Over the last decade it has gotten harder and harder to obtain a worthwhile patent in the United States. Thanks to the Supreme Court’s decision in eBay v. MercExchange a victorious patent owner is no longer entitled to a permanent injunction that orders the infringing defendant to cease infringing in the future. Thanks to the America Invents Act (AIA) and the creation of the Patent Trial and Appeal Board (PTAB) commercially valuable patents are challenged in administrative proceedings before administrative law judges who ignore the presumption of validity a patent is statutorily promised (see 35 U.S.C. 282) and apply rules that move the proceedings along so quickly that due process is seriously compromised. Thanks to a tetralogy of misguided patent eligibility cases from the Supreme Court over the last five years software and biotechnology industries have had their innovations largely deemed unpatentable.
Yes, the last decade has been rough for patent owners and innovators in the United States. But as bad as the Supreme Court, Congress and the PTAB have been for the U.S. patent landscape, a far larger problem continues to loom.
By and large the United States continues to export our intellectual property so foreign companies and subsidiaries around the world can engage in manufacturing instead of making things in America. Unfortunately, when manufacturing exits a country research and development funding dwindles in direct response, thereby creating an enormous problem for subsequent generations of innovation. This manufacturing vacuum has been and will continue to be an acute problem for the United States moving forward, yet none of the Presidential candidates seem to be discussing manufacturing or the prospect of bringing manufacturing back to America, at least not in any kind of coherent way.
With countless manufacturing jobs already gone what the American economy thrives on is intellectual property, particularly in the form of innovation. It is believed that as long as America is innovating we have no problems and will continue to have a robust and even dominant economy. But since the housing collapse the U.S. economy has been anything but robust and dominant economy. Indeed, stagnant growth and the feeling by many that the recession never ended more than anything seems to explain the rise of candidates like Senator Bernie Sanders (D-VT) and Donald Trump (R). After all, if the economy were growing at 4% per year over the last 8 years would either party be so enamored with so-called outsider candidates?
The American story of lost manufacturing jobs dates back for decades. Bruce Springsteen’s song My Hometown, which is actually about my own hometown of Freehold, New Jersey, immortalized the tale of a textile mill closing down, jobs leaving and never coming back, which leads to vacant stores throughout the town. The line – “Foreman says these jobs are going boys and they ain’t coming back” – has proved to be eerily prophetic, repeated in once thriving manufacturing and industrial communities all across America.
It doesn’t need to be this way! There is something that can be done, but turning the economy around requires our leaders to consciously focus on facts and reality rather than politics, myths and fear mongering.
Unfortunately, those that are talking about this issue are only talking about it indirectly, without sophistication and in a way that makes absolutely no sense. For example, Donald Trump promises high tariffs on imported goods coming from Mexico and China. He gets wild cheers because supporters seem to want the importers punished and the goods to cost more, but in the end tariffs would hurt the people buying those goods because they will simply have to pay more, and in many cases pay more for essential items.
The U.S. cannot win a trade war based on raising tariffs. China, for example, thinks in terms of generations at a minimum. U.S. leaders on the other hand think in terms of 24-hour news cycles. There is no possible way a high tariff that would hurt U.S. consumers would be able to be placed on goods coming into the U.S. for long enough to do anything other than harm the U.S. economy. Our trade partners know that there is no will to raise tariffs so high that it would guarantee a trade war that would devastate U.S. consumers, so the threat isn’t tough talk, it is stupid talk.
Rather than engage in a trade war that the U.S. can’t win, why not embrace smarter manufacturing policies? We don’t need better negotiators to cut better trade deals; we need smarter manufacturing policies that make it unnecessary to require better negotiators in the first place. After all, what exactly are better negotiators going to do? If the United States remains an inhospitable climate for business, with extraordinarily high tax rates and loopholes that only the richest corporations can take advantage of, why would we ever reclaim widespread manufacturing in the United States?
Would it surprise you to learn that China has but a 3.5% cost advantage for manufacturing compared with the United States? Regulations, taxes and an environment that makes it practically impossible to start a new business creates the disadvantage, and thoughtful policies to revitalize U.S. manufacturing would produce dividends, lead to a broader middle class, provide an economic boon to the entire country and lead to greater national security because we wouldn’t be relying on foreign producers for everything, like we are today. This is why it is all the more frustrating that the discussion, to the extent we are having it during this Presidential campaign, is about raising tariffs. Raising tariffs didn’t work for President Thomas Jefferson and it won’t work for a President Donald Trump.
