(What’s Left of) Our Economy: Why Trump Should Have Hung Tough with China

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Applied Materials, ASM Lithography, Bloomberg, Bloomberg.com, China, electronics, forced technology transfer, Fujian Jinhua, G20 Summit, information technology hardware, intellectual property theft, KLA-Tencor, Lam Research, Made in China 2025, Micron Technology, Netherlands, semiconductors, Taiwan, technology, Trade, trade war, Trump, United Microelectronics Corporation, Xi JInPing, ZTE, {What's Left of) Our Economy

A U.S.-China summit on the sidelines of the global economic conference in Buenos Aires has produced what amounts to a three-month truce in the trade conflict the two countries have been waging since the early months of the Trump administration. I’ll have a detailed reaction coming out in a major newspaper op-ed piece tomorrow, so I don’t want to steal my own thunder here.

For now, it’s worth spotlighting a recent Bloomberg.com piece on America’s latest efforts to fight China’s intellectual property theft, and the dangerous progress and ambitions it’s been largely fueling. It’s so good, and so important, that it illustrates exactly why the President should have hung tough in his China trade diplomacy – and how much more thoroughly America’s China policies need overhauling before they can adequately serve U.S. national interests than even the Trump administration has been indicating.

Just to review, the Trump administration has imposed several rounds of tariffs on literally hundreds of billions of Chinese products typically headed for the American market, largely in response to China’s newly explicit ambition to achieve worldwide technological supremacy – and in the process become the world’s strongest economy and military power.

This Chinese goal – made clear in a program called Made in China 2025 – is anything but entirely new. Indeed, much of the blueprint has been in effect literally for many years, and certainly once Chinese leaders realized that the United States, Japan, South Korea, Taiwan, and Western Europe seemed happy enough to foster their country’s economic development by supplying in various ways the knowhow to make major tech catch-up a realistic goal. So China has long sought to secure such technology as fast as possible, by whatever means were needed – including those that violated various trade commitments it had made.

In the last few years, however, China’s often startling resulting advances, its reversion to a national economic strategy ever more reliant on government dictates and strong-arming and discriminating against foreign investors, and its mounting belligerence in world affairs, have woken up even many pillars of America’s free trade-happy establishment to the threat they’d been creating. And crucially, the crestfallen included many of the very companies that were handing over their crown jewels to China, along with the politicians and think tank shills they funded.

The Bloomberg article is so valuable because in one fell swoop, it illustrates how deeply involved American companies have been involved – and remain – in strengthening China’s tech capabilities, how consequently vulnerable China remains to American inputs of various kinds, and therefore why there is absolutely no reason for the Trump administration to relieve its tariffs’ pressures on China’s economy without major – and completely verifiable – concessions from Beijing.

In the piece, a team of Bloomberg reporters make all these points with a detailed account of a Chinese (government-supported, of course) entity that sought to produce advanced versions of critical pieces of the semiconductors used in smartphones. The explicit goal: Reduce the Chinese electronics’ industry’s dependence on foreign semiconductors.

That objective per se is highly objectionable – that is, for anyone who takes seriously the supposed main purpose of the global trade system, which is to foster the most efficient possible global division of labor by freeing up trade flows to ensure that the output and provision of various products and services is concentrated in those countries that do these jobs best. But defenders of the global trade status quo never seemed to notice that China demonstrated no interest in passively accepting the verdict of market forces.

In fact, as the Bloomberg team makes clear, American technology companies have been all too ready to aid this Chinese ambition, even with Beijing’s ambitions ringing more and more alarm bells. Specifically, this Chinese entity (as usual, I refuse to call these outfits “companies” or “businesses” because Beijing’s effective control over them sharply distinguishes them from groupings in largely free market economy that actually deserve those labels), was being supplied by U.S. semiconductor manufacturing equipment firms KLA-Tencor, Applied Materials, and Lam Research – along with foreign counterparts like the Netherlands’ ASM Lithography and Taiwan’s United Microelectronics Corp.

But at the end of October, the U.S. government placed the Chinese entity – called Fujian Jinhua Integrated Circuits – on a list of economic actors whose operations are just to pose “significant risk of becoming involved in activities that are contrary to the national interest of the United States.” Several days later, Washington also indicted the entity for stealing the intellectual property of American semiconductor firm Micron Technology of stealing its intellectual property. As a result of the national security finding, American companies are in effect prohibited from supplying Fujian Jinhua. And since Fujian’s non-U.S. suppliers sell it goods that contain American-made parts, the restrictions cover them, too.

