Posted on 02/08/2006 9:39:34 AM PST by Paul Ross
Smoot Hawley, Chinese Style
Forbes.com
May 20, 2005
Original Article
In his insightful new book, The World Is Flat, Tom Friedman of The New York Times, though generally disdainful of anything conservative, somehow brings himself to cite an exemplary Heritage Foundation study of U.S. companies with facilities in China. These firms are not an unhealthy set of "Benedict Arnolds," as they were quaintly dubbed by Sen. John Kerry during the last presidential campaign. They are the heart of the U.S. economy and the spearhead of global economic growth.
As Friedman explains, these manufacturing outsourcers together generate 21% of the U.S. gross domestic product, 56% of U.S. exports and 60% of U.S. manufacturing employment. But even these figures understate the significance of these companies, because GDP is full of fluff--Berkshire Hathaway-type dross such as Coca-Cola and reinsurance flimflam and government dependents such as the Washington Post and AIG - while the leading investors in China are our technology leaders, such as Qualcomm, IBM and Applied Materials.
I know that on the market I have recently been slipping and sliding all over the track, but I have held fast to one proposition: China is vital to U.S. technology.
The U.S. economic relationship with China expresses the most fruitful synergy in the entire industrial world. Any systematic attack on trade with China would prove as devastating to U.S. companies, and thus to U.S. prosperity and power, as the Smoot-Hawley tariff was to the U.S. economy at the time of the Great Depression.
The greatest current danger to the U.S. position in the world, therefore, is not the surge of oil prices or the terrorist jihad or the alleged "imbalances" in trade and investment. The direst peril is the current concerted bipartisan attack on the U.S. relationship with China.
Compounded of misinterpreted national security threats and delusional trade gap fears, the bipartisan consensus strangely imagines that China is somehow exploiting us. China is surely a powerful country with a mind of its own and a lot of leftover Communist generals with a Taiwan fixation. If the U.S. is suffering from national security overreach, however, the answer is to improve our economy and our armaments, not to disrupt our most valuable economic relationship.
Nonetheless, with the administration and its congressional minions chiming in with Sen. Hillary Clinton and Sen. Charles Schumer, and with a chorus of Davosian corporate gulls led by Warren Buffett and even sometimes Bill Gates, the American establishment has adopted a near unanimous belief that the dollar is way too strong vis-à-vis the Chinese currency. In response, both Congress and the Administration urge a 27.5% tariff against Chinese goods designed to force a major revaluation of the Chinese yuan.
Nothing that al Qaeda could do to America is as destructive to U.S. interests as this attack on the heart of our economy. Of course, many foreign politicians seethe with envy at the supposed "imbalances" that give the U.S. nearly half of global market cap and some 30% of global GDP. Naturally they want to bring us down. But why on earth do Americans join them? How on earth can the U.S. benefit from compounding the sharply higher prices it now pays for energy by paying sharply higher prices as well for Chinese manufactures and technology?
When John Snow and George Bush agree with Hillary Clinton and Charles Schumer on anything, even such a woebegone whim as a weak dollar as a remedy for supposed excesses of foreign investment in America, you can be sure things are not going well. After all, the Clintons and their agents such as Rubin and Summers, and their billionaire Berkshire Hathaway buddy Buffet, never urged a drastically weaker dollar when they held the power to achieve it. But the Administration remains full of economists who believe that anyone who fails to accept the idea that the U.S. under Bush may be felicitously described as "Squanderville" is a supply-sider practicing voodoo.
Exacerbating the damage of this macro-trade policy, the Administration is pursuing almost equally perverse micro-trade policies. It is moving to ban the U.S. semiconductor capital equipment industry from selling state-of-the-art 90-nanometer gear to China on the grounds of national security. And it is conducting a Federal Trade Commission witch hunt against the dynamic random access memory (DRAM) industry, which is somehow deemed to be charging too much (gouging), or too little (dumping), or just right (colluding), or perhaps all at the same time, in one of the nuttiest notions of criminality since the Salem witch trials. The DRAM witch-hunt fails to notice that this is perhaps the world's most ferociously competitive industry, reducing its price per bit by some 50% per year.
The DRAM follies merely make the U.S. government look silly. But the national security effort is serious. It is based on the assumption that technology is something owned by the U.S. and stolen by foreigners or leaked to them rather than created in tandem on both sides of the Pacific.
