Knowledge-Intensive Manufacturing Could Bridge Trade Gap
July 31, 2013
Economists and politicians continue to push U.S. manufacturing as a central part of a healthy economic future. Yet for years prior to the recession, experts had claimed that American manufacturing was no longer viable and that the country needs to focus on being an information-oriented, service economy. A recent report Knowledge-intensive industries are defined in the report as including motor vehicles, trailers, and parts; other transportation equipment, including aerospace; chemicals and pharmaceuticals; medical, precision, and optical equipment; semiconductors and electronics; and machinery and appliances." From a skills and education standpoint, the industries share much in common with knowledge-intensive services, which include R&D, financial intermediation, and architectural and engineering services. Unfortunately, while net U.S. exports of knowledge-intensive services have risen to a strong surplus, net exports of knowledge-intensive manufacturing has declined, contributing significantly to the total trade deficit. The McKinsey report notes that the growing trade deficit in knowledge-intensive goods is not the result of exchange rates Overall, McKinsey finds such industries account for 50 percent of U.S. manufacturing value-add and 40 percent of the manufacturing employment. Moreover, the R&D intensity is five to 12 times higher than all other manufacturing industries. Yet the trade gap in these sectors continues to widen, from a net export deficit of $6 billion in the 1990s to $270 billion today. Motor vehicles, computers and office machinery, and semiconductors and electronics drove most of the decline, the report notes. If knowledge-intensive manufacturing could approximate the success of global service exports, which saw its trade surplus jump from $30 billion in 1990 to $200 billion in 2012 (in nominal terms), "it would have a game-changing impact on the economy," the report states. There are promising signs for reversing the deficit, McKinsey finds. For example, although exchange rates can be volatile, since 2002 the dollar has "gradually depreciated on a trade-weighted basis by 24 percent," making American-manufactured items more competitive in international markets. New technologies, specifically Big Data analytics, are disrupting many industries. Looking at the microdata, McKinsey identifies seeds of a potential reversal in the deficit already. Looking forward, McKinsey sees numerous opportunities:
- Since 2009, U.S. net exports of aircraft have more than doubled in real terms. In particular, Boeing's delivery of 601 airplanes in 2012 (including 416 to non-U.S. customers) was 30 percent higher than deliveries in 2010 and is expected to increase by nearly 40 percent in total by 2020.
- New automotive assembly plants have been established in the U.S. every year since 2005. The report estimates, "A single assembly plant can produce 200,000 to 300,000 vehicles annually and generate gross revenue of $4 billion to $6 billion."
- The growing supply of affordable shale gas has the potential to boost petrochemical production, which could accelerate the existing surplus to an additional $60 billion to $80 billion by 2020.