Wednesday, April 15, 2020

De-coupling from China

Let’s see. The Trump administration, having discovered that the great World Health Organization is not really interested in world health, has chosen to defund it. Surely, we all agree.

And then, senators like Missouri’s Josh Hawley are beating the drums for punishing China. It sounds good and it feels good. After all, the coronavirus comes to us from China. And it took more than a few people making more than a few mistakes for this to happen.

Moreover, we have discovered the limits of free trade. In principle, allowing each country to specialize in what it is best at is a worthy policy. And yet, what happens when we come to depend on other countries, for pharmaceuticals and for defense technology. When this is the case, declaring war and pretending that we are going to punish our suppliers is not the brightest idea.

While senators are fulminating over communism-- which, for all intents and purposes, has been dead for decades now-- one David Goldman is injecting a little rational thought into our lust for revenge.

He had already written the following about our dependence on China for defense technology, with a co-author in December, 2016:

We wrote: “Washington should also enforce strict US content rules for sensitive defense technology. Many of the Pentagon’s military systems depend on imported components. That’s a concern on security grounds alone. Procurement rules should be changed to require that critical components be manufactured in the US.”

But, is this really doable, realistically? Goldman is not quite so optimistic:

There is no way to secure the electronics of the American military except by fabricating the components in secure facilities in the United States. That will strain our resources and cost upwards of $100 billion. A number of promising new technologies are still in embryo that might transform the industry. Instead of etching transistors on silicon with light, it may be possible to build chips up from the molecular level, at a fraction of the cost.

Defense technologies are one thing. The larger idea, floated by people who think they know how to think, involves complete decoupling of America from Chinese industry. Goldman rejects the idea, on rational grounds:

The suddenly popular idea of total decoupling of the American and Chinese economies, however, is not a policy, but a tantrum. 

He continues:

Self-sufficiency in all manufacturing is a different matter; imports from China now amount to roughly a quarter of total US manufacturing output, and the cost of domestic substitutes would be far greater than that, because the US doesn’t have the skills to replace a great deal of Chinese production. 

Take the example of smartphones, now manufactured in China for Apple. What does Apple CEO Tim Cook think about whether we can simply move all of it to America?

China shipped $70 billion of smartphones to the US in 2018 and $45 billion worth of computers. Here is Apple CEO Tim Cook on why Apple makes I-phones in China: “China has moved into very advanced manufacturing, so you find in China the intersection of craftsman kind of skill, and sophisticated robotics and the computer science world. That intersection, which is very rare to find anywhere, that kind of skill, is very important to our business because of the precision and quality level that we like.”

Of course, China is a very large smartphone market. And yet, beyond that, China has many very competent and skilled engineers. It has more than we do, by a lot. Goldman continues to quote Cook:

“The thing that most people focus on if they’re a foreigner coming to China is the size of the market, and obviously it’s the biggest market in the world in so many areas. But for us, the number one attraction is the quality of the people… It’s not designed and sent over, that sounds like there’s no interaction. The truth is, the process engineering and process development associated with our products require innovation in and of itself. Not only the product but the way that it’s made, because we want to make things in the scale of hundreds of millions, and we want the quality level of zero defects.”

Cook added: “The products we do require really advanced tooling, and the precision that you have to have, the tooling and working with the materials that we do are state of the art. And the tooling skill is very deep here. In the US you could have a meeting of tooling engineers and I’m not sure we could fill the room. In China you could fill multiple football fields.”

So, our educational establishment has been turning out lawyers and social justice warriors. Subtending the current attack on Chinese culture is the notion that our lawyers and social justice warriors would never have let the coronavirus escape from a Wuhan lab and would never have tried to cover it all up. Of course, said lawyers and social justice warriors are incapable of building anything, but don’t let that bother you.