Since Asia commands roughly ten times more engineering talent than the U.S. does, and since China alone now graduates more English-speaking engineers every year than the U.S., and since the U.S. neither adequately trains Americans in math and science nor now permits the needed levels of immigration of foreign talent, leading-edge technology skills are no longer anywhere near a U.S. monopoly. Because China makes up roughly half the incremental market for semiconductor wafer fabrication equipment, moreover, the campaign to deny to China state-of-the-art microchips will reliably drive one of our most valuable and coveted industries off shore. So much for national security.
Seeing these policies make their way through the political process, the markets have responded with an exuberantly rational crash of technology stocks. Should these devastating policies hold, they will heavily punish the U.S. technology sector and jeopardize our continued world leadership in the field already suffering from our pathetic inability to deploy real broadband.
These policies are based on the silly socialist view, masked as a "free market" in currencies, that trade should be equilibrated at national borders through gyrations of the value of money. But in a global economy, with capital moving at the speed of light down fiber-optic lines rather than across perilous seas on clipper ships, nothing is less natural than a trade balance. It can only be achieved by constant destructive manipulation of currencies, which are finally determined after all by governmentally run and appointed central bankers.
George Gilder is a Senior Fellow of Discovery Institute and Chairman of the Gilder Technology Report.
I think it is essential to see how fuzzy-headed thinking emplaces scales over the eyes of the Administration. We have all seen the Adminstration more or less confess that they fear enforcing diligently the immigration laws against illegals because of the short-run economic turbulence the U.S. economy would experience.
Now we can see that the same argument which captured the President's mind on illegal aliens are being repeated with regard to China.
George Gilder is representative of the problems. Yes, the same George Gilder who believes in Christian Capitalism. (Apparently just not in China however).
George Gilder's 'freaking out' column was first printed in Forbes last year.
As can be seen, he claimed that China was VITAL to the U.S.?
Not as a market. Not as an ally. Not as source of natural materials. But for its cheap labor.
His sole concern was the rise of U.S. protectionism....but in his litany of alarm ...he in fact made a telling and IRREFUTABLE case for that same protectionism.
He said we were dependant already. That if cut off we would be destroyed.
Seems to me, that destructive "cut off" is thus right within the power of the Chinese Communist Party. We have them right where they want us.... :-)
So precisely who will be cracking the whip in this 'relationship'? Who has the high cards? Who has the leverage? One would assume that a U.S. President who truly valued U.S. sovereignty would reach for and use our advantages. But we know he didn't.
We already saw that with the conspicuous failures in Bejing with the President's visit late last year. Complete and utter humiliation for the President. Tyranny, censorship and oppression, from one end of the country to the other...and we do nothing about it.
Meanwhile, George Gilder sees no evil. Just like Google.cn does no evil.
And what is especially tragic is that he has totally lost any real credibility as regards national security. His blatant espousal of transferring the remaining U.S. technology advantages, such as the higher density semiconductor production equipment, demonstrates an ignorance that simply has to be the product of a systemmatic and willful disregard for all the evidence of Chinese enmity.
The problem of those fail to ascertain or appreciate that China is not a U.S. "technology advantage."
Don't worry, the Chinese love us, and live only to ship us snazzy low-cost consumer goods in exchange for thin-air helicopter money.
This will continue forever, because we are Americans, and it is our birth right.
It's like the fool who was saying we all have a trade imbalance with our grocer so our losing industry to China is a good thing.
I can't speak for anyone else, but my grocer hasn't been plotting for over a hundred years to destroy me.
I would assume your grocer lives in the US and that you'd know US citizenship is not based on ethnicity.
If so I'd assume you know your comment makes no sense.
The problem with these articles is the complete lack of any hard numbers to put the problem in perspective. For example,
1) How much trade do we have with China in dollars & as a percent of GNP?
2) How much is the trade gap?
3) And if trade with China was cut off, how much could be replaced (esimtated dollars) thru increased trade with other countries?
My feeling is that collapse of trade with Chna would cause some disruption but we would soon recover. I also think (but have no numbers to back it up) that China trade is a VERY SMALL PART of our GNP.
I sort of mangled it, but the original quote was more or less that we had a trade deficit with our grocer, we give them money and they give us things. We have a trade deficit with the Chinese, too and that was a good thing.
The economist who said that was ignoring the fact that China has been planning to destroy us for a long time. My local grocer likes me.
