U.S. Loses Its Advantage In Technology Trade

Manufacturing News | April 2, 2004 | Charles W. McMillion

[doug9732]

For the first time ever, the United States has a negative trade balance in technology goods and services and from royalties on intellectual property and patents.

The superiority the United States has held in technology trade has suddenly vanished. The U.S. Commerce Department tracks foreign earnings and payments for royalties and fees on intellectual property. It tracks trade accounts in technology services such as data processing and engineering. It also maintains a constantly updated list of specific advanced technology products (ATP) and monitors the export and import of these goods.

During the second half of 2003, ATP goods suffered a deficit of nearly $17.5 billion, while the surplus for royalties, fees and technology services was barely $16 billion. This left a small but symbolic deficit for the first time on record in the trade of all U.S. technology goods and services. If recent history is any guide, this U.S. loss in technology will quickly become very large and concentrated in China.

The significance of the U.S. losing advantage to China in technology trade has far-reaching consequences. With less than one-quarter of China's population and a vastly more expensive living standard to sustain, the United States cannot compete without a large technological advantage.

Over the past decade, the United States accumulated global current account deficits -- and debts -- totaling $2.8 trillion. Deficits worsened substantially for manufactured goods and the overall surplus in services declined. Wall Street economists and most politicians ridiculed concerns that the United States was producing so much less than it consumed.

"New economy" advocates said that U.S. technological superiority would provide good jobs and enormous export earnings needed to pay for the trade deficits in traditional industries from autos to textiles. Indeed, in 1997 the U.S. trade surplus in technology goods and services reached a record $60 billion -- $32 billion in ATP and about $28 billion in IP and services.

Now, technology is itself a source of lost U.S. jobs and mounting bills for net imports.

A major change occurred with the end of the technology and financial bubble in 2000 as firms looking to cut costs greatly accelerated the export of technology jobs rather than goods and services. Unlike past recessions, when U.S. trade balances improved sharply, the technology balance began to collapse with the first-ever annual ATP deficit in 2002, worsening by 65 percent in 2003. Spurred by a much weaker dollar, the IP surplus improved only slightly in 2003 after seven years of decline and stagnation.

Last year the United States faced $43 billion in trade deficits just for computers, cell phones and their parts. Fortunately, almost half of this deficit was offset by $21 billion in surpluses for semiconductors, a vital industry that has rebounded in the U.S., but now faces strong new supply-chain and policy incentives to step-up outsourcing abroad. The United States is amassing a current accounts deficit at a rate of $1 million per minute while the country lost 718,000 jobs during the first 27 months of cyclical recovery.

The shift from exporting to outsourcing pits the world's lowest wage countries -- their labor and regulatory policies -- against each other. China, now under its tenth ambitious Five-Year Economic Plan dedicated to technology, usually wins this contest. The world's most powerful global companies have made China the leading choice for productive new foreign investment.

This is entirely different from concerns in the 1980s when U.S. companies were losing the competition with Japanese companies. The concern now is not between companies but that global U.S., European and increasingly Japanese companies are all shedding their national loyalties and outsourcing their best jobs, research and production to China and elsewhere.

Despite constant media stereotypes that low-value products such as shoes and toys make up the bulk of U.S. imports from China, electrical machinery was the major U.S import from China from 1994 until last year, being displaced by non-electrical machinery.

The U.S. has had an ATP deficit with China since 1995 and an overall deficit in technology goods and services trade with China since 1999. Last year, that deficit soared to over $20 billion, almost five times larger than the U.S. technology deficit with Japan.

Technology is driving vital economic changes far too rapidly and far too threateningly for politicians and pundits in the U.S. and elsewhere to continue merely repeating over-simplified 18th Century economic theory. Serious public education and discussion of the dynamics of global commerce is long overdue. The current electoral cycle is a critically important time to begin.

-- Charles W. McMillion is president of MBG Information Services in Washington, D.C. He is formerly an Associate Director of the Johns Hopkins University Policy Institute and Contributing Editor of the Harvard Business Review.

[guitfiddlist]

You're right. NASA doesn't have the right stuff. The American military is way ahead of other militaries in tech, for the time being. That, too, will come to an end some day. So the American Industrial Revolution is officially over, and what is there waiting in the wings to take its place?

We may become modern day Vikings, albeit in much more sophisticated ways. I thought about this possibility about 30 years ago when thinking of a scenario in which a nation-state has a lot of military power, but never had, or is losing economic production clout. It is a time-honored practice, though not an honorable one.

[clamper1797]

The following quote is courtesy of Belmont_mark from another thread but seemed appropriate here ... it speaks of William McKinney and the GOP platform of 1900 ...

Firstly, it seems to me that the GOP, over the course of the 20th century, allowed itself to be taken over by people who could only be described as extreme money mongers with anarchistic political and geopolitical tendencies

[RightWhale]

I have no problem with being Viking. I am personally way too old to raid coastal villages, but I could tend the livestock and repair shields and swords.

[InABunkerUnderSF]

Is having a two tiered society in everyone's best interest?

It is if you are on the top tier.

Welcome to the new American Sudra Caste.

[chimera]

We may become modern day Vikings, albeit in much more sophisticated ways. I thought about this possibility about 30 years ago when thinking of a scenario in which a nation-state has a lot of military power, but never had, or is losing economic production clout.

That is one strange scenario to contemplate. Imagine a world-class military superpower (which would be the case for awhile, but would inevitably decay with time) standing to protect a nation of burger flippers, insurance salesmen, academicians, and farmers.

