Our So-Called Foreign Policy: Evidence that the Multinationals Really Did Sell the U.S. Out to China

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capital spending, chemicals, China, computers, electronics, health security, healthcare goods, information technology, investment, Lenin, manufacturing, multinational companies, national security, offshoring, offshoring lobby, Our So-Called Foreign Policy, pharmaceuticals, research and development, supply chains, tech, tech transfer, U.S-China Economic and Security Review Commission, USCC, World Trade Organization, WTO

RealityChek readers and anyone who’s familiar with my work over many years know that I’ve often lambasted U.S. multinational companies for powerfully aiding and abetting China’s rise to the status of economic great power status – and of surging threat to U.S. national security and prosperity. In fact, the dangers posed by China’s activities and goals have become so obvious that even the American political and policy establishments that on the whole actively supported the policies – and that permitted money from this corporate Offshoring Lobby to drive their decisions – are paying attention.

If you still doubt how these big U.S. corporations have sold China much of the rope with which it’s determined to hang their own companies and all of America (paraphrasing Lenin’s vivid supposed description of and prediction about the perilously shortsighted greed of capitalists), you should check out the latest report of the U.S-China Economic and Security Review Commission (USCC). As made clear by this study from an organization set up by Congress to monitor the China threat, not only have the multinationals’ investments in China figured “prominently in China’s national development ambitions.” They also “may indirectly erode the United States’ domestic industrial competitiveness and technological leadership relative to China.”

Worst of all, “as U.S. MNE (“multinational enterprise) activity in China increasingly focuses on the production of high-end technologies, the risk that U.S. firms are unwittingly enabling China to achieve its industrial policy and military development objectives rises.”

And a special bonus – these companies’ offshoring has greatly increased America’s dependence on China for supplies of crucial healthcare goods.

Here’s just a sampling of the evidence presented (and taken directly by the Commission from U.S. government reports):

> U.S. multinationals “employ more people in China than in any other country outside of the United States, primarily in the assembly of computers and electronic products.” Moreover, this employment skyrocketed by 574.6 percent from 2000 to 2017.

> “China is the fourth-largest destination for U.S. MNE research and development (R&D) expenditure and increasingly competes with advanced economies in serving as a key research hub for U.S. MNEs. The growth of U.S. MNE R&D expenditure in China is also comparatively accelerated, averaging 13.6 percent yearon-year since 2003 compared with 7.1 percent for all U.S. MNE foreign affiliates in the same period. This expenditure is highest in manufacturing, particularly in the production of computers and electronic products.”

> “U.S. MNE capital expenditure in China has focused on the creation of production sites for technology products. This development is aided by the Chinese government’s extensive policy support to develop China.”

> The multinationals’ capital spending on semiconductor manufacturing assets “has jumped 166.7 percent from $1.2 billion in 2010 (the earliest year for which complete [U.S government] data is available) to $3.2 billion in 2017, accounting for 90 percent of all U.S. MNE expenditure on computers and electronic products manufacturing assets in China.”

> “China has grown from the 20th-highest source of U.S. MNE affiliate value added in 2000 ($5.5 billion) to the fifth highest in 2017 ($71.5 billion), driven primarily by the manufacture of computers and electronic products as well as chemicals. The surge is especially notable in semiconductors and other electronic components.”

> “[P]harmaceutical manufacturing serves as the largest chemical sector in terms of value-added [a measure of manufacturing output that seeks to eliminate double-counting of output by stripping out the contribution of intermediate goods used in final products]…” And chemicals – the manufacturing category that include pharmaceuticals – has become the second largest U.S-owned industry in China measured by the value of its assets (after computers and electronic products).

Incidentally, the report’s tendency to use 2000 as a baseline year for examining trends is no accident. That’s the year before China was admitted into the World Trade Organization (WTO) – and the numbers strongly reenforce the argument that the multinationals so avidly sought this objective in order to make sure that the value of their huge planned investments in China wouldn’t be kneecapped by any unilateral U.S. tariffs on imports from China (including those from their factories). For the WTO’s combination of consensus decision-making plus the protectionist natures of most of its members’ economies created a towering obstacle to Washington acting on its own to safeguard legitimate American domestic economic interests from Chinese and other foreign predatory trade and broader economic activity.

At the same time, despite the WTO’s key role in preserving the value of the multinationals’ export-focused China investments, the USCC study underestimates how notably such investment remains geared toward exporting, including to the United States. This issue matters greatly because chances are high that this kind of investment (in China or anywhere else abroad) has replaced the multinationals’ factories and workers in the United States. By contrast, multinational investment in China (or anywhere else abroad) that’s supplying the China market almost never harms the U.S. domestic economy and in fact can help it, certainly in early stages, by providing foreign customers that add to the domestic customers of U.S.-based manufacturers.

