Our So-Called Foreign Policy: Europe’s Worrisome Fence-Sitting on China

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alliances, allies, Biden, Bloomberg.com, China, Emmanuel Macron, Europe, export controls, France, free-riding, Mark Rutte, national security, Netherlands, Our So-Called Foreign Policy, semiconductors, technology

Ever since he belatedly admitted their importance (see here and here), a foundation of President Biden’s strategy for dealing with the wide-ranging challenges posed by China has been bringing America’s long-time treaty allies on board.

As the President made clear in a major speech shortly after his inauguration, China is America’s “most serious competitor” and “America’s alliances are our greatest asset” in countering this threat – and dealing with other global threats and crises.”

Mr. Biden seems to be making progress in mobilizing support from America’s Asian allies, both in terms of pushing them to get serious about their military budgets, and by winning meaningful cooperation for U.S. efforts to stay ahead of China in the means to produce ever more advanced semiconductors – which are central to creating the cutting-edge military systems of today and tomorrow.

But on the Europe front, this allies-focused strategy is hitting some serious roadblocks. Specifically, as Bloomberg.com just reported, although the continent’s major economies – especially the Netherlands, home of ASML, the company that makes the world’s most important semiconductor manufacturing equipment – have gone along to some degree with this American campaign, they’ve also warned that their cooperation will be limited in important ways.

Most disturbingly, particularly given U.S. plans to expand its new, sweeping controls on doing advanced semiconductor business with China, the Netherlands trade minister declared that the country “will not copy the American measures one to one. “We make our own assessment….” His remarks came after Chinese dictator Xi Jinping urged Dutch Prime Minister Mark Rutte to “oppose the politicization of economic and trade issues and maintain the stability of the global industrial chain and supply chain.”

Less disturbingly (because his country isn’t nearly as important a link in the global semiconductor supply chain) but disturbingly nonetheless (because it has always spoken with an outsized voice in European councils), France’s President Emannuel Macron told a group of business leaders, “a lot of people would like to see that there are two orders in this world. This is a huge mistake, even for both the US and China. We need a single global order.”

As a foreign policy realist, I can’t possibly criticize these and other countries for prioritizing what they view as their own national interests. Nor should American leaders. (Criticizing the accuracy of these views? That’s another story.) But Washington should call out avowed allies like the Netherlands and France for what looks like another version of long-time European national security free-riding, and make clear that continuing to play the game of what Bloomberg reporters call “carving out a middle ground when it comes to China” will carry severe consequences.

After all, Macron is right that the United States and China are “two big elephants” in a jungle, and that “If they become very nervous and start a war, it will be a big problem for the rest of the jungle.”

By the same token, however, allies that can’t be counted on when such conflicts start aren’t really allies at all, for their uncertainty makes impossible sound military planning, and could lead to dangerously erroneous miscalculation and other decisions.

In 1931, Florence Reece, the wife of a union organizer, wrote the classic protest song “Which Side Are You On?” to decry the notion of fence-sitting during times of conflict like those in Kentucky’s coal fields during that era. It’s a question that American allies like the Netherlands and France soon need to start answering much more clearly as China’s systemic threat to the United States grows ever more serious.

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(What’s Left of) Our Economy: Inside the U.S. Research and Development Slump

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Bank for Intenational Settlements, Bernie Sanders, Elizabeth Warren, innovation, National Science Foundation, neo-liberalism, private sector, Project-Syndicate.org, research and development, science, stock buybacks, technology, William H. Janeway, {What's Left of) Our Economy

At the risk of sounding like an Elizabeth Warren or Bernie Sanders clone, I’ve just come across some data showing that stock buybacks by U.S. public companies have really gotten out of hand. That matters because it looks like they’ve been denying these firms major resources for performing the research and development (R&D) needed to keep creating new products, services, and processes, and maintain the U.S. economy’s global competitiveness.

I got interested in these trends due to a post at the Project-Syndicate.com website by William H. Janeway. According to this business and economics writer, for decades through the first half of the twentieth century, America’s industrial giants in particular spent significant shares of their profits on “Scientific research and development of technological applications,” and indeed virtually monopolized such activity in the United States up to the start of World War II.

Once the war broke out, and long after (including of course during the early Cold War), these efforts were powerfully supplemented by the federal government. And beginning in the 1960s (roughly), when for various reasons, the profits that powered private sector R&D began drying up, Washington’s funding actually was able to fill the gap pretty satisfactorily.