This mindset is still massively prevalent in the MSM. Here is a clip from the New York Times columnist, a devout follower of his colleage, Thomas Friedman evidently, on Monday, Feb. 6th:
Posted on Mon, Feb. 06, 2006
The facts and figures are clear: U.S. isn't wrestling with decline
DAVID BROOKS
Everywhere I go, people tell me China and India are going to blow by us in the coming decades. They've got the hunger. They've got the people. They've got the future. We're a tired old power, destined to fade back to the second tier of nations, like Britain did in the 20th century.
This sentiment is everywhere — except in the evidence. The facts and figures tell a different story.
Has the United States lost its vitality? No. Americans remain the hardest-working people on the face of the earth and the most productive. As William W. Lewis, the founding director of the McKinsey Global Institute, wrote, "The United States is the productivity leader in virtually every industry." And productivity rates are surging faster now than they did even in the 1990s.
Has the United States stopped investing in the future? No. The United States accounts for roughly 40 percent of the world's R&D spending. More money was invested in research and development in this country than in the other G-7 nations combined.
Is the United States becoming a less important player in the world economy? Not yet. In 1971, the U.S. economy accounted for 30.52 percent of the world's GDP. Since then, we've seen the rise of Japan, China, India and the Asian tigers. The United States now accounts for 30.74 percent of world GDP, a slightly higher figure.
What about the shortage of scientists and engineers? Vastly overblown. According to Duke School of Engineering researchers, the United States produces more engineers per capita than China or India. According to the Wall Street Journal, firms with engineering openings find themselves flooded with resumes. Unemployment rates for scientists and engineers are no lower than for other professions, and in some specialties, such as electrical engineering, they are notably higher.
Michael Teitelbaum of the Alfred P. Sloan Foundation told the Wall Street Journal last November, "No one I know who has looked at the data with an open mind has been able to find any sign of a current shortage." The GAO, the RAND Corp. and many other researchers have picked apart the quickie studies that warn of a science and engineering gap. "We did not find evidence that such shortages have existed at least since 1990, nor that they are on the horizon," the RAND report concluded.
What about America's lamentable education system? Well, it's true we do a mediocre job of educating people from age 0 to 18, even though we spend by far more per pupil than any other nation on earth. But we do an outstanding job of training people from ages 18 to 65.
At least 22 out of the top 30 universities in the world are American. More foreign students come to American universities now than before 9/11.
More important, the American workplace is so competitive, companies are compelled to promote lifelong learning. A U.N. report this year ranked the United States third in the world in ease of doing business, after New Zealand and Singapore. The United States has the second most competitive economy on earth, after Finland, according the latest Global Competitiveness Report. As Michael Porter of Harvard told the National Journal, "The U.S. is second to none in terms of innovation and an innovative environment."
What about partisan gridlock and our dysfunctional political system? Well, entitlement debt remains the biggest threat to the country's well-being, but in one area vital to the country's future posterity, we have reached a beneficent consensus. American liberals have given up on industrial policy, and American conservatives now embrace an aggressive federal role for basic research.
Ford and GM totter and almost nobody suggests using public money to prop them up. On the other hand, President Bush, reputed to be hostile to science, has increased the federal scientific research budget by 50 percent since taking office, to $137 billion annually. Sens. Lamar Alexander and Jeff Bingaman have proposed excellent legislation that would double the R&D tax credit and create a Darpa-style lab in the Department of Energy, devoting $9 billion for scientific research and education. That bill has 60 co-sponsors, 30 Democrats and 30 Republicans.
Recent polling suggests that people in Afghanistan and Iraq are more optimistic about their nations' futures than people in the United States. That's just crazy, even given our problems with health care, growing inequality and such. America's problem over the next 50 years will not be wrestling with decline. It will be helping the frustrated individuals and nations left so far behind.
[ COMMENT ]
Hence, GWB's proposals for lifting caps on H-1B visas run afoul of basic realities... Equally hollow then is his own Labor Dept. claiming that 60,000 H-1B's going unused last year was "unacceptable" rings rather hollow doesn't it?
I put a healthy dose of salt upon Brooks claims, e.g., the unemployment figures for those professional categories being 'normal' is a severe misrepresentation of how bad some of the fields are for NEW GRADUATES. Hence the extreme pressures on the U.S. college students to avoid these fields, which are crowded out by foreign students (which the Duke study numbers cited herein mysteriously fail to disaggregate) who are preferentially hired because of willingness to take lower pay, and H-1Bs.
And foreign students are a potential problem. They are industrial espionage threats. And they are loyalty threats. And they often pick up and leave for their home countries.