There’s no doubt that the phenomenal growth of China’s own consumer class in recent decades has, as the China Commission report observes, generated more and more American business decisions to supply those customers from China. In other words, the days when critical masses of Chinese couldn’t possibly afford to buy the goods they made in U.S.- and other foreign-owned factories are long gone.

But the data presented by the USCC does nothing to support this claim, and the key to understanding why is the central role played by computer, electronics, and other information technology-related manufacturing in the U.S. corporate presence in China. For when the Commission (and others) report that large shares of the output of these factories are now sold to Chinese customers, they overlook the fact that many of these other customers are their fellow entities comprising links of China-centric corporate supply chains. These sales, however, don’t mean that the final customers for these products are located in China.

In other words, when a facility in China that, for example, performs final assembly activities on semiconductors sells those chips to another factory in China that sticks them into computers or cell phones or HDTV sets, the sale is regarded as one made to a Chinese customer. But that customer in turn surely sells much of its own production overseas. As the USCC documents, China’s consumer market for these goods has grown tremendously, too. But China’s continually surging share of total global production of these electronics products (also documented in the Commission report) indicates that lots of this output continues to be sold overseas.

Also overlooked by the USCC – two other disturbing apects of the multinationals’ activities in China.

First, it fails to mention that all the computer and electronics-related investment in China – which presumably includes a great deal of software-related investment – has contributed to China’s economic and military ambitions not only by transferring knowhow to Chinese partners, but by teaching huge numbers of Chinese science and technology workers how to generate their technology advances. The companies’ own (often glowing) descriptions of these training activities – which have often taken the form of dedicated training programs and academies – were revealed in this 2013 article of mine.

Second, the Commission’s report doesn’t seem to include U.S. multinationals’ growing investments not simply in high tech facilities in China that they partly or wholly own, but in Chinese-owned entities. As I’ve reported here on RealityChek, these capital flows are helping China develop and produce high tech goods with numerous critical defense-related applications, and the scale has grown so large that some elements of the U.S. national security community had been taking notice as early as 2015. And President Trump seems to be just as oblivious to these investments as globalist former President Barack Obama was.

These criticisms aside, though, the USCC has performed a major public service with this survey of the multinationals’ China activities. It should be must reading in particular for anyone who still believes that these companies – whose China operations have so greatly enriched and therefore strengthened the People’s Republic at America’s expense – deserve much influence over the U.S. China policy debate going forward.

(What’s Left of) Our Economy: The AP’s Manufactured Nonsense About Manufacturing

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AP, Associated Press, Calvin Woodward, fake news, innovation, Jobs, manufacturing, productivity, research and development, technology, Trump, {What's Left of) Our Economy

The Associated Press (AP) is a ginormous global news organization, and its reach is especially widespread here in the United States (although I couldn’t find figures breaking out its American clientele specifically). So it’s a big deal when one of its highest profile writers spreads the kind of utter claptrap about domestic U.S. manufacturing that Calvin Woodward just peddled in his new piece on President Trump’s views on the economy.

In an article posted today, Woodward portrayed Mr. Trump’s emphasis on industry (and other elements of his worldview) as nothing more than a pathetic and downright dangerous exercise in nostalgia for the “grunt work of old” that ignores how “Industry, technology and much of the culture are finding new ways of doing and living” and how “U.S. prosperity has been driven for decades by services, technology and new things….”

Some confidence in Woodward’s conclusions might be justified if he relied on manufacturing specialists or even economists to support them. But the authorities he cites are a “professor of communications” and a psychologist who “studies nostalgia from Britain’s University of Southampton.”

Not that economists have been killing it in recent decades in properly evaluating the importance of manufacturing. But if Woodward had bothered to consult one,  the odds would have been higher that he’d have encountered the idea that industry is kind of important for any country seeking to build or maintain a world-class military. Or” that it’s historically been the U.S. economy’s leader in productivity growth (although as RealityChek regulars know, it’s recently been losing its mojo on that score). Or that it boasts one of the nation’s biggest employment multipliers – meaning that the creation of each American manufacturing job generates an outsized number of jobs elsewhere in the economy compared with employment increases in most other sectors. Or that manufacturing accounts for the lion’s share of American business research and development spending. 

That last fact is especially important for Woodward and others of his ilk to know. For it makes clear that if the United States is to keep generating the “technology and new things” that of course are central to its hopes for continued (much less greater) prosperity, it has better keep its manufacturing base world class.

I’ll leave it to you to judge whether Woodward’s article qualifies as Fake News.  But there can’t be any legitimate doubt that it’s manufactured nonsense.   