Yet starting in the early 1980s (and I’m simplifying terribly here), market-friendly neo-liberal national economic policies like regulatory reform and tax cutting revived corporate profits. But these measures also presented business with a less risky, more immediately lucrative, and therefore more appealing way to use this new windfall than figuring out how to provide new and better goods and services – buybacks of their own shares of stock, a practice that was legalized in 1982.

I’ve found data going back to 1995, and from then through 2019, reports the Bank for International Settlements (a grouping of the world’s major central banks) annual U.S. gross stock buybacks soared more than ten-fold – from $73.16 billion to $829.18 billion. Yearly net buybacks jumped even faster – from $34.41 billion to $605.22 billion.

And since then, annual gross buybacks have jumped still higher. Investment banking firm Goldman Sachs pegs the 2021 gross buyback total at $992 billion, and not surprisingly predicts that the number for this year will hit $1 trillion. The slow growth stems partly from a one percent excise tax on the largest buybacks that kicks in next year.

Private sector R&D hasn’t exactly stood still during this period. But the National Science Foundation (NSF) says it rose only four-fold, from $129.83 billion to $498.18 billion. (See the spreadsheet provided at the first link here.) Put differently, in 1995, annual gross buybacks were 56.35 percent of annual R&D outlays. In 2019, annual gross buybacks just over 60 percent higher.

The NSF believes that private sector R&D neared $532 billion in 2020. But even that nice increase wouldn’t change the ratio much.

During these decades, moreover, federally funded R&D hasn’t remotely filled the gap. It increased nearly 150 percent from 1995 to 2019, but in absolute terms, the latter total was only $62.80 billion. And in 2020, it’s estimated to have risen only to $65.69 billion.

Further, neo-liberalism (or market fundamentalism, or whatever you want to call it0 is just as much to blame for this sluggish pace as it is for Wall Street deregulation, for it resulted from the same, reflexive anti-government impulses.

I don’t mean to demonize private business or finance or free markets, or to lionize government. But clearly something’s gone very wrong with the incentive structures shaping business decisions, and just as clearly, lots of business lobbying has had lots to do with it. Ditto for inadequate federal funding. Without major changes, don’t expect the U.S. economy from escaping the dangerous trap of heavy reliance on debt-based growth any time soon.

Those Stubborn Facts: The Digital Revolution in a Nutshell

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infotech, innovation, microchips, semiconductors, technology, Those Stubborn Facts

Number of transistors in a state-of-the-art computer chip, 1961: 4

Number of transistors in Nvidia’s latest graphics chip: 76 billion

(Source: “The ‘chip choke’ on China may breathe air into semiconductor industry,” by John Thornhill, Financial Times, September 29, 2022, The ‘chip choke’ on China may breathe air into semiconductor industry | Financial Times (ft.com))

Making News: Back on National Radio to Analyze a Big Change in Chinese Factories

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automation, CBS Eye on the World with John Batchelor, China, competitiveness, Gordon G. Chang, innovation, Jobs, labor shortage, Making News, manufacturing, robots, technology

I’m pleased to announce that I’m scheduled to return tonight to “CBS Eye on the World with John Batchelor.” The segment is slated to air at 9:30 PM EST and along with co-host Gordon G. Chang, we’ll be discussing why robots are becoming common in factories in China – whose predominant competitive edge in manufacturing used to be cheap labor – and what it means for the world economy.

You can listen live at links like this one and, as always, if you can’t, I’ll post a link to the podcast as soon as it’s available.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

(What’s Left of) Our Economy: Apple Products Now Designed in China, Too

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Apple, China, design, engineering, Federal Trade Commission, globalization, Made in America, manufacturing, offshoring, research and development, technology, The New York Times, Tripp Mickle, {What's Left of) Our Economy

Although Apple has long relied on factories in China to turn out its incredibly popular electronics products, the company has clearly sought to counter charges that it’s been a world champion outsourcer that’s contributed to U.S. industrial hollowing out and general economic weakening. How? By touting its products as “Designed by Apple in California.”

