Our So-Called Foreign Policy: A China Fork-in-the-Road Coming for America First-ers?

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allies, America First, Barack Obama, China, deterrence, East Asia, globalism, industrial policy, Marco Rubio, national security, North Korea, nuclear deterrence, Our So-Called Foreign Policy, South Korea, Trade, tripwire, Trump

Something’s been bothering me for some time about the way that the national debate over dealing with China has been evolving.

Don’t get me wrong – it’s been great to see the major shift in the conventional wisdom since President Trump took office toward genuine recognition that the People’s Republic poses major economic and national security threats to the United States, that many of these threats are closely related, and that they have to be dealt with both on the economic and national security policy fronts.

That’s tremendous progress from the pre-Trump – and globalist – consensus that greater U.S. economic engagement with China was promoting more economic and political freedom in China, and more peaceful international behavior (or definitely would in some indefinite future), and that any dangers emanating from Beijing in the national security sphere are best coped with by increasing America’s military presence in East Asia (e.g., former President Barack Obama’s “pivot to Asia,” largely rhetorical though it was), cooperating more closely with the country’s allies in the region, or some combination of the two.

You don’t have to be an avid follower of world affairs to realize that the sharp distinction drawn by this globalist consensus between China economic and China national security policy was already producing a mind blowingly idiotic result: Washington was still resolving to resist any expansionist ambitions of Beijing’s in East Asia while continuing to help send China’s way floods of money and defense-relevant technology bound to turn into formidable military equipment that U.S. and other allied forces would face if conflict broke out.

Further, as I began pointing out years ago, because of the impressive progress made by both China and North Korea in developing intercontinental-range nuclear weapons, the globalist approach was exposing the American homeland to an ever increasing threat of nuclear attack – and mainly because even the U.S.’s wealthiest regional allies refused to field the (admittedly) expensive conventional military forces that could repel aggression from Beijing or Pyongyang without American help.

So everyone should be encouraged by the growing, bipartisan support for limiting the flow of U.S. resources and technology to China – even though many allegedly converted globalists continue hoping in vain that this goal can be achieved without setting limits (like tariffs) on trade and investment between the two economies.

My problem? Many of the new China hawks (and the leading example here is Florida Republican Senator Marco Rubio, who deserves considerable credit for his out-front role waking up other conservatives to the need for changing course on China) apparently believe that new U.S. trade, investment, and technology transfer curbs are mainly needed to shore up America’s decades-long position as the national security kingpin of East Asia. In other words, they’re hoping that America First-type China economic and technology policies can buttress globalist East Asia policies.

Maybe they’re right.  And if they succeed, it will at least become less likely that American troops will be killed in battle by Chinese weapons developed with dollars and knowhow from the United States.

Unfortunately, too much of the nuclear danger to the United States will remain in place – because the free-riding instincts of America’s East Asian allies inevitably will be reinforced. That is, the more confident they stay in America’s determination to protect them, the less military effort they’ll feel the need to make, and the longer U.S. military forces in places like South Korea will be needed to play tripwire roles – deterring aggression due to their vulnerability to attack and the chances that their imminent destruction will pressure a U.S. President to save them with nuclear weapons use that could trigger a similar retaliatory strike on the United States.

As I’ve written repeatedly, because taking every step possible to prevent a nuclear weapon from landing on American soil should be a much higher priority for Washington than protecting free-riding allies, it’s best for the United States to pull its troops back from the front-lines in East Asia and force its allies to defend themselves. And if this means okaying their own decisions to build nuclear forces, fine with me. I’d also sell them any conventional weapons they’re seeking – which would achieve the added benefit of improving American economic growth and employment.

Does this mean that an America First China policy would or should lack any national security dimension? Not at all. For as I first explained in this recent interview, staying ahead of China technologically will stay imperative for the United States to protect itself from the kinds of cyber-attacks Beijing is already capable of waging and has probably been sponsoring. And the threat is hardly limited to the hacking of U.S. government agencies or private businesses that originates from China. The more Americans (including individual Americans possessing valuable knowledge) use Chinese technology products because these goods have become the world’s best or cheapest, the more their privacy will be vulnerable to Chinese surveillance and ultimately blackmail. The advanced telecommunications equipment produced by Huawei is of course the most important example so far.

There’s another technology-based national security issue that purist America First-ers of my ilk need to deal with as well, and one that I haven’t sufficiently thought through. Nothing’s changed my mind about the United States being a big net loser from trade with East Asia, or about how it can retain the clout if needs in the solely from its role as a final consumption market these export-dependent economies will desperately need.