(What’s Left of) Our Economy: Trade and Supply Chain Disruption Myths are Getting Disrupted by Apple

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Apple Inc., Breitbart.com, China, deadweight loss, design, engineering, global value chains, John Carney, manufacturing, marketing, Nikkei Asian Review, production, research and development, sourcing, supply chains, tariffs, Trump, {What's Left of) Our Economy

Yesterday’s report from Japan’s Nikkei Asian Review (NAR), on how the U.S.-China trade war is affecting Apple Inc.’s sourcing plans, was stunning not only for claiming that the company is studying moving up to 30 percent of the China production capacity it uses out of the People’s Republic. It also greatly undermined three of the most pervasive myths surrounding the decision by such companies to concentrate so much manufacturing in China, and the resulting impact on the American economy.

Since Apple’s production in China and elsewhere is handled almost entirely by independent contract manufacturers like Taiwan’s Foxconn, its reported decision to ask them to start estimating the costs of partly leaving China speaks volumes about why multinational companies place various links in their supply chains in the countries decided on.

The first myth? That production and sourcing decisions are based overwhelmingly on the kinds of free market forces and developments that supposedly dominate the current world trade system, and that explain its root assumption that any government interference will reduce – to every country’s detriment – trade’s ability to maximize global efficiency.

According to the NAR piece, however, a team of 30 Apple employees has begun “discussing production plans with suppliers and negotiating with governments over financial incentives they might be willing to offer to attract Apple manufacturing, as well as regulations and the local business environment.” In other words, Apple’s decisions won’t solely, or even mainly reflect the principle of comparative advantage – which holds that economic activity naturally flows and should flow to locations where it’s most efficiently conducted.

The NAR article also hints at a point that’s become crucial in today’s trade war-spurred debate – about whether trade barriers like the Trump administration’s recent tariffs create major “deadweight losses” for the world economy by forcing companies to spend precious time and resources coping with government interference, rather than on continuing to improve their products and processes. For as the NAR piece states, among the advantages China has offered manufacturers for so long have been “lighter labor rules.” That’s a euphemism for a government policy of ruthlessly repressing worker’s rights to organize freely.

NAR could have also added practices such as government-encouraged technology extortion (which forces foreign businesses to hand over their knowhow to Chinese partners in return for the ability to operate in China), value-added taxes (which fosters producing inside China by penalizing importing and rewarding exporting), an artificially depressed currency (which has effects similar to those value-added taxes), explicit requirements that goods made in China contain certain levels of Chinese content, and all manner of tariffs and subsidies that are illegal under World Trade Organization rules.

Moreover, as detailed in my 2002 book on globalization, The Race to the Bottom, foreign government distortion of trade is hardly confined to China. It’s long represented the way much manufacturing-related business has been done around the world.

In other words, the deadweight loss issue, and government interference in trade flows, is nothing new, and raised few hackles among economists until the United States under President Trump started imposing serious trade barriers of its own. (See this article by Breitbart.com‘s John Carney for an excellent discussion of the issue and the hypocrisy of Trump tariff opponents.)

The second Apple- (and broader offshoring-related-) myth debunked by the article is that the reshuffling of global supply chains already being prompted by the Trump tariffs will devastatingly disrupt worldwide manufacturing and economic fortunes. But here’s what one Apple supplier representative told NAR: “It’s really a long-term effort and might see some results two or three years from now. It’s painful and difficult, but that’s something we have to deal with.” In other words, rather than whining and/or throwing in the towel, such companies are apparently rolling up their sleeves and getting to work.

P.S. – So, reportedly, is Apple. Not that the company hasn’t whined about the Trump tariffs. But according to the NAR article, its examination of diversifying away from China – where currently more than 90 percent of its worldwide manufacturing is located – began “at the end of last year” to “expand [the aforementioned] capital expense studies team.”

Moreover, the trade war evidently wasn’t the only issue on Apple’s mind. Said “one executive with knowledge of the situation,” a “lower birthrate, higher labor costs and the risk of overly centralizing its production in one country. These adverse [China] factors are not going anywhere. With or without the final round of the $300 billion tariff, Apple is following the big trend [to diversify production].” The biggest implication – which should have always been obvious – is that because countries and their economies, societies, and demographics are constantly changing independent of government policies, no smart business would ever view its supply chains as being set in stone.

The final myth – that performing nearly all Apple manufacturing in China has enormously strengthened the U.S. economy, and that this proposition holds for much China production by U.S.-owned multinational companies.

Because Apple products sell for so much more than the cost of their materials, it’s clear that most of the value they create comes from the company’s mainly U.S.-based research and development, engineering, design, software development, and marketing operations. So its slogan “Designed by Apple in California, Assembled in China” is not only accurate but extremely important economically.