And that’s mattered in more than a public relations sense because it’s been that U.S.-located design – and engineering – that’s long comprised the vast majority of the value of Apple products. Even better, it’s also long been the case that almost none of the wealth generated by iPhones and iMacs and the rest have gone to China. Those factories in the People’s Republic, owned by contract manufacturers, have largely been snapping the sophisticated parts together according to Apple’s appealing designs and sophisticated blueprints.

Now, though, according to excellent reporting by The New York Times‘ Tripp Mickle, it’s clear that Apple’s going to have at least put a big asterisk on its slogan. He’s updated trends that I identified literally decades ago in my book The Race to the Bottom and have followed since (see, e.g., here) making clear that not only is much of the Apple’s most advanced manufacturing (of parts and components) now performed in China, but so is a large and surging share of that engineering and design.

According to Mickle’s sources,

“More than ever, Apple’s Chinese employees and suppliers contributed complex work and sophisticated components for the 15th year of its marquee device, including aspects of manufacturing design, speakers and batteries, according to four people familiar with the new operations and analysts. As a result, the iPhone has gone from being a product that is designed in California and made in China to one that is a creation of both countries.”

Mickle continues: China’s “engineers and suppliers have moved up the supply chain to claim a bigger slice of the money that U.S. companies spend to create high-tech gadgets.”

As a result, just as American leaders have belatedly been awakening to the dangers of heavy reliance on China for critical goods, both because of Beijing’s burgeoning power and challenges to U.S. global technological leadership and the national security created by this stature, Apple has been boosting its dependence on the People’s Republic – and helping to enrich and empower this hostile dictatorship. 

Some of Mickle’s specifics:

>”This year, Apple has posted 50 percent more [high wage] jobs in China than it did during all of 2020, according to GlobalData, which tracks hiring trends across tech.”

>”When China closed its borders in 2020, Apple was forced to overhaul its operations and abandon its practice of flying hordes of California-based engineers to China to design the assembly process for flagship iPhones. Instead of subjecting staff to lengthy quarantines, Apple began empowering and hiring more Chinese engineers in Shenzhen and Shanghai to lead critical design elements for its best-selling product….”

>In 2007, Chinese suppliers accounted for a mere 3.6 percent of an iPhone’s value. Now this figure is more than 25 percent.

The U.S. Federal Trade Commission has just begun to enforce new regulations aimed at ensuring that products labeled “Made in America” really are produced domestically.  It’s time for Washington to require Apple to start telling the truth about its operations, too.     

Our So-Called Foreign Policy: The Deaf Leading the Blind on U.S. China Policy

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Barack Obama, Biden, Blob, China, Donald Trump, Fareed Zakaria, George W. Bush, globalism, Mainstream Media, national security, Our So-Called Foreign Policy, privacy, South China Sea, Taiwan, technology, Washington Post

Is “beyond clueless” or “beyond intellectually dishonest” the best way to describe Fareed Zakaria’s latest column for the Washington Post? It’s tough to tell. And you could ask the same of the editors at the Post‘s opinion pages, who clearly saw nothing wrong with letting this apologia for the United States’ thoroughly discredited (at least for those blessed with working and/or uncorrupted brains) pre-Trump China policies see the light of day.

Zakaria’s missive, from this past Thursday, suffers two glaringly obvious flaws. First, like America’s most influential leaders from both parties for decades before 2017 the author insists on the importance of Washington building and maintaining “a serious working relationship” with a regime that has developed (with oceans of reckless American assistance) into one of the world’s “two most powerful actors.”

And former President Donald Trump’s greatest sin (which Zakaria accuses President Biden of following)? Adopting a policy toward Beijing of “open hostility and criticism” that has caused the “collapse” of “communications channels for managing tensions,” and especially during crises or near crises such as that which appears to be developing over Taiwan.

But nothing could be clearer by now than the delusional nature of these procedure-obsessed and substance-free views (which of course despite Zakaria’s claim have continually been parroted by the Biden administration.) For by now it should go without saying that China’s top priority isn’t avoiding conflict with the United States. In particular, it lacks any interest in the President’s oft-stated  objective of creating clear “guard rails” and other rules of the road that result in a safe and orderly “competition” for goals like “winning the twenty-first century” whose definition seems just as vapid, utopian – and distracting – as his administration’s “liberal global order” references.

