliance” on Chi-
nese pharma products.
Both presidential candidates want to
bring manufacturingback,but their
strategies differ. Democrat Joe Biden has
unveiled a plan to boost federal spend-
ing on U.S.-made goods, support re-
search and development, change the tax
code to discourage offshoring, and close
loopholes in rules that already require
Uncle Sam to “Buy American.”
“The U.S. economy is far less resilient
to shocks than it needs to be,” Jared
Bernstein, one of Biden’s top economic
advisers, tells Barron’s. “Serial abuse
from dumb industrial policy” inflicted
by Washington hollowed out the U.S.
manufacturing sector, he says, and
America needs to “onshore certain sup-
ply chains, both medical and defense.”
That last concern is also the view of
the Trump administration, which has
defended the legality of its tariffs, on the
grounds that they are necessary to pro-
tect the “defense industrial base.” But
where Biden seeks to boost the nation’s
manufacturers through additional pro-
curement and R&D subsidies, Trump’s
preferred approach has been corporate
tax cuts and deregulation to encourage
domestic investment, with levies on
imports to discourage purchases of for-
eign-made goods.
At the same time, Robert Lighthizer,
the administration’s chief trade negotia-
tor, is encouraging other countries to
buy more U.S. products. The most sub-
stantial deal has been with Canada and
Mexico, and is notable for its emphasis
on labor standards, local content re-
quirements, and environmental regula-
tions. (Lighthizer didn’t respond to re-
quests for comment.)
One thing that’s often lost in the de-
bate on reshoring is that the U.S. is still a
manufacturing superpower, producing
more than $6 trillion of goods in 2019.
The problem is that, while the U.S. and
global economies are far bigger than they
were in 2000, America’s manufacturing
sector hasn’t grown at all. As a result, the
U.S. now imports about $1 trillion more
in manufactured goods than it exports
each year, a deficit equal to roughly 4.5%
of gross domestic product.
Imports ballooned at the expense of
American workers because companies
outsourced production—and the associ-
ated capital expenditures, which would
otherwise have depressed profit mar-
gins—to countries with lower labor and
environmental standards, bigger subsi-
dies for businesses, and cheaper curren-
cies than the overvalued U.S. dollar.
Foreign profits of U.S. multinationals
boomed—to shareholders’ delight—but
the strategy came with significant costs.
The offshoring fad hollowed out Amer-
ica’s ecosystem of suppliers, research-
ers, and skilled workers. The factories
that remain are highly specialized and
reliant on outside suppliers and capital
equipment. That has had consequences
for jobs, economic dynamism, and na-
tional security.
“What’s missing is the capability to
pivot” to respond to sudden changes in
demand, Erica Fuchs, a professor of
engineering and public policy at Carne-
gie Mellon said in recent testimony to
Congress. Americans faced shortages of
masks and ventilators in the first
months of the pandemic, in part because
medical-supply companies lacked U.S.
“technicians and operators with the
know-how” to adjust to changing cir-
cumstances. In contrast, Chinese facto-
ries accustomed to making a wide range
of goods for multinational customers
could quickly adapt to redirect produc-
tion, she tells Barron’s.
Technological progress often comes
from tinkering and experimentation,
which is harder to do if research, pro-
duction, and design aren’t all in the
same place. Fuchs, along with col-
leagues Chia-Hsuan Yang and Rebecca
Nugent, found that companies that can
cut costs by offshoring to lower-wage
countries face fewer incentives to inno-
vate. That might have contributed to the
sharp slowdown in U.S. productivity
since the mid-2000s.
This is a problem even in the heart of
America’s high-tech economy—and it’s a
long-term threat for investors. While
Silicon Valley is now known for soft-
ware, it originally prospered as a manu-
facturing center that supported funda-
mental scientific research in physics,
electronics, and materials science. Many
of the world’s leading electronics hard-
ware companies are still headquartered
in Silicon Valley, but most don’t manu-
facture anything there.
Consider what this has meant for
Intel (ticker: INTC). While Intel still
makes the chips it designs, it has fallen
behind rivals such as Taiwan Semi-
conductor Manufacturing (TSM)
and Samsung Electronics (05930.Ko-
rea) in manufacturing. Since the begin-
ning of 2004, TSMC shares have re-
turned almost 1,000%; Samsung’s
have gained more than 400%; and
Intel’s are up less than 100%.
Hassan Khan, who focused on the
semiconductor and advanced-electron-
ics industry when he was a consultant
at McKinsey, says that TSMC and Sam-
sung have an advantage, in part because
they have practice making chips for a
wide range of customers with different
designs and preferences. In contrast,
Intel is vertically integrated and makes
chips only for itself. That makes the two
big foreign firms more flexible and in-
novative when it comes to production
techniques than Intel, which recently
raised the possibility of shifting at least
some output to contract manufacturers.
There is historical precedent for verti-
cally integrated manufacturers being
left behind by the market: A similar fate
befell IBM, once the world’s leader in
silicon processing, Khan notes. One
solution is to focus on design at the ex-
pense of production. Advanced Micro
Devices (AMD) spun off its manufac-
turing arm into GlobalFoundries in
- That has been great for AMD’s
stock, but less so for Americans’ ability
to make the most sophisticated chips.
Rebuilding America’s high-tech
ecosystem is doable, but it could take
decades. Brookings Institution econo-
mist Geoffrey Gertz notes that China’s
rise as a manufacturing power was a
result of “a decadeslong intentional
push by the Chinese government,” and
that a comparable commitment would
be necessary to restore what has been
lost in the U.S.
Success will depend on Americans’
willingness to commit to a long-term
strategy and investors’ willingness to
pay the costs. The experience of the past
few years suggests that rhetoric without
major policy changes won’t do much,
one way or the other.B
70
80
120
110
100
90
2001 2005 2010 2015 2020
American manufacturers haven’t increased overall production in two decades.
January2000=100
Diverging Fortunes
Note: Excludes oil and coal refining Source: Federal Reserve Board; Barron’s calculationsProduction
Capacity
Production (excluding semiconductors)
Capacity (excluding semiconductors)
Manufacturing production stagnated after 2000 even as the rest of the
U.S. economy continued to grow.
Revenues, inflation-adjusted, 1990 = 100
Manufacturing Stagnation
Source: Bureau of Economic Analysis; Barron’s calculations200
175
150
100
125
1991 ’95 2000 ’05 ’10 ’15
Total economy Manufacturing
By the
Numbers
Statistics on U.S.
manufacturing.
$6 T
Value of goods
produced in the
U.S. in 2019
$260 B
Amount U.S.
companies have
invested in Chinese
operations since
1990
<100%
Intel’s stock gain
since 2004, far
below the returns
of competitors
Taiwan Semicon-
ductor and Sam-
sung Electronics
71%
Percentage of U.S.
manufacturers that
told the American
Chamber of Com-
merce in Shanghai
they had no plans
to move produc-
tion out of China