The reason, Goldman says, is that China trains many more STEM graduates than we do. And some of them are trained over here. As noted above, advanced study in STEM disciplines is largely Asian. By now, we could cut off access of Chinese students to American education and it might not have much of an effect. The Chinese now have the capacity to do it themselves:

The US doesn’t have the engineers to make a smartphone. In fact, we don’t have enough engineers to expand US manufacturing output by any significant margin. As of 2015, China graduated six times as many engineers as the United States, according to the National Science Foundation. That was five years ago. In the meantime China’s university system, enriched by tens of thousands of American-educated doctoral candidates, has come up to par with US universities in most STEM fields. Four out of five US doctoral candidates in electrical engineering and computer science are foreign students, and the largest cohort by far is Chinese. And most Chinese engineers go home when they get their degree, because only 5% of American college students major in engineering, and there aren’t enough faculty jobs around to hire new PhDs.

Whether the United States could train up enough tooling engineers to produce I-phones onshore, and how long it would take if we could, is hard to answer. The US graduates barely over 30,000 mechanical engineers per year. If we waste our limited talent by replacing production of consumer electronics imports from China, we will lose the race for pre-eminence in the Fourth Industrial Revolution. The United States should concentrate on forcing breakthroughs in frontier technologies that China does not yet dominate, rather than chasing after China’s production of existing products.

How are we doing with information technology?  Surely, companies like Apple and Google are world leaders, especially in the technology needed to track viruses and to do similar tasks. Well, not so fast. Goldman explains:

Apple and Google announced this week that a smartphone app would be forthcoming in May that would inform the user whether they had been in contact with a person infected with coronavirus. Alipay and Tencent had such an app available in mid-February; the South Koreans and Israelis had similar apps available in early March. Israel used the terrorist tracking system of its formidable security police, the Shin Beth, to track actual and suspected carriers, while China employed its comprehensive surveillance capability to match coronavirus test results to the location and body temperature readings of hundreds of millions of people. 

Let’s say that you are still undeterred. After all, if conscious decoupling was good enough for Gwyneth Paltrow, it should become policy for everyone. How would we do it? First we would have to reconfigure our entire education system in order to emphasize achievement and to de-emphasize self-esteem and social justice:

Writing in The American Interest, Andrew Michta of the George Marshall Center for European Studies proposes a “long hard road to de-coupling,” and avers: “We need a massive reinvestment in STEM curricula in our high schools and in science and engineering programs at our colleges and universities, so as to expand the available labor and management pools for our re-shored companies. Again, it will take a concerted effort by Congress, the US Department of Education, and especially parents and alumni donors to restore colleges to their proper place of teaching and learning, which at one time decades ago produced the best professional and managerial classes in the world.” That is what America requires, but the lead time will be a generation. 

If China provokes us [to] impose a culture of competence on our educational institution, and to reward real achievement instead of the inculcation of self-esteem, it will have done us a greater service than any of our allies at any time in our history.

But, as a competitor in the international marketplace, China remains formidable. European drug firms are less interest in affixing blame and punishing China than they are in having access to China’s superior information technology:

As I reported April 3 in Asia Times, Europe’s big pharmaceuticals firms are lining up to start joint ventures with Tencent, Huawei and other big Chinese IT companies, in order to exploit China’s vast wealth of data. In the European view, China’s initial blunders in reporting the coronavirus outbreak are of less interest than China’s use of information technology to control the epidemic, and the artificial intelligence applications of China’s vast database. 

As noted, Europe’s pharmaceuticals firms sees in China’s handling of the coronavirus not an insidious cover-up by a wicked Communist Party, but rather a technological advance in which they hope to invest. If the world divides into economic zones, all of Eurasia may wind up in a zone dominated by China, standing off against North America and Japan.

Goldman calls for what is called industrial policy, government driven initiatives to help us catch up with China. Of course, if the products of our university system are not up to the task, we might not be quite as successful as we wish:

The US requires a set of “Manhattan Project” initiatives focusing on quantum computing, technological spinoffs of mobile broadband, defense against the new generation of hypervelocity missiles, chip-making technology, and other game changers. Whether America’s penchant for innovation still is powerful enough to compensate for the sheer number of Chinese and Russian engineers remains to be seen. As an American, I would hate to lose by default.

