1. Value Creation and Trade in 21 st Century Manufacturing: What Policies for UK Manufacturing? Richard E. Baldwin and Simon J. Evenett BIS, London, 14 June 2012

2. Overview & plan of attack  We all know the industrial policy & targeting debate of the 1980s early 1990s.  General feeling: Something is different now.  We provide a conceptual basis for this ‘feeling’ & and draw policy implications.  Build up to three policy topline points:  Traditional ‘competitiveness’ policies still valid (skills, openness, etc)  Possible caveat on unbounded enthusiasm for R&D  Cities are the factories of the 21 st century, so urban policy should be part of industrial / globalisation / competitiveness policy  Industrial competitiveness has an important regional dimension, so national policies are not sufficient.

3. Globalisation has changed Globalisation as two great unbundlings

4. Transport on technology vs transmission technology Steam revolution ICT revolution

5. Implications: Offshoring stages & mobile technology  Result #1: Rapid EM industrialisation & growth.  Result #2: G7 de-industrialisation accelerates, GDP share declines. Manufacturing output, 1970- 2010 Manufacturing output, global share 1970-2010 G7 global GDP share, 1820-2010

6. Implications: Offshoring stages & mobile technology  Result #3: Regional clustering of stages.  Distance still matters (people still expensive to move)  Supply chains are regional not global, so  Comparative advantage is regional, not national, so  National policies not sufficient.

7. Changing landscape of manufacturing  Functional unbundling: Gains from specialisation vs cost of coordination:  Better communication tech (CT) reduces cost of specialisation;  Better information tech (IT) reduces benefits of specialisation (CAD/CAM, robots, etc.)  CT & IT transform UK manufacturing jobs …

8. CT + IT = Polarisation of factory floor Lots of manufacturing jobs Many opportunities for L-skill workers 1980 + Better Communication Tech (CT)  Reorganise production by stages Stages with mostly L- skilled tasks Stages with mostly H- skilled tasks, or high coordination costs stay in UK offshored + Better Information Tech (IT)  Reorganise occupations by tasks Occupations with mostly H-skilled tasks Occupations with L- skilled tasks : Many L-tasks bundled into H-jobs via computers and robots 2012 Polarised jobs in fabrication: - Applied engineers, technicians, etc; & -“Man & dog” jobs (competing on the margin with robots, not China).

9. Topline policy implications 1.Advanced manufacture, fine but:  Never again many jobs for L-skilled workers in UK fabrication;  Limited number of ‘base’ jobs for H-skilled workers (ag example).

10. Topline policy implications 2.Smile curve economics:  Fabrication stages become commoditised;  Value shifts to pre- and post- fabrication services. Stage Share of value added Manufacturin g stages Sales, marketing and after sales services Product concept, Design, R&D 2012 value chain 1970s value chain N95 value decomposition

11. Base jobs are important  Moretti empirical results on US cities:  New job in traded sectors create many other jobs;  New job in non-traded sectors creates no extra jobs.  Notion of “Base Jobs” validated.  Few base jobs can be created in manufacturing in UK  All such jobs are good, but not enough.  Base jobs in traded services:  Smile curve value-shift plays to UK comparative advantage.  Output is tradable but production involves localised externalities.  Traded services jobs:  Localised backward & forward linkages important;  ‘Sticky’ & ‘good’ jobs due to agglomeration rents;  Central in the input-output table  diversified labour demand;  Flexible (service skills more easily transferable across sectors).  Good, sticky, central & flexible.

12. Cities are 21 st century factories  Factories were a major source of base jobs in 20 th century.  Traded services are & likely to be largest source of base jobs going forward.  Skilled workers meet, produce and innovate mostly in cities.  ERGO: cities are factories of the 21 st century.  “Cities = Industrial parks” is a more precise analogy.  ERGO: Urban policy is part of ‘industrial policy’

13. Parting thought: To promote high-value added economic activity domestically, which factors should governments focus on? ICT