The result of the ban announcement? According to the Bloomberg article, Fujian Jinhua’s “dream is now in tatters with consultants from American suppliers gone, the factories silent and workers rattled.” And lest you think this is just one anecdote, recall that a similar American export ban on selling to Chinese telecommunications manufacturer ZTE would have doomed that entity had President Trump not let it off the hook in hopes of currying some valuable favor and negotiating leverage (so far, in vain) with Chinese leader Xi Jinping.

In other words, the United States enjoys decisive leverage over China in the struggle for technological, economic, and military power, and should continue ramping it up to extract whatever concessions it can get from Beijing. In this vein, it’s as shocking as it is disturbing that U.S. tech firms like those mentioned above are still allowed to contribute to China’s technological development months after the Trump administration has literally designated China as a power (along with Russia) that is challenging “American power, influence, and interests, [and] attempting to erode American security and prosperity.” Further, the same national security strategy document declared, more specifically, that “Part of China’s military modernization and economic expansion is due to its access to the U.S. innovation economy, including America’s world-class universities.”

But more important, as I’ve written, since verifiable concessions are so unlikely, this pressure should form one major element of a larger strategy that to disengage America from China economically, and this goal, and the stakes that justify it, should be declared by President Trump soon after his return from Buenos Aires.

(What’s Left of) Our Economy: A Productivity Collapse in America’s “Industries of the Future”?

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advanced manufacturing, information technology hardware, Labor Department, manufacturing, multifactor productivity, productivity, {What's Left of) Our Economy

To the surprise of exactly no one who’s been following the issue lately, last week’s newest data from the federal government on productivity was literally brimming with bad news.

True, the figures only go up to 2016 – because the report covered multifactor productivity, the broader of the two measures tracked by the Labor Department. These figures take longer to calculate than the narrower productivity measure (labor productivity) because they examine many inputs other than simply hours worked. But the results were entirely consistent with the longstanding story that the U.S. economy’s efficiency keeps growing more and more slowly – that is, where it continues to grow at all.

In fact, America’s recent productivity performance has been so bad that observers could actually take some comfort in the headline finding that multifactor productivity improved between 2015 and 2016 in only 37 of the 86 manufacturing industries looked at in detail by Labor. That’s because this total was significantly higher than in 2014-15 – when multifactor productivity rose in only 21 of those sectors.

I could repeat previous exercises and list the industries with the best and worst latest annual multifactor productivity performances – which as usual, will be full of surprises for those expecting that the stars would be the nation’s technology-intensive “industries of the future.” But for now, let’s focus on what looks like an especially alarming development: Over the last roughly three decades, these crucial chunks of the economy have turned from multifactor productivity growth champs to multifactor productivity disaster areas. Over the same period, several other touted advanced manufacturing industries have also tumbled into the dumps multifactor productivity-wise from much less lofty perches.

The worst examples of literal collapse in multifactor productivity growth are in information technology hardware, and the most dramatic plunge has taken place in computers and computer peripheral equipment. Between 1987 and 2016, these sectors collectively have run away with the American economy’s multifactor productivity growth honors, with their efficiency advancing by this measure by 12.1 percent annually.

Since 2007, however (the year the Great Recession began), their average annual multifactor productivity growth rate has slumped to 1.2 percent, and between 2015 and 2016, it actually fell – by 2.6 percent.

Semiconductors and electronic components fared little better. Their 1987-2016 average annual multifactor productivity growth was 9.1 percent. But it’s fallen throughout the 2007-2016 period, and between 2015 and 2016 – when the current economic recovery was in its seventh year – it also dropped by 2.6 percent.

The ups and downs of multifactor productivity growth in communications equipment (including the gear used by the internet) have been more modest, but undeniably depressing all the same. Average annual growth between 1987 and 2016 was only 2.6 percent, but during the 1990s, it surged to nearly 5.5 percent. But since recession onset year 2007, multifactor productivity has decreased here as well, and declined by 1.6 percent between 2015 and 2016.

The aerospace industry, long America’s biggest net export winner, oddly has never registered robust multifactor productivity growth – at least not since 1987, when the data began to be collected. The average annual multifactor productivity growth rate for finished aircraft, missiles, and their parts? It’s actually -0.1 percent. The golden age (relatively speaking) of multifactor productivity growth for these companies came in between 2000 and 2007, when the average annual advance was 2.7 percent. But since 2007 it’s off slightly (dipping by an average 0.6 percent per year) and between 2015 and 2016 alone, plummeted by 6.7 percent.