But thanks largely to failed globalist trade policies, most of the world’s semiconductor manufacturing capacity and capability is now located in East Asia – particularly in Japan, Taiwan, and South Korea. It may be tempting to believe that these countries will become more resistant to China’s power if the United States withdraws militarily from the region. But prudence counsels against simply assuming the best.

So as America First leaders start and keep offering these countries all the military hardware they need to rebuff Chinese advances, they will also need greatly to step up efforts to restore U.S. self-sufficiency in these key building blocks not only of high tech industry, but increasingly of all high value manufacturing and services. (To their credit, Rubio and some other new China realists also understand the need for redoubled American industrial policy efforts to achieve these goals.)

Attempts to reorient U.S. foreign and trade policies in America First directions are still at such an early stage that concern about these differing emphases might look premature. But events have a way of forcing major decisions much earlier than expected – either because crises erupt sooner, or because lead-times to implement new strategies can be longer, than is convenient. So all America First-ers should agree at least agree that the earlier this potential division in America First ranks is addressed, the better.

(What’s Left of) Our Economy: A Vital Globalization Lesson from South Korea

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China, Financial Times, industrial policy, Japan, self-sufficiency, South Korea, technology, Trade, {What's Left of) Our Economy

As Americans continue debating the merits of remaining dependent on supplies of key products from China (including state-of-the-art 5G telecommunications technology), a great example of why self-sufficiency can be crucial – along with laying adequate groundwork – has just come from an economy much smaller than the United States’ and capable of standing on its own in many fewer areas: South Korea.

In fairness, never during its remarkable rise from deep impoverishment and war-time devastation has South Korea bought the basic principle underlying the generally open trade (and investment) policies that have shaped the global economy throughout the post-World War II era. That is, its leaders have never been willing to prioritize worldwide efficiency by permitting market forces to determine which of their industries would excel.

Indeed, South Korea has been one of the world’s most hermetically sealed economies and hasn’t even been able to cite legitimate national security concerns for its approach. After all, it’s been staunchly defended by the United States for decades – even enjoying the presence of American military tripwire units aimed at forcing, to the greatest extent possible, Washington to risk nuclear attack on the American homeland in Seoul’s defense.

Recently, however, South Korea encountered an economic threat that it – understandably – concluded posed unacceptable risks to the high tech industries that have created so much of its prosperity. Because of a dispute centering on from compensation for atrocities committed by Japan during its long-time colonial rule over South Korea, Japan in July cut South Korean tech companies off from supplies of three chemicals needed to make numerous key products, including semiconductors and advanced displays (computer and TV screens). Japan also removed South Korea from its list of countries enjoying preferential trade status.

And as the Financial Times reported last week, in response, Seoul has decided not simply to accept that Japan’s curbs would surely reduce the competitiveness of its tech sector, and to leave to the subsequent workings of market forces to determine what types of activity would dominate its economy – and determine its fate. Instead, it’s decided to build up its own capabilities in electronic inputs in order to reduce its vulnerabilities to even broader restrictions that Japan might impose as long as this bilateral trade war lasts – and surely in order to cut its exposure to similar potential threats from elsewhere.

According to the Financial Times, “Seoul plans to invest more than Won 5tn between 2020 and 2022 in research and development, in an attempt to localise about 100 different components and materials in the next five years. South Korea has also said it will provide tax breaks, cut red tape and encourage co-operation between big companies and their small suppliers to accelerate the localisation process.”

Nor is South Korea’s government is unlikely to pay much heed to any whining about short-term cost pain from consumers or companies elsewhere in these high tech supply chains. Its officials “stress the importance of diversification. ‘Cost savings is no longer the best thing for our companies. Risk hedging has become much more important.’”

And Seoul seems completely unimpressed with the warnings from conventional economists, like the one who stated “No country can be fully self-sufficient. Focusing on local substitutes only can bring more negative side effects. They may end up having to buy expensive local parts and materials although they can be easily sourced abroad at cheaper prices.”

For the South Korean government understands that Japan’s cutoffs mean that vital parts and materials may not always, or often enough “be easily sourced abroad at cheaper prices” – or at any prices.

Moreover, although it’s no doubt true, as the article contends, that South Korea is behind Japan technologically, Seoul’s drive for greater self-sufficiency is no pipe dream. For the country has built impressive enough technological wherewithal to endow these policies with a solid foundation. Indeed, there’s considerable evidence that decades of “Korea First” industrialization policies have been keys to the South’s long record of rapid gains in global technological competitiveness.

