Our So-Called Foreign Policy: Why Scalpels Won’t Cut it Against China

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Biden, China, China Strategy Group, decoupling, Donald Trump, Eric Schmidt, EU, European Union, FDI, foreign direct investment, Germany, Google, health security, Made in America, manufacturing, multilateralism, national security, Our So-Called Foreign Policy, semiconductors, Silicon Valley, supply chain, Taiwan, technology

Yesterday’s RealityChek post argued made clear that one of the two recent blueprints for China policy offered to President Biden from the foreign policy and technology establishments suffered from crippling internal contradictions.

The second effort, from the Silicon Valley-dominated “China Strategy Group,” can be read more profitably by the President, because popping up here and there are some insights that are genuinely valuable especially since they come from analysts once strongly supportive of what they themselves call the pre-Trump strategy of “near-unbounded integration.”

Principally, the group, which notably is co-chaired by Google co-founder Eric Schmidt, calls for recognizing that “some degree of [U.S.-China] disentangling is both inevitable and preferable. In fact, trends in both countries—and many of the tools at our disposal—inherently and necessarily push toward some degree of bifurcation.” In other words, it’s endorsed a limited version of what’s now commonly called economic and technological decoupling.

In addition, it argues that both this decoupling, along with tariffs that it acknowledges may be needed to push back against certain Chinese offenses and provocations, should be pursued even though they will entail costs – a refreshing and crucially important departure from the long-time pre- and post-Trump consensus in the mainstream American political, business and policy communities that any increased consumer or producer price, or loss of even a smidgeon of market share in China resulting from retaliation from Beijing, proves conclusively the folly of placin any significant curbs on doing business with the People’s Republic.

Finally, the group points out that efforts to rebuild domestic supply chains to reduce reliance on China for critical goods must involve “more than a focus on the end products. Safeguarding key technologies requires the United States to define and secure the entire ecosystem of production, from fabrication to supply to talent to cutting-edge innovation.” In other words, Washington can’t simply seek to become self-sufficient, or largely so, in face masks or ventilators or semiconductors. It needs to become self-sufficient or largely so in all the materials, parts, and components required to make these products.

Yet many of these important insights (and useful recommendations for restructuring the U.S. government to foster the competition with China more effectively) are kneecapped by equivocation and a resulting failure to understand that sometimes policy scalpels cut too finely, and some policy needles are too small to be threaded – especially considering the “all of society” drive China’s totalitarian system is making to gain global technology leadership, and the dangers to America’s “security, prosperity, and way of life” Chinese success would create.

For example, the group emphasizes that decoupling policy mustn’t invite “escalatory cycles of confrontation, retaliation, or unintended conflict” or overlook those areas “where cooperation, collaboration, and exchange with China is in our interest, as severing ties and closing off the United States to the ideas, people, technologies, and supply chains necessary to compete effectively will undermine U.S. innovation.” At the same time, the authors acknowledge that China will respond to any further U.S. decoupling moves “more aggressively” precisely because “China’s leaders understand U.S. dependency as an important source of leverage.”

So although in principle, this omelet can be made without breaking many eggs, Beijing won’t be cooperating in fact. And the circle can’t be squared with clever phrase-making like “navigating the asymmetric competition” that look satisfactorily reassuring on paper and in speeches to conferences but that need to survive the body blows that will inevitably be delivered by reality.

The group’s approach to Chinese investment in the United States (whether in the form of creating new businesses or taking over or contributing capital to existing firms) illustrates the other big drawback of granular approaches when it comes to China: They ignore how any Chinese entity big enough to play in any foreign market, and especially America’s, is under Beijing’s thumb in every important respect.

As a result, there’s no point in taking the time and expending the resources to follow the group’s recommendations to figure out which Chinese tech platforms (whose importance it emphasizes) are and are not violating American privacy standards or conducting misinformation campaigns dangerous to democracy, or censoring content Chinese authorities don’t like, or helping suppress human rights in China or anywherer else, or stealing valuable data, or helping terrorists and criminals launder money; or whether these activities matter enough to merit official U.S. attention, or whether troublesome practices can be negotiated away through talks with Beijing on technical and other fixes.

In this instance, Washington should stay out of the black holes of setting priorities and especially monitoring and enforcing agreements, and assume that by simply banning these platforms from operating in the United States and in fact prohibiting all Chinese entities from owning U.S. hard assets. The latter step would add the benefit of shielding participants in America’s economy from competition with subsidized, market-distorting outfits from China. At the very least, Chinese entities should be required to prove that they’re not controlled or subsidized in any way by Beijing, or engaged in the above malign activities, before gaining entry.