Then again, it could lead to the Next Big Thing: a nation of mercenaries. Rent out your military power to the highest bidder (didn't that happen in Catch-22 with Milo Minderbinder's M&M Enterprises being contracted to bomb his own base?). Hey, I better not give these globalists any ideas...

[1rudeboy]

Platitudes, platitudes. BTW, is anyone keeping a running-count of them on this thread? [laughter]

[lelio]

These area require years of education not "training." "Training" in this context is about "skills" not higher level knowledge.

What, do you mean that Washington elite can only relate to people as cogs in a factory wheel?

I'm perplexed too about this "training" -- is it Bush's version of the WPA? What exactly are these people going to be trained to do?

And what about the college educated people whose jobs are going overseas, are they going to be retrained to do something new?

The government's sole purpose in this scheme is to get people to lower their expectations, to take that dead end job they've been "retrained" to do, and to assume that all thinking jobs are going to go overseas, except those of the CEOs and politicans who are the only ones benefiting from this.

[Cronos]

It was funny as hell having my black manager comment one day about how she went into the coffee room and thought she was in another country.

Actually it would be funny if it wasn't so UNfunny.

hmmm... what's that supposed to mean? Your black manager doesn't belong in this country with us palefaces? I'da thunk blacks would be more affected by additional labour.

[CasearianDaoist]

The government's sole purpose in this scheme is to get people to lower their expectations, to take that dead end job they've been "retrained" to do, and to assume that all thinking jobs are going to go overseas, except those of the CEOs and politicans who are the only ones benefiting from this.

I think that you are being too optimistic here. The "purpose" is to put out a meaningless campaign promise and buy some time, and that is from both parties. There is a concerted effort to get this practice so entrenched that they will say "well we are stuck with it now, what can we do?" The country will not stand for it how ever. It is amazing how strange the rhetoric about all this is. They are not really making sense at all and seem to think that they do not need to make sense either. This, unlike the manufacturing hollowing out that happened in the 80s and early 90s will be deeply examined as it effects almost everyone. They have really miscalculated here. It may not be an issue this year but it will by 06. You can bet on it.

[1rudeboy]

To satisfy my own curiousity, I counted the number of platitudes on this thread up to my reply number 126.

Number of platitudes by "protectionists:" 26.
Nuber of platitudes by "free traders:" 3.

Interestingly, a small number of posters are responsible for the greatest number of platitudes.

[chimera]

And what about the college educated people whose jobs are going overseas, are they going to be retrained to do something new?

This is the question I have always asked those who mindlessly spout the "retraining" (or "get an education") platitude. Sure, it might possibly help for someone who was working on a textile mill line with an eighth-grade education to get their G.E.D., but is "retraining" going to do any good for someone like by brother-in-law's brother, a Ph.D. in EE whose job with H-P was offshored to Malaysia by sweetheart Carly Fiorina and her "cost-cutting" brigade? How much more "training" can he get, he's already at the maximum in terms of "training"?

And it it really going to do the country any good, long-term, to have Ph.D. physicists driving trucks, or M.S.-level industrial designers glad-handing at WalMart?

[Havoc]

What planet are you on. Trade policy determines how imports get priced. That would mean TARRIFS - familiar word? No? How imports are handled via trade policy determines what stores ultimately can get by with charging for the product on the low end. Absent that, competition will rule. If competition is unfair, outside products will cause local producers to go out of business or on the inverse will cause imports to languish on the shelves. Tarrifs are a balancing measure to keep imports competing on a level playing field by inflating their price to the level of local pricing so that local business is not destroyed. That is called protecting the economy from being subverted.

What's going on now is free reign at subverting our economy.
We are no longer the technology leader on this planet - we outsourced that along with every other advantage we had and we are only going to lose more. People can only pay low prices for something if it gets through import process without being adjusted to protect local wage earners. So, yes the government is directly responsible for this. The consumer operates in good faith that the government is watching out for their best interests - not their desire for cheaply priced cheap goods. If your politicians don't have the character to look out for the best interests, then you're screwed. It rests squarly on them. This is NOT a democracy.

[GOP_1900AD]

I am thinking of a start up. Two ideas. One would be managing a consortium of underutilized domestic industrial facilities and talent to rebuild the US aerospace, space and defense industry from the ground up, using lean Sigma principles. Clearly, very capital intensive and fairly risky. The second idea is a bit more mundane - making ammunition. This one would use a combination of advanced techniques, which I will not share here, to design and build ammo which blows away any and all imports in terms of performance, price and quality. Eventually, once established we could uplevel to doing military work up to and including the largest artillery shells. It's good to have these sorts of plans.

[GOP_1900AD]

You are being investigated by the Canadian and US Governments, another Enron in the making.

[GOP_1900AD]

I feel for you. I am taking it on the chin as well. Globalism made me rich during the 1990s, but today it has turned into a monster, I doubt my current line of business can continue without radical changes to the environment, or, some major externally imposed new conditions.

[GOP_1900AD]

LOL! ;)

[GOP_1900AD]

They are the modern equivalent of the pirates of the 18th century. And I am increasingly drawn to being part of the long arm of the rule of law.

[funkywbr]

The coffee room was filled with 25-30 in-sourced Pakistanis.

You get it now?

[GOP_1900AD]

Not greed, but a combination of geopolitical cowardice and stupid addiction to the multilaterlist intellecutally abstracted utopianism which came into vogue, initially with Wilson, and in a big way after WW2.

[GOP_1900AD]

You pretty much nailed it. Although I personally am more a less protected (no debt, most assets as land, the rest highly diversified and not overly laden with securities, etc...) I'd say most Americans are not. The reckoning will be severe.