Yet even these dismal figures look positively glowing when compared with those of the American pharmaceutical industry – widely viewed (like aerospace) as the global state of the art. From 1987 to 2016, multifactor productivity in this sector has decreased by an average of 2.3 percent every year. That’s by far the worst performance among the 86 industries tracked by the Labor Department. And since 2007, the rate of decline sped up to an annual average of 3.8 percent. Between 2015 and 2016, moreover, the drop-off gained even more momentum, reaching 4.8 percent.

Nor have other manufacturing sectors not typically classified as “technology intensive,” but nonetheless falling into the high value category, been immune from these woes. Here are the average annual multifactor productivity growth (and shrinkage) figures for key time periods for sectors both qualifying for this description, and known for strong exports:

 

agriculture, construction, and mining machinery

1987-2016: -0.2 percent

2007-2016: -2.5 percent

2015-2016: -8.6 percent (the year’s worst nosedive)

 

industrial machinery

1987-2016: 0.3 percent

2007-2016: -1.1 percent

2015-2016: -4.1 percent

 

turbines and power transmission equipment

1987-2016: 0 percent

2007-2016: 0.1 percent

2015-2016: -4.4 percent

It’s always possible that these multifactor productivity numbers have improved substantially over the last two years. But 30-year old trends rarely turn around completely, or even close, in such short time-spans. And multifactor productivity growth trends don’t turn around without the type of capital spending surge – among other developments – that the economy simply hasn’t seen yet. Until business begins spending considerably more, expect multifactor productivity in America to remain depressed – along with the nation’s odds of recreating sustainable prosperity.

(What’s Left of) Our Economy: Are the (Computer) Chips Really Down in Japan?

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DRAMs, EETimes Junko Yoshida, foreign policy, information technology hardware, Japan, SEMI, semiconductor manufacturing equipment, semiconductors, technology, Victor Basiuk, {What's Left of) Our Economy

What a difference a few decades make! Back in early 1983, during my first few months as Associate Editor of FOREIGN POLICY magazine, a technology consultant named Victor Basiuk approached us with a draft article containing terms we’d never heard of – like semiconductors and DRAMs and industrial policy. It warned of a dramatically shrinking U.S. lead in key industrial and high tech sectors crucial to maintaining military strength and superiority, and the main threat to American predominance was Japan – especially in that semiconductor sector.

Although our staff only dimly understood what Victor was writing about, his findings – e.g., that Japan had overtaken America as a producer of what were then the world’s most advanced computer chips (64K RAM memory chips), and was determined to extend their leadership into next generation devices (256K RAM chips) – looked scary enough to justify publishing, and I’m glad we featured it in our Winter 1983-84 issue. (Unfortunately, the piece doesn’t seem to be available for free on-line.)

So a new EETimes article on the demise of the Japanese semiconductor industry couldn’t help but remind me of the trends Victor spotlighted so long ago, and how dramatically differently the world has turned out. Or has it?

To the experts, the woes of Japanese semiconductor makers are nothing new. Even I’ve recognized how, after years of pace-setting performance, they’ve fallen behind many competitors not only in the United States, but in Taiwan and South Korea as well. But the sectoral portrait painted by EETimes chief international correspondent Junko Yoshida, one of the best tech reporters around, is still jaw-dropping.

According to the author, “the single reality facing Japanese semiconductor firms is this: They no longer matter in the global market.” She supports the claim by noting that nowadays, only one of the world’s corporate semiconductor sales leaders is Japanese – Toshiba. And that one-time titan is so strapped with debt that some of its bonds have earned a junk rating. In 1990, by contrast, six of the world’s top ten semiconductor suppliers was Japanese.

Moreover, Yoshida demonstrates that all the steps taken by the Japanese government to reverse the decline have failed – because they were unable to offset the destructive impact of rigid and increasingly outdated Japanese management practices. Indeed, from 2010 to 2015 alone, these firms’ share of the global semiconductor market had been cut in half, from 14 percent to seven percent. As a result, “Japan as a whole has become a niche player” in the sector.

Yet there’s a crucial part of the story that Yoshida neglects: Japan’s continuing prominence in the advanced materials, equipment – and technologies – needed to manufacture semiconductors.

According to figures from the leading (international) association of the semiconductor sector summarized last year in a U.S. Commerce Department report, although the United States controlled the greatest share of the worldwide chip equipment and materials market (44 percent), Japan wasn’t all that far behind, at 32 percent.