This is a concern that is too long run for most U.S. industry, driven by its notorious short-run concerns only for quarterly issues. Five years down the line is too far for them to worry about.
The Bechtel Engineer I met in Yellowstone was an EE. And he said flat out that even though we are facing losing the base of engineers we have now, through aging and retirement of the U.S. workforce in the engineering fields...telling the American students we needed more math and science graduates ...'was a lie.' And it wasn't due to 'productivity.'
Bechtel in the space of less than five years is now outsourcing 50% of all their engineering man-hours work to New Delhi, India. Bechtel used to be 100% American. He doesn't believe they will be hiring any Americans in the future.
General Electric used to be a HUGE engineering company. Now its U.S. R&D is down to just Schnechtady in NY. 3/4's is now divided btwn Germany, China and India.
These aren't unique. These anecdotals belie a phenomenon of tsunami-like proportions, and one that the 'studies' mysteriously failed to look at in their attempt to gloss over the fundamental elements undermining American supremacy.
Our probblem with immigration is that we are not sucking in the world's technology brains any more. Our public schools do not produce them in nearly the numbers that our industry and government need to remain the economic and military top dogs in the world. Formerly the world's techies and engineers got their educations in America and most of them went to work here because they preferred the freedom and working in a system that lets them keep a substantial portion of their earnings. We have been denying visas to these people at much higher rates in some scheme to combat illegal aliens and have been pushing them back offshore when they get their degrees.Other countries have been forced to build high class tech schools to make up for the American cold shoulder. We are by these policies cutting off our technological superiority and future political and military superiority. That is a normal government response to a problem. If folks complain about illegal immigration then you cut down on legal immigration where it really will hurt and then say see? we can't stop the illegals because we need immigrants.
"We have been denying visas to these people at much higher rates in some scheme to combat illegal aliens and have been pushing them back offshore when they get their degrees."
You don't have a clue what you are talking about.
I work in high-tech. There is NO shortage of qualified people in the US. If you want evidence of that, look at the figures for tech people who have been laid off the last few years and have had to leave the high-tech field altogether. The numbers are very high, and that proves that there are people out there who could work but aren't able to find work.
You might say that those people don't have the right skills. But that doesn't wash, either, because it's generally alot cheaper to train experienced people in some new skill than to get rid of them and find someone else.
The issue is all about money. Companies use layoffs to get rid of higher paid employees, then bring in H-1B visas to fill those positions. I've seen this happen time and time again. And if that's what it takes for American business to succeed in a global marketplace then they should just say so instead of complaining about not being able to find enough tech workers.
Of course, at some point, the tech industry will have to get used to the idea of declining wages. That's the nature of the global marketplace. The truth is that the tech workers have been priced out of the job market because of global competition, but no one wants to take a lower salary to do the same job so it's easier just to bounce them out the door and hire immigrants.
BTW, the H1-B visa program is little more than an indentured servanthood situation. If you lose your job at the company which is sponsoring you then you can get deported within 30 days if you don't find another one willing to sponsor you (getting another sponsor is not simple). Hence, those people get abused because the employers know that the people can never quit.
My point is that we once had a near monopoly on brains. We are pushing those brains offshore and out of employment by American companies. Yes, it seems to keep the compensation for engineers below the stratosphere but it also keeps the markets for those engineers in this country.Those brains taking their education offshore or being forced offshore after getting their degrees here will keep those salaries "depressed" just as well because the market is, indeed worldwide. Were it not most American engineers would be doing something else instead. American techies are competing with Germans and Russians and Indonesians whether they come here to work or not.
"My point is that we once had a near monopoly on brains."
Yes, but when a country has a population of 1 Billion people they can turn out alot more engineers than we can, just by sheer size. And we are up against two countries that are that size.
We can't expect to maintain some sort of near monopoly on brains by importing the cheap talent just like we import cheap goods from China. The talent pool of techies overseas is like a tidal wave, and that is just a fact (of course they got all sorts of technology for free from us because we gave it to them by outsourcing over there, so they got a huge boost just from that).
The only thing American companies need to do is find out how to be successful in the marketplace as it stands. Importing more and more techies into the US is not going to help, it will only drive more people in the US out of those careers.
The job market can handle some re-adjustment of wages, that's just normal. But when the perception among young people is that the tech sector is a lousy place to try and have a career because you will just get outsourced at some point then no one will get tech degrees anymore. No one thinks they can have a long-term career in tech sector anymore, and that is what is driving people out of studying in those fields.
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