Losing trade in green

Earlier today, I mentioned the fact that our trade deficit in advanced technology goods stems from a failure of trade and innovation policy — not because we are less innovative. It is the result of an “invent it here; build it there” business model. Well, it looks like we may be going doing the same road with green technology. This morning, the New America Foundation issued a report on the Green Trade Balance. The situation is not good:

Green investment is a major pillar of the president’s economic recovery plan. Yet, America’s dependence on foreign countries to produce green technologies may undermine this recovery strategy. Using a list of green goods derived from the Organization of Economic Cooperation and Development (OECD) and the Asia-Pacific Economic Cooperation (APEC), we have determined that the United States ran an overall green trade deficit of -$8.9 billion in 2008, including a deficit of -$6.4 billion in the critical category of renewable energy, one of the main targets of the Obama administration’s green agenda. The U.S. economy also suffered a significant deficit in the pollution management category. On the positive side, the United States ran modest surpluses in two categories–energy efficiency and a grouping of other environmental goods related to water purification and sustainable agriculture.

If current trends continue, the green trade deficit can be expected to widen further as the administration’s agenda increases domestic demand but without sufficient measures to increase domestic production. If the deficit continues to grow, the United States will forego the creation of millions of high-wage, high-skill green manufacturing jobs and lose its potential to be a global producer as well as a consumer of green technologies.

. . .

The trends in America’s green trade balance should caution policymakers against over-promising about the jobs and investment we can expect from government spending to support the green economy. If the green recovery is to deliver more jobs and spur more domestic investment, it will need government measures to encourage domestic production as well as domestic consumption.

When the stimulus bill was passed, some policymakers recognized this need (see earlier posting). As I reported then, Sec. 1302. (Credit for Investment in Advanced Energy Facilities) of the tax provisions of the bill created a 30% tax credit for the establishment of an alternative energy manufacturing facility. As my old boss, Senator Jeff Bingaman was quoted in the Wall Street Journal as saying, “Several of us have come to recognize that we’ve outsourced the very things we’re going to need to change the nation’s energy mix, and this is a way of encouraging more manufacturing here at home.”

The New America Foundation report highlights how urgent that task is.

Reports on innovation – and lessons for policy

Some updates on innovation policy:

This week is the annual OECD Ministerial meeting. The overall theme of the meeting is The Crisis and Beyond: For a stronger, cleaner, and fairer world economy. As part of the preparation, OECD has issued a new report: Policy Responses to the Economic Crisis: Investing in Innovation for Long-Term Growth. The report argues that the focus on innovation should increase during the economic crisis, stating that “[T]he crisis should not damage the drivers of
long-term growth, but should instead be used as a springboard to accelerate structural shifts towards a stronger, fairer and cleaner economic future.” In that vein, they recommend continued support for focused research and public-private partnerships, enacting policies to lower obstacles to entrepreneurship (including addressing the liquidity problems facing start ups and small firms), and continue investments in information technologies and in human capital. The report goes on to describe policies being taken by OECD countries.

Thanks to Intellectual Property Watch for point this out.

– – –

A much more pessimistic view comes from Mike Mandel’s recent Business Week cover story The Failed Promise of Innovation in the US. His basic argument is that the innovations of the 1990’s have failed to deliver – especially in biotech. I have to say that I find his arguments rather unconvincing. It seems like he desperately wanted all the high tech hype to be real. It wasn’t. It couldn’t have been. And it won’t be in the future. But the failure of reality to live up to the hype does not mean that innovation has failed.

I was especially interested, however, in his comments on trade and innovation. He take the growing trade deficit as an indicator of a lack of innovation. I disagree. The real reasons for the growing trade deficit are many. But part of it was the innovation business model: invent it here, make it over there. That is a failure of trade policy, economic policy and innovation policy, not innovation per se.

– – –

Then there is the story in today’s Wall street Journal In Search of Innovation. They use one of my favorite analogies: the dunk under the light post. “Why are you searching here under the light post when you lost your keys over there,” asks the cop? “Because this is where the light is,” answers the drunk. The authors point out that much of the search for “innovation” is where the current light is — rather than where the innovations are. They offers a number of tips for how to broaden the search — all of which generally fall under the rubric of open innovation.

One other thing I would point out is that there definition of innovation is a broad one — encompassing new products, services and process. One of the most interesting example is this:

Doctors at the Great Ormond Street Hospital for Children in London, for example, consulted with members of a pit-stop crew from Italy’s Ferrari Formula One motor-racing team to explore ways of improving how children were being moved out of heart surgery and into intensive care.

In contrast, Mandel’s complaint is about the failed promise of high-technology.

– – –

So let me go back to the light post story. In our search for innovation policy, we have been looking in the usually places where there is light. In this case, in technology policy. But I will reiterated what I have said time and time and time again: technology is not the same as innovation. Business gets that. But government policy makers don’t. Until we have a broader definition of innovation policy, we will continue to be like the drunk under the light post — search for answers in all the wrong places.

