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Reindustrialization in USA and in Russia

The article looks into the most important aspects of the world economy reindustrialization on the example of current reindustrialization in the US.

The article looks into the most important aspects of the world economy reindustrialization on the example of current reindustrialization in the US. Given the US experience it has been revealed that the reindustrialization of Russia’s economy should combine active modernization of the existing production capacity as well as shaping new industries on the basis of technologies of the sixth technology wave.

The developed countries of the world understand reindustrialization as the implementation of a policy capable of changing the downward trend in the real sector of national economies of countries, in coordination with solving the problem of employment of the population through the innovative re-equipment of production, the optimization of production chains. Reindustrialization programs primarily affect those industries that are experiencing the strongest competition with imported goods. In the process of searching for the points of economic growth, we observe not only the return of production to the developed countries and the restoration of industrial activity on an innovative basis, but also the formation of new industries.

According to experts[1],[2] as a result of reindustrialization in the framework of the fourth industrial revolution in the mid-term and long-term perspective, we can expect:

·the creation of new markets and the disappearance of some traditional activities;

· the formation of the areas of rapid industrial growth;

· the transformation of a sustainable system of countries' industrial specialization by eliminating the obsolete elements of technological chain;

· reduced need for the unskilled types of labor and growing global unemployment problem;

· the extension of the technological superiority of industrialized countries.

In the US, the main directions of reindustrialization are the implementation of an energy strategy to increase the availability and cheapening of energy resources (primarily for industry) and the encouragement of so-called “onshoring” (“reshoring”), that is, return to the homeland of previously outsourced manufacturing capacities. The mechanisms of reindustrialization in the US are the implementation of the “energy strategy to increase the availability and cheapening of energy carriers”[3], as well as the encouragement of the “return of manufacturing enterprises”[4].

Among the reasons for the return of American trans-national corporations back to the US is the increase in wage costs in developing countries. In addition, the “shale revolution” affected the US as an industrial production center, which allowed to increase oil and gas production in the country. For the first time in 40 years, the oil export ban was lifted, and the ambitious goal of transforming the US from the main consumer of oil into its exporter was set. However, since there is no infrastructure for the export of oil and gas, the prices of energy resources on the domestic market have noticeably decreased. The cheapness of gas and oil in the US domestic market means that industrial companies have an energy price advantage of 60–70% compared with competitors in China, Japan, South Korea and Europe. The long-term perspective of low prices is already attracting industrial companies to invest in the expansion of capacities in the United States. As a result, cheap gas can become the powerhouse of the reindustrialization of the US. This is especially true for energy-intensive heavy industry, as well as for chemistry and petrochemistry.

The US, as the leader of new technologies, especially in the sphere of information and communication, has been most successful in the introduction of the Internet of things, including through the active use of the public-private partnership and environmental management, which Russia needs to develop.[5] As arguments in favor of the reindustrialization in the US, the following can be noted. First, manufacturing industry generates the effects of spreading new knowledge to the rest of the economy. New knowledge and technologies, management forms used in the production of new products will inevitably spread to other business projects. Second, a decline in market share in knowledge-based industries has a negative effect on the entire economy. So, if a country loses aerospace industry, then the entire innovation ecosystem degrades, which hinders the development of new enterprises and the generation of new technologies. If technological capabilities in one of the industries are lost, then it is almost impossible to revive it. This hinders the growth of other industries, which weakens the overall competitiveness. Third, if production is outsourced, then innovation usually follows the same way, weakening the country's international competitiveness.

In the USA, according to the calculations of the author, from 2009 to 2016, the manufacturing sector of the industry grew by 20%. As a result of the growth of this industry sector, it is possible to note the appearance of 900 thousand new jobs in the period from 2008 to 2016, 80 thousand of which were created as a result of a direct return from abroad. At the same time, in 2016, the US GDP grew by more than 3%, and production in the manufacturing industries increased by 3.5%. Among reindustrialization stimulation measures undertaken by the US government, one can mention the use of the scientific and technical base of US universities. For example, in the United States,[6] a consortium was established headed by the LSU College of Engineering and Science, and consisting of five universities (LSU, Louisiana Tech, Grambling, Southern and University of New Orleans), to support promising technologies and teaching them. In addition, the Massachusetts Institute of Technology has developed a number of programs to support next-generation production. In addition, many other programs are being implemented in the United States, including regional ones aimed at expanding the possibilities of using the country's collective potential.

Representatives of the middle and working class of the US have not felt an increase in income over the past twenty years. Moreover, the deindustrialization of America took place symmetrically with the growth of the industrialization of China and other developing countries, such as Mexico, and the growth of the incomes of their middle class. Therefore, the decision of the US President D. Trump to return production to the US looks more than logical from the standpoint of the middle and working class.

