U.S. manufacturing is in trouble. Technological innovation, particularly in new process technologies, can play a key role in spurring a revival, but that won’t happen without a coherent and well-funded national manufacturing technology strategy.

First, some background. From January 2000 to January 2010, the number of U.S. manufacturing jobs fell by 6.17 million, or 34 percent. It would be one thing if this job loss were due solely to superior productivity. But output declined as well. From 2000 to 2009, 15 of the 19 U.S. manufacturing sectors shrank in terms of real value added (gross output minus the cost of inputs), and overall manufacturing output declined by 10 percent during a period when U.S. GDP grew 15 percent. Had manufacturing output maintained its share of GDP, we’d have two million more manufacturing jobs and eight million more jobs overall.

This trend does not just reflect the loss of low-tech manufacturing as we transition to a high-tech future. In fact, the U.S. trade deficit in manufactured products is not seen just in low- to mid-technology products; the nation ran an $81 billion trade deficit in advanced-technology products in 2010, the largest in its history.

One would think, given this dismal performance, that alarm bells would be sounding in Washington. But in fact, the Washington elite has justified this decline as either natural or irrelevant, claiming that manufacturing is falling off everywhere or that the United States is evolving to a superior post-industrial economy. Still others argue that we can lose manufacturing but still keep innovation. But as Dow Chemical CEO Andy Liveris succinctly states: “Where manufacturing goes, innovation inevitably follows.”

America cannot hope to compete with low-wage nations without robust efforts to boost productivity and spur the development of complex products that are hard to produce there. This is the path that’s been followed in Germany, where wages remain high. That country runs a manufacturing trade surplus, in part because while it shed jobs in lower-value-added manufacturing sectors, it compensated with gains in higher-value-added, high-productivity sectors.

Some will argue that a national manufacturing technology strategy is not needed because “the market” will take care of things. But market forces have translated into lost jobs and lost competitiveness. Moreover, a national strategy is justified for two reasons. First, other nations have well-crafted and well-funded manufacturing technology strategies, and if we don’t respond in kind, we will lose even more manufacturing. Second, a national strategy can help overcome the market failures and externalities that inhibit innovation in manufacturing. When companies invest in product and process innovations, spillover effects can benefit other firms and the entire economy. But firms can’t capture all the benefits of their own investments in R&D and new capital equipment, which means that left on their own, they will produce much less innovation and productivity than is optimal for society. This is the key rationale for government support of manufacturing-technology research and for policies such as the R&D tax credit and accelerated depreciation of investments in new equipment. Moreover, small and medium-sized manufacturers often lack the resources to stay abreast of the innovative technologies and processes constantly emerging around the globe.

A national manufacturing strategy would increase public investment in industrially relevant R&D, supporting technology transfer from universities to industry as well as other programs designed to enhance the innovativeness and competitiveness of small and large U.S. manufacturers alike. As the Obama administration’s recent Advanced Manufacturing Partnership articulated, a number of key technologies, including robotics and nanomaterials, will be critical for the future of U.S. manufacturing. But simply funding university research in these areas won’t be enough. We need to support the creation of industry-led technology consortia. A good, but underfunded, model is the new NIST Advanced Manufacturing Technology Consortia program, which seeks to fund industry-led manufacturing research collaborations. We also need to expand support for NIST’s Manufacturing Extension Partnership program which helps small manufacturers adopt new technology.

The focus in Washington is on reducing budget deficits. While that is important, it is not the most urgent action policy makers should be taking at this moment to return the United States to economic health. Rather, they should be focusing on restoring manufacturing competitiveness. For only by restoring a competitive manufacturing sector can we shrink the historic trade imbalances, reduce unemployment, and stimulate enough economic growth to generate the tax revenues that will ultimately help reverse the budget deficit.

Robert D. Atkinson is the founder and president of the Information Technology and Innovation Foundation, a Washington-based technology policy think tank.