Nonetheless, the company itself has maintained that a significant number of its goods suppliers have been U.S.-owned (though not necessarily American-located). Yet the NAR article found that this number has been shrinking steadily since 2012 – and that the number of China- and Hong Kong-owned suppliers has been rising so strongly that last year they exceeded the number of their American counterparts for the first time.

In fact, as I’ve reported, the China content of most goods produced in China been increasing so significantly for so long that the notion of the People’s Republic as a simple assembler of products that add little value to the Chinese economy is becoming rapidly outmoded. Further, this development has always been a prime objective of the Chinese government, as is especially obvious from its technology extortion and local content requirements.

It’s true that these developments per se don’t affect the aforementioned “white collar” manufacturing activities vital to creating Apple products. But it’s legitimate to ask whether, without the Trump trade war, this extremely high value work would long remain mainly in the United States. After all, even in a world of instant global communications, manufacturers have found it highly advantageous to locate functions like research and development etc close to their factories – because the two broad aspects of manufacturing tend to interact with each other so continuously, and because big differences in time zones means that there’s still nothing as easy and convenient as contacting a colleague by driving a few blocks away or phoning or texting or emailing from there, much less by walking down the hall.

To listen to economists and pundits and even many beat reporters even nowadays (or especially nowadays?), the emergence of the kinds of global value chains epitomized by Apple’s operations has been as much a force of nature, or technology, as economic globalization itself has been portrayed. They’ve ignored how the Trump trade policy revolution reminds invaluably that these trends have also stemmed from human decisions that are anything but givens. The reaction of Apple, and all the other companies that have either left China or are contemplating leaving because of the President’s actual and threatened tariffs, is a welcome sign that the folks who deal with these problems in real life, and not simply in the abstract, have finally been getting this message.

(What’s Left of) Our Economy: Could Trump’s Business Tax Cuts Be Working (Kind of) as Advertised?

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capex, capital spending, dividends, Factset.com, mergers and acquisitions, research and development, Standard & Poor's 500, stock buybacks, tax cuts, taxes, Trump, Washington Post, {What's Left of) Our Economy

One of the biggest stories in economics and politics over the past year has been the tax bill championed successfully by both the Trump administration and the Republican-controlled Congress. Economically it’s widely judged to have failed in its primary stated mission: encouraging more productive investment in the U.S. economy. And because it supposedly did little more than shower cash on already profit-rich corporations that overwhelmingly put it to supposedly unproductive uses like share buybacks and dividend payments (see, e.g., here and here), the American public rightly recognized it as a giveaway to tycoons and The Rich generally, and viewed it as one big reason to vote GOP candidates out of office in the recent midterm elections.

What a surprise, then, to come across evidence that the $1.5 trillion in business tax cuts so far have done a respectable job of working as advertised.

According to the Washington Post‘s Michael Heath, new research from Standard and Poor’s shows that since the tax package was passed, the firm’s well-known group of the 500 largest publicly traded U.S. companies have performed as follows:

>Through the first three quarters of this year, they’ve boosted share buybacks – which support the value of company stock and in the process enrich executives paid largely based on the increase (or decrease) in these stocks’ value – by 11.84 percent.

>During the same period, they’ve hiked capital spending (on new plant and equipment) by 19 percent.

>Over this span, they’ve boosted research and development spending by 34 percent.

>During the first eleven months of the year, their dividend payouts have been virtually unchanged.

When the entire American business universe is examined, the picture looks somewhat different – at least through the first half of this year. According to this summary of research from Goldman Sachs:

>buybacks rose 48 percent

>capital spending rose 19 percent

>research and development spending rose 14 percent.

What’s noteworthy about these figures, though, is that they indicate that the larger, indeed multinational U.S.-based companies spent their tax windfalls more productively than smaller, largely domestically focused firms. That’s noteworthy because one of the principal objectives of the tax cuts was to persuade the multinationals to stop stashing so much of their earnings abroad and bring these monies back home to stoke growth and jobs. So it appears that, to a significant extent, that’s what they’ve done.

Of course, the real results of the effects of the tax cuts (or any other policy initiative) can only be assessed accurately not simply by comparing year-on-year rates of change in various metrics, but examining how these rates of change have differed (if at all) from those of years before the initiative went into effect. I haven’t yet located the data for most of these indicators, but the chart below combined with the Washington Post figures for capital spending for the S&P 500 makes clear that it’s been growing much faster since the cuts were passed than before.

One area the Post didn’t look at, though, can’t be neglected: mergers and acquisitions. The numbers indicate that, measured by value, such activity increased much faster between 2017 and 2018 (for the first three quarters of the year) than between 2016 and 2017 – by 33.47 percent to 1.05 percent. (My sources are the 2016-18 data published by Factset.com.  Here’s its latest report.) The absolute numbers are sizable, too – the value of these transactions rose by more than $387.5 billion from January-through-September, 2017 to the same period this year. (Note: These figures are only authorized expenditures – but reportedly there’s evidence that 85 percent wind up getting made.)