The relocation of production to the US is encouraged by restrictions in the form of an increase in the import tax, and also by the introduction of incentives – actual privileges on energy prices for industries within the country. When the Carrier equipment manufacturer, whose products are heaters and air conditioners, announced in February 2016 the decision to relocate 1,400 jobs to Mexico, the US authorities, through the negotiations with the company’s management, achieved that in exchange for a proposal to lower taxes, the company announced intent to save 1,000 jobs in the United States. Although it should be mentioned that the company United Technologies, whose subsidiary is Carrier as a manufacturer of military equipment, is significantly dependent on government procurement (10% of its sales fall to the share of US state companies).

As another example of attracting production in the US, we can mention the Taiwanese company Foxconn, engaged in the assembly of high-tech products of the American Apple (it is the company's largest client). Foxconn already has production departments in the US and has decided to create an assembly plant there. Strictly speaking, this is not a direct relocation of activities, since the company does not provide for simultaneous “disinvestment” in Taiwan, but in anticipation of the growth of the American market and the establishment of trade barriers, the creation of a full-fledged production in the US can be a very advantageous step for Foxconn.

In the mid-term and long-term perspective, the automotive industry will be one of the main US industrial sectors. While the automotive industry is now highly globalized, in 2017, Ford Motors decided to cancel its $ 1.6 billion project on building a plant in Mexico and announced an investment of $ 700 million in a plant in the United States focused on construction of electric vehicles and autonomous vehicles (i.e., vehicles with a fully automated control system). Despite the fact that the automotive company has not yet completely given up on its plans to transfer its production capacities to Mexico, and the decision it made is more like redistributing the company's production than relocation, the analysis shows that the US uses protectionist measures, for example, by increasing the duties on import of vehicles from Mexico and Canada.

In addition, the increase in duties can help the competitiveness of American automotive industry in domestic market, as it frustrates the plans of potential competitors, in particular, the leading German automotive companies that invested heavily in the production of automobiles in Mexico and planned to strengthen their positions in the US market, including through cost reduction.

Let's note that although the return of production in the US will entail a reduction in energy and tax costs for carmakers, this can significantly increase the cost on wages for workers (manufacturers costs on wages in the US per hour are equivalent to the wage costs in Mexico per day).

Let's also add that the US has a strong position in the world markets on the production of metals, chemical industry products, as well as other manufacturing industries, in which the share of energy costs in the cost of production is high (in the chemical industry – 12.5%, metallurgy – 9 %, in some sectors of the manufacturing industry – about 10%). Therefore, reducing the cost of energy in the US is an important argument for these industries in favor of developing production on the territory of the US. The return of production in the US will entail a reduction in energy and tax costs, but may again increase the costs on workers' wages. Thus, the US expects to ensure the success of reindustrialization due to such factors as attracting qualified personnel and an increase in the number of people employed in industry; technological leadership in major industries (including the use of public-private partnership mechanisms for the transfer of scientific and technological advances to production); reducing the cost of energy resources within the US.

In the context of the current constraints, most of the components of the proposed industrialization strategy are difficult for Russia[7]. The Russian Federation faced a situation where carrying out reindustrialization, which implies, among other things, reliance on the import of high technologies, is complicated by an unfavorable foreign economic and policy situation (the policy of sanctions against Russia). In this context, the intensive development of the Russian industry due to the acquisition of new technologies and equipment abroad is limited.

Thus, in the process of reindustrialization, we observe an increase in the share of the manufacturing industries, there is a shift to capital-intensive industries (first of all, to chemistry, machine industry and metalworking), and in the developed countries – to high-tech industries (electronic engineering, aerospace, biological, pharmaceutical industry, etc.), capable to become the basis of growth and effective adaptation of the economy to the processes of global transformation in the future.

In its turn, the high share of energy costs in the cost of production in terms of energy efficiency compared with the US, significantly reduces the competitiveness of the Russian Federation. The share of costs for the acquisition of electricity and gas in the cost of certain types of products of manufacturing industry is about 10% (chemical industry – 12.5%, metallurgy – 9%).