Manufacturing in the Intangible Economy

There is a lot of misunderstandings about the Intangible Economy (or the “dematerialized” economy or the “weightless” economy or the really misleading “services” economy). One of the greatest misunderstandings is that manufacturing has no role. Or that a national economy can survive without manufacturing. For example, a recent story in the Wall Street Journal on Michigan and the Knowledge Economy: Manufacturing won’t support the middle class. The story advocates an abandonment of manufacturing for knowledge industries, which they define as “information, finance, insurance, professional services, health care and education.”
There are two fallacies to that argument:
1) that “manufacturing” and “services” are completely separate and unrelated activities
2) that a large nation can export enough “services” from the knowledge industries to pay for the importation of manufactured goods.
Let’s start with the first argument. One of the hallmarks of the intangible economy is the fusion of manufacturing and services. As I have noted before, even the very nomenclature manufacturing and services has become misleading. This is highlighted in a new report from the Work Foundation in the UK on Manufacturing and the Knowledge Economy. (Part of their series on the Knowledge Economy.)
The reports make a number of important points about manufacturing:

Modern manufacturing has been reshaped by exactly the same forces driving our transformation into a knowledge based economy. There are two closely related major consequences of these changes.
• Firstly, modern manufacturing invests more heavily in knowledge based intangible assets than services and provides large numbers of knowledge intensive jobs;
• Secondly, the conventional boundaries between manufacturing and services are blurring as manufacturers incorporate high value added services into the production process.

On this second point – the blurring of manufacturing and services, the classic case is Rolls-Royce as I’ve noted before. But not only is the business model blurring the boundaries, the jobs linkages remain strong. The Work Foundation report references a 2004 report from the EU High-Level Group Report Manufuture Technology PlatformManufuture: A Vision for 2020. This report notes that for every job in manufacturing there were two jobs in manufacturing related services. They also cite a report to the UK Department of Trade and Industry – A Portrait of Trade in Services – that about 25 per cent of all exports of business services and between 40 and 45 per cent of trade and technical related service exports were generated by manufacturing companies.
And those manufacturing sector jobs are more knowledge intense. The Work Foundation finds that in the UK high to medium high tech manufacturing have the same level as knowledge intensive services — around 40% of the workforce in both.
In other words, manufacturing and services are not two sides of the same coin – they are parts of the design of the face of the coin. Losing the manufacturing base means losing knowledge-intensive jobs and knowledge intensive value added.
– – –
The second part of the “let-manufacturing-go” is that we can export enough services to pay for imports of goods. That may be partial true for a very small economy — say Singapore. However, for an economy the size for the United States, the ability to produce goods is vital for our international financial position. While manufacturing may be under 15% of GDP, it makes up a large part of our trade deficit. Even if we were self-sufficient in energy, we would be running a $300 billion trade deficit because of our deficit in manufactured goods.
Our trade surplus in services is so small relative to our deficit in goods — as illustrated below and in my earlier posting. In addition, we need to be careful in the definition of services – since it included travel, tourism and transportation. The core of what people think of is in just two of the categories: royalties and “other business services”. I label these as “intangibles” and publish that data monthly. At current levels, our intangibles surplus (business services and royalties) would have to be 6 times as large as it is now in order to offset our goods deficit.
Annual Trade Balance 2008.gif
In addition, trade in intangibles is subject to the same competitiveness pressures as trade in goods. Other nations are expanding their knowledge based service industries as well. In fact, our imports of intangibles grew faster than our exports in 7 of the last 10 years. There is no reason to believe that our exports in these sectors can grow 6 times as large in the near future.
There is one other way to look at the importance of manufacturing to the US economy. Let us undertake a thought experiment as to what would happen if manufacturing output declined. The chart below illustrates the impact on the trade deficit — using the Federal Reserve’s data on industrial production for total consumer goods and durable goods. Let us simply see how much more we would have to import if domestic production declined — assuming consumption remained at 2008. This does not include any decline in manufacturing exports. If output of durable goods (the smallest US manufacturing sectors) were eliminated, the deficit would increase by 60%, If output of all consumer goods (durable and non-durable) were cut in half, the deficit would double. And if the entire consumer goods manufacturing base disappeared, the deficit would triple.
Manufacturing scenarios and trade deficit - imports only.gif
Now, let’s also take away our exports in consumer goods. Here we have to be a little creative with the data since the categories of “consumer goods” for trade data and for industrial production are not the same. For this thought experiment, we will subtract out from the goods balance any exports of what fall into the trade categories of “automotive vehicles” “consumer goods” and “other goods”. The impact is even more dramatic.
Manufacturing scenarios and trade deficit - imports-exports.gif
Bottom line: manufacturing still matters. But it is a different from the past – more sophisticated and knowledge intensive that ever. As such, it is an integral part of the Intangible Economy