Instead, China’s top priority is specific and concrete: increasing its power (in all dimensions) and reducing America’s in every way possible. The reason? Eliminate the greatest obstacle to its plans to ensure its decisive control over every major trend shaping the globe’s future – whether the field is military prowess or technological advance or wealth creation or the evolution of society and culture (especially through privacy-threatening progress in cyber-hacking and facial recognition technology).

Not that the Chinese are eager for conflict or even any kind of frontal challenge or showdown – especially when prevailing is still anything but guaranteed. But the ultimate objective is prevailing, and the means entail building the domestic, regional, and global conditions needed to prevail, either without firing a shot or when clashes do break out.

And not that American leaders shouldn’t make sure to maintain those communication lines with Beijing. With both countries possessing vast nuclear arsenals, lowering the odds of accidental conflict is clearly imperative.

But communication, much less broader engagement, mustn’t become an end in and of itself. History too often has shown that they encourage the (1) U.S. acceptance of empty promises; (2) rationalization of failure to achieve or preserve particular valued objectives in the here and now for the sake of payoffs stemming from a sense of mutual obligation that could be entirely unilateral and imaginary, over a time frame that tends to keep lengthening; and (3) the substitution of wishful thinking about attainable goals for gaining and maintaining the ability to deter or successfully counter specific, dangerous Chinese initiatives.

The second glaringly obvious flaw in Zakaria’s column is its exclusive reliance on former Obama administration officials to support his analysis – which makes as much as sense as citing former Carter administration officials as inflation-fighting experts.

After all, it was under Trump’s immediate predecessor that the Chinese began running wild throughout the South China Sea, pushing aggressive territorial claims and literally building islands with military facilities capable of controlling those commercially vital waters – and according to one senior U.S. admiral at the time, precisely because Beijing concluded that Obama would keep sitting on his hands.

It was also Obama who continued enabling China to pursue the predatory economic policies that badly damaged numerous manufacturing industries vital to American national security, and who turned a blind eye to the massive transfer by U.S. and foreign companies of advanced, defense-related techology to the People’s Republic.

But at least Obama “upgraded” the George W. Bush-era “Senior Dialogue” and “Strategic Economic Dialogue” in order to merge “the economic and security tracks” to “break down the barriers inside both the U.S. and Chinese governments to more effectively tackle cross-cutting issues such as climate change, development, and energy security.” Which accomplished exactly what to advance and defend American interests?

And this is where Zakaria’s editors at the Post come in. Evidently none of them thought to say something like, “Hey, Fareed. Maybe quote someone on China policy whose advice isn’t widely seen as a proven failure?”

Maybe they’re just supposed to look for stray commas and dangling participles?  I suspect that the real reason is that they’re part of the same group-thinking, self-perpetuating globalist Blob that keeps working overtime to ensure that the American public is never exposed to any genuinely fresh ideas about promoting the United States’ security, prosperity, and optimal place in the world – and whose  decades-long record of squandering the nation’s blood and treasure on behalf of one grandiose goal after another is its only claim to success.

(What’s Left of) Our Economy: Will the Tech Competitiveness Bill Shaft American Tech Workers?

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China, competitiveness, Congress, Immigration, labor shortages, Lisa Irving, NumbersUSA, semiconductors, STEM, STEM workers, tariffs, tech workers, technology, Trade, visas, {What's Left of) Our Economy

In case you didn’t already think that the U.S. government has become a dysfunctional mess, the immigration realist group NumbersUSA has just highlighted a recent, thoroughly depressing example. It’s the decision of the Democratic-controlled House of Representatives to turn its version of a bill to boost American technological competitiveness (especially versus China) into a device to advance its Open Borders-friendly immigration agenda ever further – and at the expense in particular of native-born tech workers and tech worker hopefuls.

Not that the story of this competitiveness effort wasn’t a prime example of dysfunction already. As I’ve previously pointed out, both the House bill and its Senate counterpart were originally introduced in mid-2020, and these efforts still haven’t become law – even though concerns about China catching up to the United States technologically, and threatening both American national security and prosperity even more sharply, remain as strong and widespread as ever.

And not that the Democrats are solely responsible: As I’ve also noted, Senate Republicans have strongly supported provisions in their version of the legislation that would both greatly weaken a president’s authority to impose tariffs (including on China to offset the economic damage to U.S. industry from its predatory trade and broader economic practices), and reduce various existing tradei barriers to many imports (including from China).