It seems that, for Russia, the reindustrialization of the economy should imply the active modernization of existing production capacities. The reformatting of industry also implies the formation of new industries based on the use of the technologies of sixth technology revolution. According to the author, for the Russian Federation, in this direction, it is necessary to develop the so-called “transitional period” technologies, i.e. to identify technologies of those industries which development intensity already allows not only to achieve tangible results, but also to create a solid foundation for future achievements based on them. In this context, the drivers of new industrialization in the mid-term and long-term perspective should be high-tech industries, which absorbed the latest technology and the largest number of highly qualified personnel, particularly in the defense industry, while ensuring the transfer of scientific advances to the civilian industry. Along with this, Russia needs to retrofit the rural sector, expand and realize the existing transit potential, including based on the technologies of sixth economic revolution. It is necessary to implement an approach that involves identifying leading industries with domestic demand and export potential, as growth drivers, while simultaneously developing the related industries. For example, developing the rural sector, the demand for products of which both domestically and abroad is significant, it is necessary to simultaneously develop the chemical industry in terms of fertilizers, environmentally friendly additives that stimulate the growth of agricultural crops, etc.

It is also necessary to simultaneously develop the production of agricultural machinery. An important condition for the effectiveness of the policy of the industry and economy renewal is the ability of the state to provide conditions for fair competition of enterprises, including in the domestic market, to implement measures for effective encouragement of the production of innovative products.

In the mid-term perspective, in the context of the development of digital economy, the key to the competitiveness of countries will be the seller’s ability not only to quickly introduce products to the market, but also to offer related services. In this situation, an important aspect of reindustrialization, including the transition to digital economy, is the consistency of the choice of the main directions of the industries and services development, implemented on the basis of a new technological wave[8]. In addition, in order to develop mutually beneficial cooperation, the Russian Federation should more actively use the interest of the European business community in reliable energy supplies, as well as a growing understanding of the economic inexpediency of the policy of sanctions against Russia[9].

In this situation, an important role in the mid-term and long-term perspective for reindustrialization in Russia will be played by the mechanism of public-private partnership[10], in which the role of the state is important not only in financing scientific organizations, but also in developing a strategy and laws for the development of high-tech production and exports, as well as innovations support infrastructure. Tangible benefits in reindustrialization can be achieved by increasing the efficiency of the interaction of state with more mobile and receptive to innovations private sector in implementing projects that transfer the results of the latest scientific research to production. Within the framework of public-private partnership projects, the state and the private sector are co-financing R&D on current issues. The task of joint actions of the Russian state and business will be the formation of a strategy for the reindustrialization of the economy to create an effective environment for a full development cycle – from the development of theoretical postulates of reindustrialization to their practical implementation.

Using the experience of the US in organizing the transfer of scientific advances and developments to industry, including through the implementation of PPP projects, may be of considerable interest for the reindustrialization of Russia.

At the same time, it should be noted that the import of technologies associated with direct investment reduces the demand for participation of national scientific and technical resources in the R&D. The wide import of technologies reinforces the technological dependence, allowing to quickly increase the technical level of production, expand the product range, but also preserves the “technological gap” between the state exporting technologies and the states - recipients of these technologies. “Technological import” washes away national capital from industries related to the production of this final product, and, therefore, is able to slow down its reindustrialization.

Thus, the analysis of the reindustrialization strategy in the USA showed that for effective reformatting and modernization of industry Russia needs to ensure: training of highly qualified scientific personnel to participate in the creation of new industries and specialists who are able to work effectively in the production sites of Industry 4.0; building a system to transfer the results of the latest scientific research to production (from the formation of a strategy for industrial reindustrialization based on the technologies of the sixth wave of innovation (Industry 4.0) to release the products to the domestic and export markets);releasing innovative products and increasing productivity in the industry through attracting investment; developing technologies of the sixth wave of innovation (Industry 4.0)[11], incl. robotics, 3D printing, the Internet of things, etc.; the modernization of traditional industries taking into account the transition to new generation technologies, incl. machine building (machine tool industry, toolmaking industry, instrument engineering, agricultural machinery); the conditions of fair competition of enterprises, including in the domestic market; simultaneous development of traditionally strong industries (including mining, agro-industrial sector, while ensuring high product standards, etc.); increasing energy efficiency in manufacturing industries; providing access to foreign markets, including growing markets in developing countries.

 References

1.Bodrunov S.D. Imperativy, vozmozhnosti i problemy reindustrializatsii. [Imperatives, possibilities and problems of reindustrialization.] [Electronic resource]. Access mode:     https://inir.ru/wp-content/uploads/2014/02/09_Императивы-возможности-и-проблемы-реиндустриализации.pdf (accessed 01.03.2018).

2.Bodrunov S.D. Integratsiya proizvodstva, nauki i obrazovaniya kak osnova reindustrializatsii RF. [Integration of production, science and education as the basis for the reindustrialization of the Russian Federation.] Mirovaya ekonomika i mezhdunarodnye otnosheniya. 2015. No. 10. Pp. 94-104.