U.S. International Transactions -1st Q 2009

This morning the BEA released the data for 1st quarter current accounts. This is a more comprehensive look at our international transaction than the monthly trade figures. It includes income and other financial transactions as well.
I’ve done something different with the data. Below is the normal chart of intangibles (royalties and business services). But I’ve also broken down the data is a slightly different way. The second chart shows the elements of our current account. “Services” have been split into travel/transportation, business services and miscellaneous. Miscellaneous includes the services categories of “Transfers under U.S. military agency sales contracts” and “U.S. government miscellaneous services” and is combined with the financial category of “Unilateral transfers.” Royalties are taken out of “services” and combined with income. It seems to me that royalty and license fees are no different than any other income on an investment.
The quarterly intangible trade data simply echoes the monthly date showing a general plateau. The reconfigured current account data tells an interesting story. Of course, it shows the massive change in goods trade due to the economic slowdown. But it also shows that most of the other categories are relatively flat (as can be seen better in the third chart). Income being somewhat volatile during this period as should be expected.
The current account data also shows the magnitude of the hole we are in. None of the other categories come close to making up for our goods deficit (even at the deep recessionary levels).
Clearly we won’t be able to fix our international trade and financial situation without dealing with our goods deficit. That is part and parcel of the Intangible Economy.
Intangibles current account 1stQ09.gif
Current account 1stQ09.gif
Current account - non-goods 1stQ09.gif

Note: we define trade in intangibles as the sum of “royalties and license fees” and “other private services”. The BEA/Census Bureau definitions of those categories are as follows:

Royalties and License Fees – Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term “royalties” generally refers to payments for the utilization of copyrights or trademarks, and the term “license fees” generally refers to payments for the use of patents or industrial processes.

Other Private Services – Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term “affiliated” refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise’s voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.

Financial reform – update

The draft of the Obama Administration’s financial plan is circulating this morning, even before the official announcement later today. As expected, the circulating drafts propose a Financial Services Oversight Council to “facilitate information sharing and coordination, identify emerging risks, advise the Federal Reserve … and provide a forum for resolving jurisdictional disputes between regulators.”
That “advise” the Fed on systemic risks part has people concerned. The critique is that the proposal gives the Fed too much power. Yesterday, Senator Mark Warner proposed a more powerful Systemic Risk Council (see the story on the Real Time Economics blog at the WSJ). These statements by Senator Warner, who sits on the Banking Committee, may be the opening shots in the turf wars.
As I’ve noted before, the networked organizational approach is the correct way to go. Now comes the important process of designing exactly how whatever Council is created will actually work. Let’s how the debate that Senator Warner has kicked off is thoughtful and complete.

Fashion Copyright – update

It has been over a year since my last update on the fashion copyright issue. Over at TechDirt, there is an interesting posting on the backlash – Fashion Designers Realizing New Fashion Copyright Would Cause Serious Harm To Business. As I’ve noted some time ago, there has been some great work on what is called the “negative space” issue — areas of innovation that flourish without traditional IP. High fashion is a case in point (for example see The Piracy Paradox: Innovation and Intellectual Property in Fashion Design).
By the way, I wouldn’t take the poll on the TechDirt site very seriously. It is hardly an accurate indicator. But the fact that the little guys are pushing back on this makes for a very interesting case study.

Patents and the sharing of ideas

Yesterday’s Wall Street Journal had a thoughtful piece on Why Technologists Want Fewer Patents. Gordon Crovitz’s column used the Supreme Court decision to review the Bilski case on business process patents (see earlier posting) to raise an often overlooked function of the system: the sharing of information:

The Supreme Court may decide that more progress would be made with narrower definitions of what is patentable. A book on the U.S. approach to patents, “Jefferson vs. the Patent Trolls” by Jeffrey Matsuura, makes the key point that “intellectual property rights were not goals in and of themselves, but were instead a mechanism through which society attempted to facilitate creative collaboration.”
Thomas Jefferson, the nation’s inventor-president, would support patent reform in an era when new information technologies build on themselves. An idea, he observed, is a rare thing whose value increases as it’s shared. “No one possesses the less because everyone possesses the whole of it,” he wrote. “He who receives an idea from me receives it without lessening me, as he who lights his candle at mine receives light without darkening me.”

The very explicit deal embedded in the idea of a patent is disclosure in return for limited protection. Otherwise, the system would work on a process of trade secrets.

It is this collaboration part of the process that gets lost in the debate — especially by the “patents as a natural property right” crowd. Interestingly Joff Wilds’s critique against the article focused on the data on patent applications and litigation costs without ever engaging in the core argument on business process patents.

There might be a typo on the patent application numbers and people do not agree on the size of litigation costs. But Crovitz got the essence of the question right: what is the purpose of patents in fostering innovation . The answer to that question is what the Supreme Court will be grappling with.