But the immigration provisions of the House version could be just as damaging, and deserve at least as much attention. As explained by NumbersUSA analyst Lisa Irving, this legislation “allows for an unlimited number of green cards for citizens of foreign countries seeking permanent U.S. residency who hold a U.S. doctorate degree, or its equivalent from a foreign institution, in STEM [Science, Technology, Engineering,and Math fields].”

Adds Irving, “This provision would result in further limiting the job prospects and resources for highly qualified Americans in tech fields.” 

To add insult to injury, as Irving reminds, the measure is based on phony and thoroughly debunked claims, mainly propagated by the U.S. technology industry, that it’s facing a crippling labor and talent shortage. In fact, the tech sector’s prime objective is curbing wage and other compensation gains by opening the flood gates ever wider to foreign-born technologists willing to accept much lower pay.   

The best outcome for the cause of American competitiveness — and for its potential to benefit the existing American population economically — would be for the Congressional conference committee assigned with devising a final compromise version that President Biden can sign into law to strip the Senate version of its trade sections, and the House version of these immigration sections

But don’t expect any progress any time soon. Reuters reports that the committee will hold its first meeting next week – and will contain more than 100 House and Senate lawmakers. In other words, more than 100 cooks for this broth.

As a result, even though China continues massively subsidizing its own tech sector, and even though other countries have already responded with their own incentives aimed at attracting and maintaining their capabilities in semiconductors and other industries, “Congressional aides said it could still take months before a final agreement is reached.” In the ultimate sad commentary on American political dysfunction, given the glaring flaws of both bills, that could be a good thing. 

(What’s Left of) Our Economy: A U.S. Productivity Report with Something for Everyone

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CCP Virus, coronavirus, COVID 19, labor productivity, productivity, stay at home economy, technology, total factor productivity, Wuhan virus, {What's Left of) Our Economy

As known by RealityChek readers, I’m always hesitant to make too much of official U.S. productivity statistics because many economists believe that these various measures of efficiency are unusually hard to measure. (Google “productivity,” “data,” “measurement,” and “problems” and you’ll see what I mean.)

Moreover, I’ve been especially hesitant during the CCP Virus era, because the pandemic and related lockdowns and behavioral changes have been so unprecedented, and it’s still far from clear how lasting the effects will be.

Having said that, these data surely aren’t completely meaningless either, and a major finding of theirs has been so dramatic that it’s tough to dismiss: Both the relatively narrow measure of labor productivity, or the broader measure of total factor productivity show a big slowdown in productivity growth in recent decades.

For total factor productivity, here are the figures that compare the performance of non-farm businesses in percentage terms during the last three economic recoveries (i.e., using the best apples-to-apples data) before the CCP Virus-era bounceback that began in the third quarter of 2020:

1990s expansion (1991-2000): +10.34 percent

bubble decade expansion (02-07): +6.91 percent

post-Great Recession expansion (10-19): +4.88 percent

The main evidence for the slowdown is the fact that even though the latest expansion was the same length as that of the 1990s, its cumulative total factor productivity growth was less than half as strong.

In this context, it’s noteworthy today’s Labor Department release on total factor productivity (which, unlike labor productivity, tries to show business’ success in using a wide range of inputs – not just workers – to improve efficiency) has something for both optimists and pessimists.

Glass-half-full types will observe that, in 2021, total factor productivity grew by 3.17 percent – a record in a statistical series going back to 1987. The previous fastest annual pace was 1992’s 2.88 percent.

The glass-half-empty types, though, can argue that even this big advance won’t be enough to end the long-running slowdown. In the first place, the excellent 2020-21 impovement followed a 1.97 percent 2019-20 decrease that was the worst performance of all time. And in that vein, because solid total factor productivity increases are typical of early stages of an economic recovery, the 2021 year-on-year jump may only be a post-CCP Virus reversion to a dreary long-term mean.

The optimists can counter by claiming that pandemic-driven trends like severe labor shortages, consequently rising wages, and the advent of a work-at-home era in both the public and private sectors will push employers to invest more in labor-saving and communications technology in particular. The result will be a turning point in the recent crummy U.S. productivity story.

The only certainty I can see is that the virus is becoming endemic and that its economic growth-depressing effects will fade steadily (at least until the next pandemic). Other than that, I’ll simply say that the force of inertia alone indicates to me that the burden of proof for a durable productivity upswing – and for a needed U.S. transition from prosperity based on government stimulus to well-being with sturdier foundations – still lies with the optimists.