But here (as elsewhere, for that matter) is where we run into a big complication that comes up whenever a policy initiative is judged: What changes are attributable to this move, and what changes to other factors? These other factors include other policies (like interest rate movements both announced and suggested by the Federal Reserve, or regulatory or trade policy changes), or existing or evolving business decisions on deploying capital (based on corporate judgments regarding likely customer demand that stem from the overall state of the economy or particular markets, and on how these situations are considered likely to change).

But all the same, a reasonable, defensible bottom line conclusion seems to be that productive business spending since the tax cuts’ passage is rising at a faster rate than before passage, and that the tax package has played a discernible role. Moreover, some of the other plausible reasons for this acceleration also are arguably attributable to Trump administration policies – at least in part.  Faster overall economic growth and regulatory reform are two examples. Trade policy might be a third.

Moreover, I’m making these points as someone who’s argued that President Trump’s prioritization of the tax cuts and Obamacare repeal was a major first-year mistakes, at least politically. Both should have taken a backseat to infrastructure building in particular. I’ve even expressed skepticism about the cuts’ likely economic impact.

But economically, the administration and its supporters seem to have had (and still have) a pretty good story to tell about the tax cuts – which could have bolstered their political appeal. Which means that a bigger mystery than the cuts’ actual effects could be why the administration told it so ineffectively.

(What’s Left of) Our Economy: More Establishment Happy Talk About De-Industrialization

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Anne-Marie Slaughter, blue collar, Bureau of Labor Statistics, design, engineering, Madeleine Albright, manufacturing, New America, offshoring, research and development, STEM, Trade, white collar, {What's Left of) Our Economy

I’m all for looking on the sunny side of life. Making up the sunny side of life? Not so much. That’s why I find Anne-Marie Slaughter’s recent Financial Times column so disturbing. For the author – a contributing editor of the FT, the president of New America (a tech and offshoring industry-funded think tank in Washington, D.C.), and a former leading foreign policy adviser to President Obama) has just served up an exercise in economic hopium that is almost entirely fact-free, and that repeats a canard that was hopelessly out of date twenty years ago.

Slaughter’s fanciful claim? That the spread of the internet of things throughout American manufacturing is going to spur a revival of America’s hard-hit, industry-heavy midwestern Rust Belt. One main reason, according to the author:

“[T]he next phase of the digital revolution is the internet of things. The Midwest is the traditional home of makers — of cars, tractors, machines and household appliances. Companies such as Deere & Co, Carrier or Ford may have shifted manufacturing abroad, but the design, engineering and innovation is still concentrated back home. Those jobs may be less sexy than billion-dollar start-ups, but they will be stable and well paid. On Thanksgivings to come, Midwest cities seeking to grow their tech sectors should have more and more to be thankful for.”

Although the headline (which Slaughter probably isn’t responsible for) – “The internet of things helps spark a rust belt revival” – signals that the Midwestern renaissance is already well underway, the author herself is honest enough to specify in the text that the only metrics she presents show progress on this score limited to “a fraction of a percentage point.” But it would have been more honest to at least hint at all the data suggesting how pie-in-the-sky her prediction is over any foreseeable time frame.

For example, although there’s no authoritative source of information showing how many employees of manufacturing companies based in the United States (either U.S.- or foreign-owned) work in science and technology positions, numbers are available for the share of American manufacturing workers occupying both blue-collar and white-collar jobs. These aren’t definitive, because many of the white-collar jobs are administrative and management jobs having little or nothing to do with innovation, and because manufacturing companies have tried to eliminate as many as possible to maximize cost savings.

But it’s still surely revealing that, since the offshoring phase of U.S. trade policy officially began when the North American Free Trade Agreement (NAFTA) went into effect at the beginning of 1994, American manufacturing employment falling outside the “nonsupervisory and production” category is down by 956,000 – or 20.45 percent. That’s a smaller hit than taken by industry’s blue-collar workforce – which is down by 39 percent, or 3.418 million. But over the last two-plus decades, the blue-collar/white-collar job split in manufacturing has barely budged, with the former’s share down from only 72.27 percent to 70.21 percent. Does that tell you a dramatic U-Turn is anywhere on the horizon?

Moreover, the U.S. Bureau of Labor Statistics (the source of the above figures) did take a cursory look at the employment of some types of engineers in various sectors within domestic manufacturing. It found that, in May, 2015, between about 38 percent and about 55 percent of the workforces in American information technology hardware production belonged in science and technology categories. But little of this type of manufacturing is located in the rust belt.