3. Vishnevskaya N. Mobil'nost' rabochikh mest i rabochey sily [Mobility of workplaces and labor power.] Mirovaya ekonomika i mezhdunarodnye otnosheniya. 2015. No. 10. Pp. 62-75.

4. Zagashvili V. Zapadnyye sanktsii i rossiyskaya ekonomika.[Western sanctions and the Russian economy.] Mirovaya ekonomika i mezhdunarodnye otnosheniya. 2015. V. 59. No. 11. Pp. 67-77.

5.Zakharov A.N. Ratsional'noye prirodopol'zovaniye v usloviyakh globalizatsii: mezhdunarodnaya praktika i rossiyskaya deystvitel'nost' [Environmental management in the context of globalization: international practice and Russian reality.] Russian foreign economic bulletin. 2003. No. 8. Pp. 38-45.

6. Zakharov A.N. Rol' mekhanizmov gosudarstvenno-chastnogo partnerstva v reshenii ekonomicheskikh i sotsial'nykh problem Rossii. [The role of public-private partnership mechanisms in solving Russia's economic and social problems.] Mirovoye i natsional'noye khozyaystvo. 2011. No.1. Pp. 2-7.

Schwab K. Chetvertaya promyshlennaya revolyutsiya [The Fourth Industrial Revolution]: translation from English. – Moscow: Izdatel'stvo “E”, 2017. 208 pages.


[1] Tolkachev S.A. Industriya 4.0. i yeyo vliyaniye na tekhnologicheskiye osnovy ekonomicheskoy bezopasnosti Rossii. Politicheskiye i ekonomicheskiye strategii. [Industry 4.0. and its influence on the technological foundations of Russia's economic security. Political and economic strategies.] [Electronic resource] Access mode: http://elib.fa.ru/art2017/bv702.pdf /download/bv702.pdf?lang=en (accessed: 01.03.2018).

[2] Vishnevskaya N. Mobil'nost' rabochikh mest i rabochey sily. [Mobility of workplaces and labor power.] Mirovaya ekonomika i mezhdunarodnye otnosheniya. 2015. No. 10. Pp. 62-75.

[3] Bodrunov S.D. Imperativy, vozmozhnosti i problemy reindustrializatsii. [Imperatives, possibilities and problems of reindustrialization.] [Electronic resource]. Access mode:               https://inir.ru/wp-content/uploads/2014/02/09_Императивы-возможности-и-проблемы-реиндустриализации.pdf (accessed 01.03.2018).

[4] Bodrunov S.D. Integratsiya proizvodstva, nauki i obrazovaniya kak osnova reindustrializatsii RF. [Integration of production, science and education as the basis for the reindustrialization of the Russian Federation.] Mirovaya ekonomika i mezhdunarodnye otnosheniya. 2015. No. 10. Pp. 94-104.

[5] Zakharov A.N. Ratsional'noye prirodopol'zovaniye v usloviyakh globalizatsii: mezhdunarodnaya praktika i rossiyskaya deystvitel'nost' [Environmental management in the context of globalization: international practice and Russian reality.] Russian foreign economic bulletin. 2003. No. 8. Pp. 38-45.

[6] LSU Faculty Lead Efforts To Win $20 million Grant From Lousiana Advanced Manufacturing Consortium. [Electromic resource] // EurekAlert. – 3 August 2015. – URL:            https://www.eurekalert.org/pub_releases/2015-08/lsu-lfl080315.php (accessed 01.03.2018).

[7] Zagashvili V. Zapadnyye sanktsii i rossiyskaya ekonomika.[Western sanctions and the Russian economy.] Mirovaya ekonomika i mezhdunarodnye otnosheniya. 2015. V. 59. No. 11. Pp. 67-77.

[8] Schwab K. Chetvertaya promyshlennaya revolyutsiya [The Fourth Industrial Revolution]: translation from English. – Moscow: Izdatel'stvo “E”, 2017. 208 pages.

[9] Zagashvili V. Zapadnyye sanktsii i rossiyskaya ekonomika.[Western sanctions and the Russian economy.] Mirovaya ekonomika i mezhdunarodnye otnosheniya. 2015. V. 59. No. 11. Pp. 67-77.

[10] Zakharov A.N. Rol' mekhanizmov gosudarstvenno-chastnogo partnerstva v reshenii ekonomicheskikh i sotsial'nykh problem Rossii. [The role of public-private partnership mechanisms in solving Russia's economic and social problems.] Mirovoye i natsional'noye khozyaystvo. 2011. No.1. Pp. 2-7.

[11] Schwab K. Chetvertaya promyshlennaya revolyutsiya [The Fourth Industrial Revolution]: translation from English. – Moscow: Izdatel'stvo “E”, 2017. 208 pages.