Moreover, the Japanese hold a significant lead in many individual products. For example, the world’s only suppliers of large-scale lithography machines – the devices that use incredibly concentrated light beams to etch circuit patterns on semiconductor wafers – Japanese firms and a Dutch company (ASML) are literally the only games in town. In addition, that semiconductor manufacturers’ group (SEMI) ranks Japan as the world’s top supplier of semiconductor manufacturing materials – like silicon wafers themselves and photomasks – with more than half the global market. Indeed, half of the world’s top ten semiconductor manufacturing equipment companies ranked by revenue are still Japanese.

Semiconductors are commonly – and correctly – described as the building blocks of a modern, high tech economy, so Japan’s quarter century’s worth of struggles to remain a force, after years of worries that it might establish lasting supremacy, are certainly noteworthy. Nonetheless, because semiconductor manufacturing equipment and materials represent the building blocks of these building blocks, Japan still seems to have plenty of tech prowess left.

(What’s Left of) Our Economy: The Closer You Get, the Weaker US Manufacturing Looks

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Atlanta Federal Reserve Bank, automotive, Federal Reserve, Financial Crisis, Great Recession, industrial production, inflation-adjusted growth, information technology hardware, manufacturing, Obama, production, technology, {What's Left of) Our Economy

Although they’ll be revised twice more in the next two months alone, the December manufacturing output figures released Friday by the Fed just gave us more of the kinds of new full-year numbers that make data geeks (figuratively) salivate – and that everyone else needs to know about.

They mean that we can speak with added confidence about where domestic industry does and doesn’t stand since the financial crisis triggered the Great Recession eight years ago – and some of the crucial details show that American manufacturing could be in even more serious trouble than is already recognized.

First, these first full-year 2015 industrial production data indicate that domestic manufacturing keeps growing more slowly even than the rest of the sluggish U.S. economy. That matters because one of the biggest lessons taken from the financial crisis by a wide range of leading American public figures was that the nation needed to rely for its growth more on sectors that create real wealth (like manufacturing) and less on sectors that largely rearrange wealth (like finance). President Obama was only the best known. 

We won’t get the first full-year numbers on the economy’s overall 2015 growth until the end of this month, but through the first three quarters of the year, it expanded by 2.15 percent after adjusting for inflation. The manufacturing figures during the same period? 1.79 percent.

Moreover, the gap is unlikely to have narrowed much in the final three months of 2015. The Federal Reserve reports that real manufacturing output expanded by a mere 0.16 percent from the end of the third quarter through the end of the fourth quarter. That’s about the same rate as the total gross domestic product projection put out by the Atlanta Federal Reserve’s impressively reliable growth tracker.

Second, real production growth in the automotive sector slowed tremendously in 2015, and automotive has until now been manufacturing’s biggest growth leader by far. Inflation-adjusted output of vehicles and parts did improve more (3.70 percent) last year than overall manufacturing output (0.74 percent). But that automotive growth rate is down from 9.78 percent the year before, and is automotive’s worst growth performance since its 32.81 percent near freefall in 2008. In fact, as noted in Friday’s post on the industrial production figures, the automotive sector entered technical recession in December, with its after-inflation production down on net over a seven-month stretch.

Automotive’s boost to manufacturing is also clear from examining statistics going back to start of the last recession. Real output for American industry is now down 1.51 percent since the downturn’s December, 2007 onset – eight years ago. Without automotive, that production slump is 4.81 percent. Moreover, no other major sectors of manufacturing show any signs of picking up the slack.

Finally, these new 2015 manufacturing output numbers should remind us that the sector has also been powered by growth engine where the numbers are downright dubious – information technology hardware. Last year, the Federal Reserve tells us, inflation-adjusted output in computers and parts, semiconductors, telecommunications gear, and similar sub-sectors rose by 1.61 percent – more than twice as fast as overall manufacturing. And since the last recession began, its growth has been a stellar 45.83 percent. In fact, without these high tech industries, American manufacturing output would be down by 5.29 percent.

But as I’ve written before, here’s the problem: The inflation-adjusted data for information technology hardware likely overstate output by a considerable amount. The reason: These products tend to have a high import content, and this import content has probably been under-counted because the prices of these info-tech goods are falling faster than government economists can track. As a result, when this import content is adjusted for inflation, the numbers come out too low – and the domestic content figures that make up the rest of these products come out too high.

In his State of the Union address four years ago, President Obama rightly emphasized the need to create “an economy that’s built to last -– an economy built on American manufacturing, American energy, skills for American workers, and a renewal of American values.” And he pointedly noted that “this blueprint begins with American manufacturing.” As he enters his last year in the White House, this goal with respect to manufacturing sadly remains un-achieved.