Competing with China

If you are serious about preferring facts to feelings you will find David Goldman’s analysis of the current state of play in the civilizational clash between America and China to be bracing-- to say the least. If you prefer emotions to facts you will start railing about slave labor in Xinjiang province and declare that the Chinese are all Nazis. 

If international competition was based on self-righteous moralizing, we would be world leaders. And I am not just talking about Republicans. What we call woke culture is all bluster and no building.

If you are not ready to send the 82nd Airborne into Shanghai, one wonders what you are going to do with your self-righteousness about China. By huffing and puffing, a habit that seems to have afflicted many good Republicans, you add nothing to our gross domestic product and you do not prepare the country for what many are now calling the Fourth Industrial Revolution, the one that concerns Artificial Intelligence.

As you can guess, or as you should be able to guess, I have no real expertise in these areas. Thus, I will pass on commentary and present Goldman’s essay points for your edification.

He begins by noting that the Trump tariffs did not bring down our deficit with China. They increased it. Oh:

The United States now imports almost $600 billion a year of Chinese goods, 25 percent more than in January of 2018 when President Trump imposed punitive tariffs. That is equal to about a quarter of US manufacturing GDP. Far from decoupling from China, a widespread proposal during the COVID-19 pandemic, the United States has coupled itself to China more closely than ever.

So much for decoupling. Besides, what makes you think that the American educational system is producing people who can do the jobs that we are supposedly onshoring.

Goldman connects China’s increasingly competitive manufacturing system with the fact that the dollar’s days as a reserve currency are numbered:

Chinese dominance in the next generation of manufacturing and logistics will erode America’s position as the provider of the world’s dominant reserve currency and ultimately lead to a funding crisis for America’s burgeoning internal and external debt.

America became a leader during the Third Industrial Revolution because it excelled in computing and communications technology:

American leadership of the Third Industrial Revolution in computation and communications made this country a magnet for the world’s capital.3 The United States was able to run a chronic deficit in goods and services because a world hungry for investments wanted our assets. Substituting cheap imports for domestic manufacturing may have been a policy error, but it was an affordable policy error because of America’s leadership in the digital age. To put this in perspective: the combined market capitalization of America’s mega cap technology stocks (Facebook, Apple, Amazon, Microsoft, Netflix, and Google) rose to $9 trillion in 2021 from $1 trillion in 2013—that is, to 26 percent of the market capitalization of the S&P 500 from 8 percent in 2013.4

But, in the Fourth Industrial Revolution, we are already lagging:

In the Fourth Industrial Revolution, where natural monopolies will arise from dominance in big data, China has a double advantage. First, it has put massive state resources into frontier R&D, and it is producing seven times as many STEM bachelor’s degrees as the United States. Second, China’s political system allows the harvesting of personal data, including medical records, without the constraint of Western privacy laws, which gives it enormous advantages. Although China’s approach is full of missteps and inefficiencies, it can and will leapfrog the United States—unless the United States revives the innovation drivers that won the Second World War and the Cold War.

What is the importance of AI? Goldman explains:

Drone swarms communicating with 5G and guided by AI can do things that manned fighter aircraft cannot do. In addition, swarms of inexpensive sea drones (unmanned underwater vehicles) combined with quantum magnetometers and satellite-based optical sensors may render submarines as vulnerable as were battleships to carrier-based aircraft in the mid-twentieth century.

And then there is the matter of 5G:

China had installed 800,000 5G base stations as of February 2021, with another 600,000 to 800,000 planned for 2022; these will cover all the major cities in China. The average download speed on China’s networks is three hundred ambits per second vs. a US average of fifty-five ambits per second.8

He continues, noting that the automated port of Shanghai is far ahead of our ports of Long Beach and Los Angeles. Might we suggest that this is one reason why container ships languish for months in the waters outside of our Western coast:

According to Chinese industry sources, five thousand private industrial 5G networks already are in place in China, with another fifty thousand expected to be completed in the next year.9 These include the automated ports in Shanghai’s Yangshan Container Port, which is the world’s largest, as well as industrial robotics, autonomous vehicles, and other applications. Comparable networks in the United States and Europe are for the most part experimental rather than operational. The Trump administration’s sanctions against sale of components, including semiconductors made with US equipment or intellectual property, appear to have slowed China’s 5G rollout only slightly.

Keep in mind, throwing sanctions and tariffs at China might have made us feel rough and tough, but asking what it has really accomplished is another question altogether.

As for the contribution AI makes to other forms of manufacturing, Goldman explains.