The only data set this same study contained that looked relevant to the midwest covered the increase in the number of mechanical engineers employed in the motor vehicle parts and various industrial machinery sectors. Only in motor vehicle parts did the workforces (modestly) exceed 10,000 – and this in an industry whose payrolls approached 564,000 that month, and whose total white-collar workforce came to just over 128,000.

Although it’s true that the statistics could be missing the kind of shift Slaughter expects (and her headline writer regards as already underway), anyone familiar with the way manufacturing typically works would understand why extreme skepticism is in order. In real-life manufacturing companies, and especially factories (as opposed to those imagined by so many think tankers and academics), production on the one hand and research and development etc on the other are rarely activities that are so sharply distinctive that one can readily take place around the world from another. In fact, they are so closely related that knowledge tends to flow back and forth between production line and lab in a continuous, interactive feedback loop. And it’s not remotely good enough to exchange this information electronically. That’s why, in sector after sector of manufacturing, when the production leaves the country, the research and development and design and engineering tend to follow.

And that’s why the only useful purpose served by Slaughter’s article – and the FT‘s decision to publish it – is reminding readers that, as long as American trade and other globalization policies keep needlessly fostering the export of manufacturing, offshoring interests, their hired guns in the think tank world, and their unwitting dupes in the press will strive to portray these losses as all for the best.

As my book, The Race to the Bottom made clear, it was a phony excuse for de-industrialization back in 1997, when former Clinton Secretary of State Madeleine Albright touted the advent of high tech products “designed and begun in the United States and…manufactured in Asian countries,” and it’s no less dangerously off-base today.

Those Stubborn Facts: How U.S Manufacturing Helps the Whole Economy – Except for its Own Workers

Tags

Employment, exports, GDP, gross domestic product, Jobs, manufacturing, productivity, research and development, Those Stubborn Facts, wages

Manufacturing share of U.S. employment: 9%

Manufacturing share of U.S. GDP: 12%

Manufacturing share of U.S. productivity growth: 35%

Manufacturing share of U.S. exports: 60%

Manufacturing share of U.S. private sector R&D spending: 70%

Manufacturing share of decline in labor share of GDP since 1990:      more than 2/3

 

(Source: “In Labor vs Capital, Manufacturing Plays an Outsize Role, Report Says,” by Harriet Torry, The Wall Street Journal, November 13, 2017, https://blogs.wsj.com/economics/2017/11/13/in-labor-vs-capital-manufacturing-plays-an-outsize-role-report-says/)

Our So-Called Foreign Policy: A Narrow-Minded Wake-Up Call on China’s Tech Drive

Tags

artificial intelligence, Barack Obama, budget, China, mercantilism, National Science Foundation, Our So-Called Foreign Policy, research and development, technology, technology transfer, Trade, trade surpluses, Trump

“#SMH” (Shaking My Head) is one of my favorite Twitter hashtags, and it’s the perfect reaction to a new post on FOREIGNPOLICY.com on the growing technological challenge being posed to the United States by China, and on its frightening national security implications. The post has me shaking my head, and should have you shaking yours, because for all the useful information it contains on this critical subject, it completely misses the much bigger, much more important picture. And it misses it because the authors are so transparently determined to lionize former President Obama’s record in this regard, and vilify President Trump’s – though few of the facts warrant this conclusion.

The post is useful mainly for calling attention to China’s intensifying effort to establish global superiority in artificial intelligence, and to the Trump administration’s budget policies, which look oblivious to China’s efforts because they don’t provide adequate resources for federal research efforts capable of keeping the United States ahead.

I say “look” because the budget situation may not be as dire as strongly suggested by the authors. Specifically, it’s true that the administration has proposed cutting funding for the National Science Foundation’s artificial intelligence programs by 10 percent. At the same time, as made clear by the source they relied on, “the proposed budget does call for more spending on defense research and some supercomputing.”

Much more misleading is the post’s portrayal of the Obama administration as nothing less than Churchillian in sounding the tocsin. After all, the Obama reports the authors cite as evidence of his foresight on the subject came out at the very end of his presidency. At least as important, they gloss over major non-budgetary developments crucial to understanding China’s progress.

As they themselves admit, for instance, Chinese tech companies have established presences in Silicon Valley because they believe that “by rotating Chinese staff to Silicon Valley and American staff to Chinese campuses, they can accelerate the timeline for reaching parity with the United States in AI technology and depth of talent.” Under whose administration do the authors believe this practice started? And why do they think the Chinese were confident they were so free to proceed?

Also completely ignored: Throughout his presidency, Mr. Obama did absolutely nothing as American companies continued their longstanding efforts to transfer advanced technologies to Chinese partners voluntarily, or were forced to share this knowhow due to Chinese threats to shut them out of its market. Nor did he move to prevent these firms from investing in Chinese companies working on tech products and services with clear defense implications, or to help them cope with Beijing’s demands that they pony up or else.