Our So-Called Foreign Policy: America’s Latest China Spy Conviction Might Not Even Be Tokenism

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aircraft, Aviation Industry Corporation of China, AVIC, avionics, China, Clyde V. Prestowitz, FBI, Gary Locke, GE, General Electric, Justice Department, manufacturing, Obama administration, Our So-Called Foreign Policy, spying, tech transfer, technology

Sorry, but I only gave a cheer or a cheer-and-a-half upon learning on Friday that a Chinese national was convicted in a federal court of trying to steal “trade secrets” relating to a key aviation technology from General Electric (GE).

Don’t get me wrong – it’s great that this spy was caught. But anyone knowing anything about the relationship between way too many other U.S.-owned advanced manufacturing and information technology companies and China would surely be asking why Beijing even bothered to send him into the field. Because the amount of sophisticated technology – and even clearly defense-related knowhow – that such companies have transferred to China voluntarily has clearly been more than enough to help the People’s Republic narrow the military gap with the United States substantially. (See, e.g., this piece I wrote for Bloomberg.com from 2013.) 

And even though the Justice Department says GE was working with the FBI to catch Yanjun Xu, it’s been a prime culprit. Notably, as recounted by long-time U.S. trade official and Asia watcher Clyde Prestowitz in his outstanding recent study of Sino-American relations The World Turned Upside Down, in November, 2009, the company announced the merger of its avionics division with China’s Aviationcons Industry Corporation (AVIC) and headquartering the new entity in Shanghai.

As Prestowitz explained, the deal was bad enough from a U.S. economic standpoint because standard commercial considerations had nothing to do with the resulting offshoring of high value manufacturing and employment. Instead, GE recognized that it wouldn’t be selling much in the way of avionics to China unless it made lots of them in China. In other words, it was victimized by extortion.

But the national security implications were even worse. For avionics are the electronics systems used in aircraft and missiles, and AVIC isn’t just another aerospace company, but an organization owned and controlled lock, stock, and barrel by the Chinese state, and one that has a “monopoly on military aircraft manufacturing and maintenance.” So it had to be clear from the get-go that any breakthroughs in avionics generated by GE would ultimately be available to AVIC and deployed in weapons that could well be used against American soldiers, sailors, and pilots in a future conflict between the two countries. Yet good luck trying to find any federal government opposition to the transaction. You won’t.

Indeed, when the new arrangement was formalized in 2011, the signing ceremony was attended by Gary Locke, former President Obama’s Commerce Secretary – who apparently didn’t even blink an eye when GE proudly declared that the new venture “will develop and market integrated, open architecture avionics systems to the global commercial aerospace industry for new aircraft platforms. This system will be the central information system and backbone of the airplane’s networks and electronics and will host the airplane’s avionics, maintenance and utility functions.”

And apparently Locke – and Obama – were just fine with GE’s avowed aim of developing with AVIC “a world-class engineering organization” with “the JV itself…creating new IP [intellectual property] and new technology.”

I guess they thought that the technology for developing civilian avionics and military avionics are fundamentally different, and that AVIC’s interests are purely commercial.

The technology that Yanjun Xu was seeking isn’t avionics-related. It has to do with engine parts made from composite materials – which the Justice Department says “no other company in the world has been able to duplicate.” And GE’s cooperation obviously means that the company wants to maintain ths monopoly over all actual and potential competitors, including from China.

But since it succumbed to blackmail over avionics, it’s far from a sure bet that it will keep drawing a line in the sand on composites – or anything else. Indeed, as the company boasts, its cooperation with AVIC on “technical training, manufacturing, spare parts distribution, and…maintenance and overhaul” for engines is already substantial. As a result, it’s equally unlikely that American regulators will be able to keep this knowhow in American hands.

The American journalist Michael Kinsley once famously wrote that “the scandal isn’t what’s illegal, the scandal is what’s legal.” You don’t need to look much further than GE’s deep, longstanding, and officially sanctioned ties with China’s state-run aerospace industry to see how right he was.