In addition, despite the group’s understanding that entire manufacturing eco-systems, not just final products, need to be rebuilt and nurtured to ensure supply chain security, it appears to underestimate just how widely these relationships extend. After all, most of the numerous inputs to goods like mechanical ventilators (like its controls, power sources, monitors, and alarm systems) depend on big and complex supply chain and manufacturing eco-systems themselves.

Further, just as before the pandemic, few expected face masks and surgical gloves to become products vitally important to the nation’s well-being, the list of critical goods is likely to change and grow over time as new threats emerge. Therefore, the group is correct in warning that “any product or service could be termed essential to national security in an extreme hypothetical.” But what’s the basis for confidence that many products or services can safely be ruled out, and that such hypotheticals will always remain extreme?

At least as important, like the Biden administration, the group’s determination not to ruffle too many international feathers has also clearly led it to back the notion that the definition of “Made in America” for supply chain purposes should actually mean, “Also Made in Lots of Other Countries” that it considers trusted suppliers. Unfortunately, many of the countries so classified imposed export controls on critical medical goods during the pandemic’s first wave last spring. That is, when cooperation was most needed, they built walls – meaning that their trustworthiness isn’t exactly ironclad.

And as then President-elect Biden learned when the European Union rebuffed his entreaty to consult with Washington before signing an investment agreement with China, the allies remain determined to fence sit in the U.S.-China technology competition. The group acknowledges that the list of anti-China partners “may include all of the [European Union], though in some cases EU position/member states’ positions are too ambiguous today with respect to China for inclusion in all instances, and members may need to be considered on an individual basis.” But simply stating this position and its EU-splitting ambitions is enough to make clear its absurdity – especially since the EU country most reluctant to cooperate against China is economic kingpin Germany.

None of this is to say that all trade with (as opposed to investment in hard assets from) China should be cut off completely, or that international cooperation can be of no use to the United States in its struggle versus the People’s Republic. In particular, (and due largely to recklessly indiscriminate free trade policies), America urgently needs products and knowhow now dominated by foreign producers (notably Taiwan’s semiconductor manufacturing industry, and Japanese and Dutch suppliers of key microchip production equipment and materials). And if other countries are willing to cooperate with Washington on various China containing initiatives at acceptable prices, more help is indeed better than less. But the United States will never safeguard its interests adequately without realizing that multilateralism can’t be an end in and of itself, and that against monumental threats, axes are usually more effective than scalpels.

(What’s Left of) Our Economy: Auto Journalism from Fortune that’s a Lemon

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automotive, Cars.com, Department of Transportation, Detroit automakers, domestic content, Fortune, free trade, globallization, journalism, Made in America, manufacturing, NAFTA, North American Free Trade Agreement, Trade, {What's Left of) Our Economy

Memo to journalists at Fortune: If you want to run an “Aha!”-type item based on a new report or study, at least read the whole document – and report all its main findings. Because apparently no one involved in its coverage of the latest Cars.com index of American-made cars and light trucks followed this rule, its readers were denied crucial facts and context.

Here’s how Fortune led off the post in question: “The phrase ‘made in America’ has always pulled at the hearts and wallets of loyal, red-blooded consumers, and never more so than in the automotive space. But according to research released Monday, the car company that qualifies as most American is….the Toyota Camry.” 

And in case you have any doubts about the main point Fortune wanted to make, here’s what the magazine concluded after spotlighting two more “surprises” about declining domestic content in vehicles sold in the U.S. market: “Globalization is here.” If you think this it’s coincidental that this observation came on the heels of a knock-down drag-out fight in Congress on trade policy, I’ve got some turnip truck tickets to sell you.

More damning evidence that Fortune was looking for a chance to score some cheap rhetorical free trade points comes from what the magazine ignored in the Cars.com study: its observation – based on official U.S. Transportation Department data – that “Detroit has the bulk of cars with high domestic content. GM, Ford and Fiat Chrysler Automobiles build 37 of the 57 U.S.-assembled cars with 60 percent or higher domestic content. Foreign-based automakers are responsible for dozens of imported cars with zero percent domestic content, according to the National Highway Traffic Safety Administration [NHTSA]. Detroit automakers have just two cars below 5 percent….”

