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Global Value Chains Complicate Policies to Support Domestic Manufacturing, Report Says

Monday, May 15, 2017
Sandler, Travis & Rosenberg Trade Report

Changes in the structure of manufacturing make it difficult to design government policies that support manufacturing-related value added and employment in the U.S., according to a recent report from the Congressional Research Service. The report comes as the Trump administration has made revitalizing domestic manufacturing and increasing associated jobs a primary focus of trade policy.

Numerous provisions in federal law are intended to support U.S. manufacturing, the report states. These provisions typically define manufacturing as the process of physically transforming goods (e.g., molding, cutting, and assembly) and establish a variety of potential benefits, preferences, or penalties based on the country in which physical transformation occurs.

However, the report adds, these policies rest on two implicit premises that have been rendered questionable as a result of developments in the private sector. The first is that each manufactured product is either made in the U.S. or is an import, an assumption that fits uneasily with the global value chains now widely used to combine raw materials, components, services, and intellectual property from multiple countries into a single, finished manufactured good. The second is that physical transformation is the means by which manufacturing creates economic benefits, which ignores the fact that other related activities (e.g., research, design, software development) may account for a large proportion of the value of the finished good or the employment related to the good’s production.

Another problem, the report states, is that the physical transformation of manufactured goods is increasingly performed by workers not classified as manufacturing workers and a growing share of workers whose jobs are related to manufacturing appear to be employed in economic sectors not directly involved in physical transformation, incl0uding business services, software development, and after-sales service. These changes have made it more difficult to identify workers whose jobs are related to manufacturing. In addition, linkages between non-physical inputs and factory production may not be evident in government statistics.

The report concludes that the increasingly blurred lines between manufacturing and other types of economic activity may complicate policies like those being pursued by the Trump administration to support domestic manufacturing and employment.

In addition, the report states, such policies could harm other sectors. For example, an April 18 executive order directs federal agencies to ensure that federal grants and procurement maximize the use of manufactured goods produced in the U.S. To the extent that domestic content requirements like these raise the cost of goods procured under federally funded contracts, the report states, they reduce the volume of procurement for any given level of expenditure and thus adversely affect employment in non-manufacturing industries such as construction and freight transportation.

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