And let’s not forget: The Obama administration made only the most token efforts to combat the predatory Chinese practices that enabled Beijing to amass immense trade surpluses with the United States; therefore to further fuel the growth of its market and make it that much more difficult for American companies to resist tech extortion demands; and to finance its own multi-billion technology development efforts with these handsome trade profits. Indeed, Mr. Obama staunchly opposed Congressional efforts to punish China for its most important mercantile policy:  currency manipulation.  

So I share the authors’ view that federal research and development efforts have been crucial to establishing America’s intertwined global technology and military leadership, and their hope that President Trump will reject the conservative anti-government dogma that justifies virtually every type of budget cut outside traditional defense or law enforcement spending. But the idea that America’s approach to the Chinese tech challenged was remotely up to snuff before Mr. Trump’s election not only fails the test of historical accuracy. It has blinded them to all the other policy changes needed to ensure that the United States stays Number One.

(What’s Left of) Our Economy: Manufacturing Should Indeed be a US “Obsession”

Tags

Binyamin Appelbaum, Donald Trump, Federal Reserve, innovation, manufacturing, manufacturing production, manufacturing wages, multi-factor productivity, multiplier, productivity, research and development, STEM workers, The New York Times, Trade, Trade Deficits, {What's Left of) Our Economy

You have to give New York Times economic correspondent Binyamin Appelbaum credit. He decided to go the flood of recent media attacks on trade policy critics one better by not only charging that Republican presidential candidate Donald Trump and others are economic know-nothings, but belittling them for an ignorantly nostalgic focus on American manufacturing. Less admirable – Appelbaum’s decision to broach the subject before learning anything important about it, or much of the broader economy.

In an October 4 Times Magazine article, Appelbaum repeated standard claims that American politicians’ “obsession” with manufacturing misses the mark because the sector is doing better than ever, and because its only major problem is actually a sign of progress – its falling payrolls reflect higher productivity, and thus outstanding technological progress. His new wrinkle: a contention that U.S. leaders should spend less time trying to revive manufacturing employment (and wages, which have lagged badly, too?), and more on turning the low-wage service sector jobs into family wage jobs.

But Appelbaum’s own assessment of manufacturing badly misses the mark. His claim of record output, for example, is belied by Federal Reserve data clearly showing that industry’s output is down 4.45 percent in real terms since the Great Recession started – more than eight years ago. Nor does Appelbaum seem familiar with the productivity figures. They show manufacturing’s performance stagnating recently by the broadest measure (multi-factor productivity).

Industry’s record in international trade is another flag that’s at least deep orange. Manufacturing keeps racking up record annual trade deficits, and yesterday’s U.S. government figures revealed that August saw the latest in a string of monthly record shortfalls. These trade balances matter because standard trade theory teaches that one of international commerce’s main virtues is fostering the best possible international division of labor. By its logic, America’s failure to produce anywhere near as many manufactures as it consumes – including in numerous high-value industries like semiconductors, advanced telecommunications gear, pharmaceuticals, construction equipment, machine tools, and ball bearings – unmistakably signals that such activity has a grim future in the United States.

And if such pessimism is warranted, the entire American economic picture will look grim as well. For no other sector appears poised to replace manufacturing as the nation’s productivity growth champ. And it’s hard to identify major new employment prospects for science and technology workers if manufacturing continues stagnating (at best). After all, the sector conducts 70 percent of the private sector’s research and development, and its STEM workers comprise 60 percent of the national total.

Moreover, this funding and these workers seem to be doing an awfully good job on the innovation front, as they generate nine out of every ten U.S. patents.

But perhaps strangest of all is Appelbaum’s call for downplaying efforts to foster manufacturing employment and dramatically raising the wages and improving the living standards of America’s fast-food workers, home healthcare aides and the like via government fiat. At least he recognizes that such steps will have nothing to do with the free market principles so widely used to justify laissez-faire approaches to manufacturing’s woes. But why does he evidently suppose that productivity improvements and especially technological innovation won’t displace many of these jobs, too, especially if employment costs get high enough? And what kind of formula for boosting national competitiveness – and therefore hopes for longer term, sustainable prosperity – would this be?

Ironically, promoting domestic manufacturing looks like the best, most market-friendly way to help these low-wage workers, too. For the sector boasts the economy’s greatest multiplier effect for overall economic activity (which by definition creates new jobs) and one of the largest for employment itself. In other words, manufacturing punches far above its weight in generating new jobs throughout the rest of the economy (e.g., in transportation, construction, retail, and wholesale). Even better, most of these sectors already pay considerably more than those singled out by Appelbaum – and without new government props.    