Moreover, had Fortune bothered to look at the latest set of government statistics and Cars.com’s observations, it would have spotted some important differences. For example, Cars.com found that “The Toyota Camry took the top spot this year, as 2014’s top vehicle,” with 75 percent of its content coming from either the United States or Canada. (NHTSA weirdly has never distinguished between the two.) But in April, Washington reported that nine models were at the 75 percent mark, and six came from the Detroit automakers.

And had Fortune gone to the source, it also might not have written that “A Chrysler hasn’t shown up [on the 75 percent list] since 2012.” The NHTSA data place the Dodge Grand Caravan in that select company.

Fortune is of course free to like free trade as much as it wishes – though an intellectually honest publication would at least mention that government decisions like the pursuit of the North American Free Trade Agreement have shaped automotive (and other manufacturing) production patterns at least as much as “globalization” – a term whose combination of sweep and vagueness inevitably implies… inevitability. But it shouldn’t be free to cherry pick findings it likes and present the slanted results as straight news.

(What’s Left of) Our Economy: Is Walmart Really Changing its Offshoring Spots?

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assembly, competitiveness, Made in America, manufacturing, manufacturing renaissance, offshoring, procurement, productivity, sourcing, trade policy, wages, Walmart, {What's Left of) Our Economy

Walmart is such a huge player in the U.S. economy that any evidence of the retail giant markedly shifting its sourcing strategy toward buying American-made goods could be significant positive for domestic manufacturing. And an article in the excellent publication Manufacturing & Technology News reports signs that such a shift is in the making.

At the same time, there’s a big cautionary note included in the piece indicating that whatever manufacturing gains result from more Walmart domestic sourcing would represent a decidedly pyrrhic victory.

Among the encouraging facts presented in the August 31 article: According to the company’s website, its Made in the USA manufactured offerings have increased from 500 to 15,000, and the number of domestic manufacturers selling it goods has quadrupled. Moreover, in the 18 months since Walmart announced its intention to purchase $250 billion in additional American-made goods by 2023, the company says that suppliers have begun moving production back state-side.

Some caveats must be kept in mind here. For example, by “goods,” Walmart could also mean not only manufactures, but farm products sold by its grocery operations. Also, Walmart’s claim that it’s now selling American-made television sets shows that its definition of Made in the USA also includes “assembled in the USA” – which adds much less value to the U.S. economy.

But there’s a much bigger problem. Walmart execs keep telegraphing to reporters that they now understand the importance of U.S. job creation – especially for working class Americans – because without adequate incomes, these folks increasingly can’t afford to shop robustly even at low-price stores like Walmart. That dawning realization is of course not only encouraging, but also hugely ironic, since Walmart’s massive overseas sourcing over the years has pushed so much manufacturing output and so many industrial jobs abroad to begin with.

At the same time, Walmart CEO insists that the company “will not change its strategy of generating low margins on high volume,” and the article made clear that “the China price” (and other third world prices) will remain the standard governing Walmart procurement policy.

That would be fine if U.S.-based manufacturers could meet this challenge overwhelmingly by improving their productivity. Trouble is, although manufacturing still leads the American economy in productivity by a wide margin, there’s no evidence showing any acceleration recently in the sector’s efficiency gains when measured by the broadest productivity indicator – multifactor productivity. In fact, according to the latest available Labor Department data, multifactor productivity in manufacturing has been improving at a slower rate since the Great Recession began (0.4 percent compounded annually through 2012) than before the downturn 1.9 percent from 2000 to 2007).

Moreover, other Labor Department figures make a strong case that, rather than taking that productivity-enhancing “high road” to maintaining and improving efficiency and therefore competitiveness, U.S.-based manufacturers are taking the “low road” of cutting wages. These data show that inflation-adjusted wages in American manufacturing have fallen nearly 13 times faster than wages for the entire American private sector during the dreary recovery that ostensibly began in mid-2009.

Worse, as long as Walmart and the rest of American business retain the option of overseas sourcing, they’ll have strong incentives to stay on the low road even if they use more domestic suppliers – by holding a totally credible offshoring threat over their heads. As a result, even if firms such as Walmart deserve considerable credit for good intentions, there’s still no reasonable denying that a genuine U.S. manufacturing renaissance will remain impossible until the offshoring option is eliminated – which will require a top-to-bottom transformation of U.S. trade policy.