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Don't Waste America's Best Chance to Beat China

Don't Waste America's Best Chance to Beat China

Wednesday, 7 April, 2021 - 05:00

Making the US more competitive with China is a big talking point for President Joe Biden as he promotes his economic agenda. After watching China seemingly go from strength to strength for two decades, it's natural to wonder in which industries we might actually have a chance at winning. The answer is: More than you might think, as long as the US adopts a smart strategy and takes care to maintain its core advantages.


In the 2000s, large segments of US industry packed up and went overseas, drawn by the unbeatable “China price.” China’s low-cost advantages included not just labor, but subsidized capital, cheap land, cheap coal power and lax environmental regulations. Now, in the 2020s, the competitive landscape is much different. Decades of rapidly rising wages, limits on coal supplies, and efforts to clean up air and water have forced up Chinese costs until China is no longer automatically the cheaper place to manufacture things anymore. Mexico or Vietnam are more likely to get the factories of manufacturers who care chiefly about cost.


That doesn’t mean China isn’t a fearsome competitor, only that the type of competition has shifted. Whereas once China did low-value assembly work, now it’s pushing into high-tech industries, such as semiconductors, 5G wireless equipment, drones, high-speed trains and cell phones. So while the battle for jobs is now over, the fight for market share and technological supremacy is just beginning. China’s government is going all-in on industrial policy in order to make sure its companies, which enjoy a substantial amount of state support, dominate as many high-value sectors as possible.


But the US has plenty of tricks left up its sleeve. Our victory in the vaccine race was resounding, thanks in large part to the almost magical mRNA technology. Former President Donald Trump’s export controls also exposed various supply-chain weaknesses in key Chinese industrial champions like Huawei Technologies Co.; there were a number of high-tech products, like certain computer chips and specialized chip manufacturing equipment, that China hasn’t been able to make yet. These were often produced by small, obscure US firms with highly specialized knowledge. China also lags in aircraft and a number of other high-tech manufacturing industries. Nor have many of its software companies become as internationally successful as Alphabet Inc.'s Google, Facebook Inc., Microsoft Corp., or Amazon.com Inc.


The industries in which the US can outcompete China have one thing in common: continuous innovation. China’s vast, hard-working, and experienced manufacturing workforce is very good at figuring out how to make high-tech products very efficiently. US designs tend to leak to Chinese companies, either through joint ventures, industrial espionage or reverse engineering. And because East Asia is now such a center of global manufacturing, it’s easy for Chinese companies to source needed parts domestically or nearby, while the US has more trouble doing this. Thus, when the US beats China in a high-tech industry, it’s because American companies manage to innovate and come out with new and better products faster than Chinese companies can copy them. These new products can rapidly seize market share and keep margins high.


Continuous innovation requires that the US have the very best scientific and engineering talent in the world. Though the US can and does educate many scientists and engineers itself, it also draws on the enormous talent pool of the entire rest of the world. In some STEM fields, foreign graduate students are actually a majority.


And though the US trains many engineers, it needs even more educated workers than it can produce by itself if it wants to maintain dominance over China. High-skilled immigration is crucial for maintaining the talent pool that allows the US to be the world’s research park.


Continuous innovation also often involves a pipeline of innovation from universities to companies. The US has most of the world’s top research universities; these produce vast amounts of scientific discoveries that are later used to inform private product innovations. In addition, researchers cross-license their discoveries or become private entrepreneurs themselves. China’s university system, though vast and increasingly well-funded, can’t yet compete with the US’ open culture of academic innovation.


Unfortunately, some Americans have grown to fear both high-skilled immigrants and universities. Opponents of skilled immigration relentlessly characterize H-1b workers and foreign students as stealing American jobs. In fact, it’s the opposite; the presence of those innovative workers is what makes high-value industries like software, biotech and high-tech manufacturing put their labs and offices in the US, which in turn creates job opportunities for native-born Americans in the same fields. Meanwhile, some conservatives have grown to fear universities, viewing them as incubators, promoters and teachers of left-wing ideas.


Another important competitive tool that many Americans fear is automation. With China rapidly automating its own manufacturing, the only way the US will be able to stay competitive is by following suit. But Americans are so afraid of robots taking their jobs that some prominent figures have actually suggested taxing automation instead of encouraging it.


That way lies madness. The US does not have a fixed number of high-tech jobs to be parceled out. If we keep out skilled immigrants and tax robots, high-tech industries will simply be snapped up by the Chinese. Instead, the US needs to focus on maximizing these crucial resources, in order to keep the pipeline of continuous innovation going. Remaining the world’s research park is the one strategy that can successfully keep us ahead of our gigantic, hard-charging overseas rival.


Bloomberg


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