Technological innovation harnessed to production capacity produces a snowball effect. As innovations are commercialized, manufacturing and logistics industries provide a real-world laboratory to test and deploy new innovations. America invented the digital age because most of the decisive innovations—optical networks, inexpensive semiconductor manufacturing, displays, sensors, and communications technology, including the internet—emerged from corporate laboratories linked to production capacity. China already produces about 30 percent of the world’s manufactured products and is moving up the technology spectrum. It also produces seven times as many STEM baccalaureate degrees as the United States. China is close to achieving a critical mass of skills, technology, and supply-chain depth that will leave the United States behind—just as the United States left Britain behind during the twentieth century.

And then, what will happen when China becomes less dependant on American agricultural products. Keep in mind, they send us iPhones and we send them soybeans. What does that tell you?

What the United States should fear most is not what China does wrong, but what it does right. For example, the United States in 2020 exported $25.7 billion worth of soybeans, America’s single largest export item for which China is the largest buyer. “Smart” agriculture in Brazil and other large soy producers will rapidly reduce China’s dependency on imports from the United States and erode American exports at a moment when the US current account deficit is running at about $1 trillion a year.

So, AI will eliminate most labor intensive jobs. You know, the only jobs that the migrants invading our Southern states can do.

As noted, China’s advances in labor saving will make it possible to eliminate many labor-intensive jobs. The job description that encompasses the most workers in the United States is “driver.” China’s newly constructed urban infrastructure and 5G buildout supports autonomous vehicles far better than the aging, often chaotic infrastructure of American cities. China, moreover, is ahead of the United States in warehouse automation. E-commerce accounts for more than 50 percent of all retail sales in China, compared to 14 percent in the United States as of the first quarter of 2021.13

And then there is the dollar, and especially its reserve status:

The United States accounts for about 8 percent of world exports, but more than 50 percent of international reserves and offshore-backed deposits.15 China already is the world’s biggest exporter with 12 percent of the total, and it will become the world’s largest economy in dollar terms before the end of this decade. If China’s currency gains a global role commensurate with its economic standing, the dollar’s reserve role will fade like the pound sterling before it, and the American capacity to borrow overseas will shrink considerably. That, in turn, implies a severe adjustment for a heavily geared US economy.

Have we seen this problem before? Goldman says we have:

Per capita GDP in the United States and the United Kingdom were roughly equal in 1930, despite Britain’s considerable population loss during the First World War. Today US per capita GDP is 45 percent higher than the UK’s, according to data compiled by the Maddison Historical Statistics Project. The loss of Britain’s industrial preeminence, its empire, and its global reserve currency did not ruin Britain, but it left Britons far less wealthy than Americans. Britain, moreover, found a niche in the Atlantic Alliance, and became the leading provider of financial and related services within the dollar sphere.

Americans no doubt will find remunerative things to do in a new Chinese Empire. The Chinese do not conquer and destroy. They assimilate. They are incurious about how barbarians manage their internal affairs, contemptuous of democracies who do not elevate their cleverest exam-scorers to Mandarin positions. America will persist even if it doesn’t prevail. We will still write smartphone apps. We will be the geeks in a new Roman Empire.

This means, while we are turning our educational system into an idiotocracy, China is all in with merit.

Is industrial policy the solution? Do we need another Manhattan Project to become competitive in the age of AI:

The United States fielded a successful industrial policy in the past for two reasons. First, the federal government (above all the Department of Defense) set clear priorities dictated by military necessity. Superior weapons systems or predominance in space demand real breakthroughs at the frontiers of science. Second, we drew a bright line between the responsibilities of the public sector and those of the private sector. The federal government paid for basic research by corporate laboratories, but the private sector shouldered the risk of commercialization. The United States should not directly invest in private industries except in the special case of products whose strategic importance is beyond question—for example, in semiconductors. The right combination of R&D subsidies and tax incentives should be sufficient to persuade American corporations to revive the system of corporate laboratories that collaborated so well with the Defense Department during the 1970s and 1980s.

Goldman sounds an alarm:

The United States can still lead the Fourth Industrial Revolution. But we do not have a lot of time to lose. China is close to attaining a critical mass of talent, skills, technological capacity, and logistical depth with a population nearly five times that of the United States. At some point in the foreseeable future, the United States will not be able to catch up.

Despite its best intentions, the Trump administration’s economic initiatives—the corporate tax cut and the tariffs against Chinese imports—did little to revive US manufacturing. Industrial production shrank in 2019—before the COVID-19 recession. The Biden administration’s massive fiscal stimulus meanwhile has given us a burst of inflation that squeezes manufacturers’ margins and deters investment.