Not that South Korea has an easy row to hoe, as this piece indicates. But here’s where we come to the lessons for the United States: Despite longstanding and offshoring-friendly trade and globalization policies, it remains the global technology leader and therefore boasts advantages that dwarf South Korea’s – or any other country’s. Even better, it’s developed a tried and true formula for fostering world-class innovation, in high tech industries ranging from pharmaceuticals (think “National Institutes of Health”) to aerospace and software and information technology (think “Pentagon”).

In other words, the United States has more than enough “wallet” to overcome the technology threat posed by China, or any other possible rivals – though the Trump administration’s industrial policy initiatives could stand considerable improvement. But the President’s China trade policies show that, for the first time in decades, the United States has a leader with the will.

Im-Politic: Want to Really Fuel Big Government? Ditch Trump’s Trade Policies

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Affordable Care Act, big government, budget cuts, Congress, conservatives, discretionary spending, entitlement spending, healthcare, Im-Politic, industrial policy, Mick Mulvaney, Obamacare, Republicans, Trade, Trump, USAToday

USA Today‘s editorial yesterday on U.S. trade policy did an excellent job of stating a major objection to tariffs and other measures that interfere with international commerce – and one that understandably resonates strongly in a nation that prizes free market values, and especially among its conservatives: These trade curbs fuel Big Government, thereby preventing the economy from achieving its full potential, and harming the nation’s society and culture as well as the economy by sapping the attractiveness of individual initiative.

The essay also understandably focused on a development that looks like a poster child for trade-fostered Big Government – the process set up by the Trump administration to decide which companies will receive exemptions from recent metals tariffs, based on claims that adequate domestic substitute steel and aluminum products aren’t available.

In the words of the editorial writers:

“[T]he administration has imposed a new tax on imported metals and then put itself in a position to decide who has to pay it and who does not.

“This is Big Government at its worst — arbitrary and capricious, if not outright political, as it picks winners and losers in business. And all this is being done without any new law being passed and while a Republican Congress, which used to stand for free enterprise and limited government, remains supine.”

One obvious rejoinder is the observation that, however cumbersome the exemptions process may or may not be, Washington actually has an impressive historical record of “picking winners and losers in business.” Examples include the information technology hardware and software industries, which were practically launched with public (largely Pentagon sponsored) research and development funds, and critically nurtured by government (again, largely defense-supplied) markets; the world-class farming sector fostered by U.S. Department of Agriculture research findings; the equally world-class pharmaceutical industry aided by the National Institutes of Health; and an aviation and aerospace industry supported by the Defense Department, by the National Aeronautics and Space Administration, and by a NASA predecessor aeronautic agency. (For an excellent summary of this historical record, see this study from the National Academies of Science.) 

But there’s another vital point missed by USAToday and by conservatives who remain devoted to preserving or renewing the expansion of the existing free trade realm: If they succeed, they’re likely to see the kind of Big Government metastasis America has never experienced before. The reason? So many renumerative Americans jobs will be lost, and so much income destroyed, that political pressures for a much more generous welfare state will positively skyrocket.

Another favorite cause of newspaper editorialists like the USAToday writers and many Big Government-phobic conservatives – the return of mass immigration – will bring the same type of outcome, for many of the same reasons.

And if you think that the nation’s leaders will unite to uphold the causes of self-reliance and much smaller government, you weren’t paying attention to the recent fight over abolishing “Obamacare.” For better or worse, the national healthcare system created at the initiative of the former President remains largely in place even though its Republican opponents control the entire federal government and a huge majority of state governments because lots of these Republican politicians recognized that eliminating this latest entitlement would be political suicide.

At the same time, standard-issue conservatives aren’t the only Americans who may need to learn these lessons. Donald Trump belongs on this list, too. Interestingly, he won the presidency after running a campaign that both promised an Americans-First overhaul of trade policy and to protect the nation’s immense middle class entitlement programs – both of which clashed strongly with conservative dogma.

But his biggest first-year push as President involved going after Obamacare – well before he had achieved any of his trade policy goals, and before he even began pursuing them energetically. And he’s so far permitted his budget director, former Tea Party stalwart Mick Mulvaney, to propose numerous deep cuts in discretionary spending and even some entitlement spending that aren’t exactly middle class-friendly, either.

This set of priorities may have been unavoidable politically, reflecting Mr. Trump’s perceived need to establish some conservative bona fides with Congressional Republicans – who mainly still strongly support the party’s old orthodoxy, but whose staunch backing he would need in any impeachment proceedings.