If you don’t believe that a thoughtful national manufacturing policy is the answer then you need to read Great Again: Revitalizing America’s Entrepreneurial Leadership. A central and often repeated theme of Great Again is that America’s decision to give up on manufacturing has not only caused the obvious problems associated with the loss of high paying blue collar jobs, but it has and is causing an enormous loss of intellectual property assets as well. The author, Hank Nothhaft, who was an extremely successful start-up CEO in Silicon Valley with many years of experience, quotes what Harvard Business School Professors Willy Shih and Gary Pisano told him: “decades of outsourcing manufacturing has left U.S. industry without the means to invent the next generation of high-tech products that are key to rebuilding its economy.”
Nothhaft explained it this way in a speech in January 2011 in Washington, DC, at the Innovation Alliance Conference:
For 30 years now we have all been fed the carefully cultivated myth, that so long as America did the creative work, the inventing, then we can let other nations like China do the so called grunt work, the manufacturing. Simply, we would think; they would sweat. So we let manufacturing go and in so doing we lost the greatest economic force multiplier in history. For manufacturing not only supplies middle class incomes to the three-quarters of all Americans without a college degree, it also creates up to 15 additional jobs outside of manufacturing for every position on the factory floor.
Worse yet, every engineer in the world knows that innovations don’t always (if ever) ramp up from the micro level to the macro level as one might predict. So when we outsource manufacturing we are handing over the follow-on innovation that will take place on the factory floor. Therefore, by outsourcing manufacturing to the lowest bidder abroad not only have we destroyed the working middle class in America, but we are also increasingly turning over our last economic advantage – our intellectual property.
How long will the United States be able to remain one of the world’s leading economies if we continue to outsource that follow-on innovation that takes place through the manufacturing processes? Perhaps right now the U.S. remains in the lead with respect to first generation innovation, and perhaps second and subsequent generations of innovation made on the factory floor are not threatening the U.S. innovation economy. How much longer will that be the case? How much longer before the countries doing the manufacturing become more sophisticated in terms of first generation innovation? This problem is far more concerning than most are willing to admit.
Shortsighted decisions by CEOs and the lack of any leadership, let alone meaningful leadership, in Washington, DC, has placed America on the path of economic ruin. The lack of manufacturing in America coupled with the increasing loss of associated intellectual property and innovation explains the “new normal,” which is represented by stagnant growth and an abundance of the new jobs that are part-time, low paying, or both.
Unfortunately, the collective narrative supports the erroneous conclusion that there is nothing that the United States can do to turn things around on the manufacturing front. While simply untrue, our political leaders have so far not wanted to offer a business friendly environment calculated to make America a strong manufacturing nation once again. According to Nothhaft, “It’s the U.S. government’s myopic policy, not China’s lower payroll costs, that make our nation uncompetitive in the all-important solar and other high-tech manufacturing sectors.”
In Great Again Louis Vintro, vice president and general manager of the semiconductor product division at equipment maker ESI explains: “What we see from our data is that China has a roughly 50 percent advantage in labor costs. But since labor represents an average of only 7 percent of operating costs across all of the semiconductor sectors, that means China has a 3.5 percent overall cost advantage.”
But with that 3.5 percent Chinese cost advantage comes uncertainty. The United States still offers a solid rule of law and there is not the political unrest here that could (and likely will) emerge in China as the rising middle class wants more and demands freedom. But even this 3.5 percent advantage can be closed, as Nothhaft explains: “If you take as a guide the roughly 30 percent tax that Intel has paid in recent years on 10 percent operating profit, that would mean a 3 percent lower cost of operating a plant here. Add in an enhanced, permanent 20 percent R&D tax credit equal to what other nations offer… and China’s advantage drops to 1 to 2 percent.” At 1 to 2 percent advantage is it worth the headaches of doing business in China?
What America needs to do is clear. We need to work together to reduce taxes on manufacturing in the United States. Approval processes for everything at every level need to be streamlined. R&D tax credits should be increased. Job killing laws and regulations, as well as laws and regulations that give incentive for companies to decrease hours, must be repealed. And, it shouldn’t have to be said, but making electricity cost more by killing coal fired power plants without any viable alternative technical solution is just idiotic.
A proactive manufacturing policy is what the United States needs, but will it be what the United States gets? It seems doubtful, at least as long as the only person talking about these issues is promising high tariffs and a trade war that will only cause real damage to the U.S. economy.