(What’s Left of) Our Economy: Why That China Competitiveness Bill Urgently Needs Trade Fixes

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China, competitiveness, consumers, health security, inflation, Robert E. Lighthizer, Section 301, Senate, supply chains, tariffs, technology, Trade, Trade Act of 1974, U.S. Innovation and Competition Act, World Trade Organization, WTO, {What's Left of) Our Economy

Nearly two months ago, I complained here on RealityChek that Congress was working way too slowly on legislation aimed at helping restore the U.S. competitiveness needed to reopen a wide lead over China in the dust in the race for future global technological competitiveness. Now I see that more time to pass the bill is needed after all – because the version approved by the Senate June 8 contains some fatal trade policy flaws that urgently need fixing.

Trade policy, as I’ve explained previously is a vital dimension of beating back the China challenge. But as reported yesterday in a New York Times article by former Trump chief trade official Robert E. Lighthizer, key amendments to the U.S. Innovation and Competition Act

“would harm U.S. interests in three important ways: It would cut tariffs on medical supplies needed in a pandemic; reauthorize the so-called Miscellaneous Tariff Bill to cut tariffs on Chinese and other imports; and amend our enforcement laws in a way that will make it more difficult to battle predatory trade practices by our foreign competitors.”

And if you read the (2,300-page) bill, you see that he’s right. For example, a section titled “Facilitating Trade in Essential Supplies” (beginning on p. 1588) refers to America’s need “to maintain readiness and to surge production of essential supplies in response to an emergency” in national security and public health and safety, or in the security and functioning of “critical infrastructure.”

But consistent with an approach taken to this challenge by President Biden, the act makes clear that achieving these goals includes developing “a whole-of-government strategy to ensure that the United States has reliable access to essential supplies from its trading partners….” In other words, it will be equally fine if the nation remains dependent on imports of such goods. These two objectives clash with each other directly and violently.

If Washington could count on lots of reliable trade partners out there to step in in a pinch and fill supply gaps, this strategy of defining “Made in America” as “Made Overseas, Too” would be defensible (if not, in my view, optimal). But although the legislation directs federal officials to “identify unreliable trading partners,” its authors seem oblivious to just how many foreign governments qualified for this label with their bans and other curbs on vital medical goods during the height of the pandemic. It was 80 according to no less than the World Trade Organization (WTO).

According to Lighthizer, the bill would also undercut American industry’s broader ability to compete with China by renewing a Miscellaneous Tariff Bill that would reduce duties on more than 900 goods produced and exported by the People’s Republic. The list – which also includes hundreds of other goods, begins on p. 1526 and goes on (in tiny type) for thirty pages.

And the text also supports Lighthizer’s claims that the bill would “gut a provision that President Trump used to impose tariffs on Chinese goods in 2018,” and “also effectively surrender sovereignty over our own trade policy to the World Trade Organization by permanently weakening Section 301 unless the United States first wins a multiyear litigation before that body.”

Possibly, the most disturbing feature of the bill’s treatment of these so-called “301 tariffs” (named after the section of the 1974 Trade Act that initially authorized suc measures is the measure that bars the imposition of these duties without an analysis of their impact “on United States entities, particularly small entities, and consumers in the United States” (p. 1607), and additionally of whether they would “unreasonably increase consumer prices for day-to-day items consumed by low- or middle-income families in the United States” (p. 1609).

Although numerous RealityChek posts have documented (see, e.g., here) that none of the 301 tariffs had lasting effects on U.S. retail or wholesale price levels (largely because importers absorbed the higher costs), there’s no guarantee that significant time frames would be examined. In addition, there’s never any shortage of businesses or business organizations in particular ready to predict disastrous price hikes from any tariff increases regardless of the historical record. So the most powerful tool possessed by Washington to enforce trade agreements and combat foreign protectionism could well be neutered unless changes are made.

Finally, Lighthizer’s contention about permanently weakening America’s Section 301 authority appears borne out by pp. 1610-1611, which states that the process for excluding certain goods from that measure’s tariffs “shall not apply” in cases under consideration by the “dispute resolution process under the World Trade Organization [WTO].” In other words, if such U.S. tariffs are challenged at the WTO, they can’t legally be imposed until the WTO decides they’re kosher.

There shouldn’t be any doubt in anyone’s mind that time is not on America’s side as it tries to raise its competitiveness game, both against the Chinese and in general. But it’s also true that haste makes waste — and even worse. And these trade policy flaws in this China competitiveness bill aren’t eliminated, Americans will see a crucial economic and national security opportunity squandered.