At the same time, a fair number of those donors-friendly, offshoring-happy Congressional Republicans are retiring – largely because they recognize that Trump-ian trade and other unorthodox policies have won over the base. And although Democratic hardliners may indeed push successfully for impeachment proceedings if the party wins the House, it’s likely that, in the absence of a major smoking gun, this campaign could alienate independent voters – who are hardly gung ho to give Mr. Trump the heave-ho. Chances are they’d be even less receptive to an impeachment spectacle dominating Washington if the President distanced himself from meat-axe public spending cuts.

If this scenario unfolds, the loudest voices complaining that Trump-ian trade policies lead to Big Government could be mainstream media editorialists and pundits. But these voices would be less important than ever.

Our So-Called Foreign Policy: Trump’s China Strategy Seems Troublingly Silo-ed

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CFIUS, China, Committee on Foreign Investment in the United States, Diplomatic and Security Dialogue, foreign direct investment, industrial policy, James Mathis, mercantilism, national security, Our So-Called Foreign Policy, Rex Tillerson, semiconductors, Steven Mnuchin, super-computing, technology transfer, Trump, Wilbur Ross

Secretary of State Rex Tillerson and Secretary of Defense James Mathis are meeting with Chinese counterparts today in Washington, D.C. to conduct a “Diplomatic and Security Dialogue” – a stripped down Trump administration version of some of the ginormous official bilateral sessions the two countries have held periodically in recent years.

It’s unclear whether these talks will turn out to be more than the elaborate gabfests their predecessors quickly became. But it’s much clearer that their potential to contribute significantly to America’s security will be limited unless the administration starts taking many more urgently needed steps to move the nation’s Asia grand strategy into the twenty first century. And the major missing piece of this effort continues to be a serious effort to deny China the advanced technologies it will need to continue becoming a more formidable military competitor.

Some promising decisions have been taken, or are being considered. For example, Commerce Secretary Wilbur Ross is thinking of launching a national security review of U.S. trade in semiconductors with an eye toward fending off what he describes as an increasingly dangerous Chinese challenge in this defense-critical sector. Mathis and Treasury Secretary Steven Mnuchin have both publicly called for updating the interagency U.S. government process for screening prospective Chinese and other foreign investments in all defense-related companies (the Committee on Foreign Investment in the United States, or CFIUS). And they along with Ross have strongly suggested that they’re thinking of redefining the relevant statute’s mandate to include economic dimensions of national security. Just as encouraging, prominent members of Congress are drafting legislation along these lines.

And most recently, the administration has announced a big new effort to ensure continued American leadership over China in super-computing (although the semiconductor industry isn’t happy with some other features of Mr. Trump’s stance on federally sponsored research and development).

Moreover, the Trump administration is responding to the Chinese challenge much more promptly than its predecessor, which prioritized this cluster of problems very late in its tenure. Its proposed responses to mercantile Chinese industrial policies in technology industries were especially weak beer.

But as with the Obama administration, Team Trump seems to be paying little attention to the continued outflow of cutting-edge defense-related American knowhow to China – including to entities that are unquestionably controlled by the Chinese government. It’s unmistakably paying much less attention to these investments than to spending billions more to upgrade American military forces in East Asia – which of course could wind up facing Chinese weapons based on U.S. tech advances.

Today’s U.S.-China talks in Washington are due to be followed up later this summer by a session devoted to economics. Maybe by then, President Trump and his advisers will be pursuing the comprehensive, integrated approach that meeting the China challenge adequately requires?

(What’s Left of) Our Economy: So You Think Apple’s Great for America?

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Apple Computer, industrial policy, manufacturing, national security, offshoring, semiconductors, technology, Trade, trade policy, {What's Left of) Our Economy

One of the great joys of my professional life is finding material that makes me exclaim, “I wish I’d written that!” So reading Andrew Zatlin’s new post on Apple Computer’s exploitation of offshoring-friendly U.S. trade policies has gotten my weekend off to a great start. The entire piece is well worth the time of anyone interested in these subjects, so I won’t summarize it. What does deserve more attention is specifying how the Zatlin’s analysis trashes the claims that even though most of Apple’s products are manufactured abroad, the company still generates huge gains for the U.S. economy.

According to the Apple supporters, manufacturing is completely incidental to the company’s fantastic success, and to understanding its role in enriching America. That’s because the real money makers for Apple, and they insist, the nation as a whole, are its professional service operations – research, development, engineering, product design, and marketing. As evidence, Apple’s fans point to numerous studies showing that this professional work, overwhelmingly performed state-side, makes up the bulk of the value of the firm’s products – and that therefore, most of the wealth Apple creates accrues to Americans. And let’s not forget all the company’s immense profits.