Those Stubborn Facts: The Highest-End Jobs Keep Getting Offshored, Too

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FDI, foreign direct investment, Jobs, offshoring, research and development, Those Stubborn Facts

Global Corporate Research and Development Investment, Jan. 2013 – June, 2016

China: $24.2 billion

India: $13.1 billion

United States: $10.2 billion

 

Jobs Created by Above Investment

China: 25,700

India: 43,900

United States: 10,500

(Source: “Apple has chance to pick better R&D model in China,” by Andrew Hill, Financial Times, August 22, 2016, https://www.ft.com/content/fe00be6a-646d-11e6-8310-ecf0bddad227)

(What’s Left of) Our Economy: Where America Is and Isn’t an Economic Superpower

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China, consumption, exports, finance, GDP, gross domestic product, manufacturing, patents, research and development, services, technology, Trade Deficits, {What's Left of) Our Economy

I’m usually not big on fancy interactive graphics in the media, but The Economist magazine and the Washington Post have just issued two that are both worth your while. Each vividly illustrates some of the most important national and international economic trends of the last few decades.

The “American Abacus” in The Economist‘s October 3 feature on the surprising (to many) resilience of America’s superpower status makes possible examining the U.S. share of 26 categories of global economic activity and how it’s changed since 1980. The categories are even color-coded into several super-categories, which enables you to see some mega-trends at a glance. Because data going back 35 years can’t be found for all the subjects the Abacus seeks to measure, it’s far from a perfect gauge. (We’ll get to some other flaws shortly). But I found it thought-provoking at the very least, and although I hope you’ll want to play around with it yourself, here are some of the main conclusions that stand out to me.

First, the situation this year – the picture presented when you first see the Abacus – makes clear that the greatest relative U.S. global strengths are in finance (look at all those medium blue bars near the top) and to a much lesser extent, technology. The technology measures, however, seem controversial, to say the least. I’m OK with including “cloud hosting.” But “social-media users”? At the risk of seeming flip, how are they going to help the nation keep Vladimir Putin at bay in the Middle East, or boost living standards across the board?

Much less impressive is the U.S. standing in the “economy” category, and not just because these measures of economic power are more concrete. After all, they also include America’s share of global research and development activity and patent issuings. At the same time, why are “public and private debt” and “cross border lending” in this grouping, rather than finance. And I know that “consumption” is part of the real economy. But does it generate, or even have much to do with, economic strength and influence?

Also more than little troubling is how indicators such as “manufacturing output” and “merchandise exports” are found near the bottom. And somewhat surprisingly, the United States doesn’t exactly dominate the world in “services exports,” either, even though economists tend to view services as sectors of the future, and goods as kind of old hat.

The results get even more interesting as you move the toggle at the bottom back and historical comparisons become clear. Take “GDP at market prices.” That’s the best measure of how big the U.S. economy is, and last year (the latest data available) it represented slightly over 20 percent of the global total. Toggle back to 2010 and it looks somewhat higher, and it stays higher going all the way back to 1980s, seeming to peak as a percentage of the world economy in the mid-1980s. The main message here: However quickly the United States has grown during this 35-year period, the rest of the world as a whole has been growing faster.

Manufacturing output shows a similar same pattern (though for some reason, the figures only go back to 1997), as do merchandise exports. Household consumption, interestingly, is somewhat different. The U.S. share of the global total has fluctuated some, but has stayed roughly the same since 1980. That, coupled with the nation’s shrinking share of global production, readily explains why the United States runs such big trade deficits. More encouragingly, the percentage of total worldwide public and private debt accounted for by Americans is down since 2000 – apparently when the first figures became available.

Also good to see – since 1985, the U.S. share of global patents has more than doubled . Yet since 1997, America’s research and development spending sank from about 40 percent of the international total to about 30 percent. That doesn’t sound like a formula for continued world science and technology predominance – and all their prosperity- and national security-related benefits.

Unfortunately, The Economist‘s Abacus doesn’t show you which other countries have been on the rise according to these various measures, and which have fallen behind. For a sense of those changes, click on this link at the Washington Post‘s cite for a short video showing that “Asia is the New Europe.” It shows how the world’s economies have seen their percentages of the total global economic pie wax and wane (according to that GDP at market prices measure).

The main conclusion drawn by the Post is that “national economies and the global economy tend to move in waves.” But that claim seems belied by the “trading places” act staged by Asia and Europe, not to mention by the ballooning of Chinese economic power. Concentrate on what happens to the China space starting about three-quarters of the way through the production. Then tell me you’re absolutely sure that it’s in America’s interests that China continue to grow strong and prosperous – and that you’re equally certain that the U.S. government has fully thought through the full implications of the PRC’s spectacular rise.