One of Zatlin’s key contributions to this debate, however, is making clear that almost none of the domestic wealth Apple has created has trickled down into the rest of the domestic economy – mainly because the company is such an expert tax dodger. I’d add three more points. First, because nearly all of them are very well paid (except of course for the retail workers), Apple’s smallish U.S. employment footprint probably has the same kind of low propensity to spend as other affluent Americans. Therefore, relatively little of these employees’ earnings is circulating throughout the economy. Second, whatever Apple employees spend on imports creates no meaningful benefits or opportunities for their fellow Americans, either. Third, Apple is also keeping more than $150 billion in profits offshore, so they’re not being spent productively in America, either.

The second big contribution made by Zatlin is showing just how much wealth for foreign economies – at America’s expense – has been created by Apple’s reliance on overseas manufacturing foreign-made semiconductors and other high tech components creates. Indeed, the author makes a great case that Apple’s procurement is keeping economies like Korea’s largely afloat, and is significantly buoying China’s remaining growth – which of course in general ain’t what it used to be.

My only quarrel with Zatlin’s post is with its timid policy recommendations. He does recommend adopting industrial policies to create real incentives for domestic high tech manufacturing – largely because, as he correctly notes, the losses in semiconductors and related products fostered by Apple’s practices (and those of so many other companies) undermine U.S. national security. But as long as American trade policies practically invite companies like Apple to supply the high price U.S. market from low-cost and largely unregulated foreign production sites, this corporate “screwing” of America (as Zatlin puts it) is bound to continue.

(What’s Left of) Our Economy: In Case You’re Still Doubting that Manufacturing Matters

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economics, industrial policy, liberals, manufacturing, multiplier, productivity, {What's Left of) Our Economy

Although its proponents have been relatively quiet these last few years, the view among economists and pundits that there’s nothing intrinsically important about manufacturing, and that therefore policy makers shouldn’t especially care about its fortunes, is far from dead.

“Manufacturing doesn’t matter” thinkers can still even be found in the ranks of self-proclaimed liberals, who normally tend to favor government caring about lots of economic specifics, and who see themselves as champions of the working class whose prosperity owes so much to industry. Skeptical? Check out these recent pieces from liberal economists Christina Romer and Joseph Stiglitz, and from journalist Matthew Yglesias.

Fortunately, evidence to the contrary keeps pouring in, and some especially striking data has appeared in just the last week.

First, yesterday, the Labor Department released its revised numbers for labor productivity for the second quarter of this year. These figures are a narrower measure of economic efficiency than the total factor productivity data I posted on August 26, but they’re more up to date. More important, they send the same message – manufacturing is the economy’s productivity leader by a long shot.

The new figures show that between the first and second quarters of this year, manufacturing productivity grew by 3.3 percent, versus 2.3 percent for the entire business sector. And since manufacturing businesses are a subset of all businesses, this means that non-manufacturing business productivity growth was even lower.

Year on year, manufacturing productivity rose by 2.1 percent – more than twice as fast as the 0.9 percent rate for all business productivity, and the consequently even lower rate for businesses outside manufacturing.

So if you don’t care about productivity, by all means be indifferent to manufacturing. If you know something about economics and the ingredients for prosperity, however, you’ll understand why America needs much more of it.

The day after Labor Day, IndustryWeek magazine featured a post arguing that manufacturing leads the economy in the equally important category of growth creation by an even wider margin that official data show. According to Stephen Gold, President and CEO of the Manufacturers Alliance for Productivity and Innovation, the government’s estimate that each dollar’s worth of final demand for manufactures generates $1.48’s worth of output in other goods and services category is too low. Gold cites new academic research that allegedly takes into account a broader and more accurate assessment of the manufacturing supply chain than do government statisticians. The result is a manufacturing multiplier of $1.92. By contrast, the multipliers for the retail and wholesale trade sectors, respectively, are only 54 cents and 58 cents.

So if you don’t care about growth, you can afford to be indifferent to manufacturing, too.

Unlike most of his immediate predecessors, President Obama does care about manufacturing. Or at least that’s what he says. In fact, two years ago, his former senior economic advisor Gene Sperling gave a speech containing the most detailed explanation of manufacturing’s value heard from a federal official in decades. Maybe by the time Mr. Obama leaves office, we’ll actually see actions that match these encouraging words.