As the old saying goes, it's a marathon and not a sprint. If so, it would be our good fortune. If not, watch out....


Anonymous said...

It's a very serious matter. At this point, I think we are all bugged by the Chinese as everything is made there.

Compare this to the level of security/paranoia in Russia :)

David Foster said...

Difficulties of making iPhones in the US...Yet somehow, we manage to make jet engines (both GE and P&W) and gas/steam turbines (GE). These products are a lot bigger than an iPhone, but they require extreme precision. They also have to operate at hellish temperatures, and extreme reliability is of the essence.

I doubt that the level of mechanical engineering and craft talents required to make an iPhone is greater than that required to make these turbomachinery products.

trigger warning said...

A few points...

First, the habit of elevating economics to the status of ideology is a foolish practice. Economics is a fuzzy social science that cannot bear the weight of ideological purity. Ricardian comparative advantage, a popular notion imported from the nineteenth century, can be and has been overturned in some cases by technology. It works for bananas, but note the price and availability of winter season cherry tomatoes in Costco - sometimes they are imported from Mexico, other times Canada(!), same price. Another false premise is optimality (e.g., everything must be as cheap as possible), a mathematical fiction. We certainly don't demand that our automobiles, financial institutions, or airplanes be as cheap as possible and damn the safety and security.

Second, the notion that the US and China are the only two choices, or the only two choices that matter, is not even wrong; its a false dilemma.

Third, the Chinese Communist Party is communist. They get a vote, so ask them. Yes, they have adopted an aggressive mercantile beggar-thy-neighbor policy to grease the levers of power, but they should not be confused with free marketeers. And they should never have been admitted to the WTO (an organization that begs for abolition anyway, being a debating society of globalist lawyers and econommists with power).

Third, with respect to some military and other critical technology and industrial sectors, the US badly needs to think about an autarkic policy mix. I, for one, could care less whether Apple sources its phones from China, Taiwan (although I am politically sympathetic with Taiwan), or VietNam. Rare earths are a different story. IMO, the US needs to adjust its regulatory stance to permit profitable extraction of these elements. There are other examples as well.

UbuMaccabee said...

I'm with Trigger.

Short, short term, we have to all get back to business just to ensure there is business. People need to get paid and pay their bills. That means business as usual for a while. We have no choice.

Once we elect orangeman and get back to work, we move to move as much as possible away from China to the many, many other locations to do business. Time for India, Vietnam, Mexico, Indonesia, Malasia, Nigeria, Taiwan, Brazil, and Thailand to step up. Big opportunities for the right talent and the right location.

David Foster said...

Huge opportunities for Mexico: the logistics of shipping product to the US by road or rail from Mexico are a lot more appealing than shipping by ocean from the Far East.

Got to get the crime under better control, though.

Ignatius Acton Chesterton OCD said...

Mexico is a narco-state. That’s a non-starter for me.

China is churning out STEM grads like crazy.

We’ll see where Far East labor arbitrage leads us next, but I’m for bringing all U.S. pharmaceutical manufacturing home.

Americans still need manufacturing jobs.

Great example with the turbines and jet engines, David! Super high-precision stuff.

David Foster said...

One other point: it's not all about STEM graduates. There are a lot of skilled jobs in manufacturing that can be and are done by non-college graduates.

There's a guy named Titan Gilroy who had a really rough background; he saved himself, first by being a boxer, next by developing CNC skills. He produced a TV series, Titan American Built, intended to show Americans what manufacturing is all about and why it is important. And he's created an academy to teach people...including prisons...CNC machining.

Random Chance said...

"I doubt that the level of mechanical engineering and craft talents required to make an iPhone is greater than that required to make these turbomachinery products."

The level of talent required isn't any greater, but the specific knowledge and skills gained through experience are different. I'm an electrical engineer. I know a little about most things, more than most about some things, and a whole lot about a few things. It's the same for all scientists and engineers. I could do any of the things that the iPhone designers do given enough time, training, and experience. But that's not what I do, nor could I begin to do those things next week or next month. And even if I did, who would then do what I do? The problem isn't lack of talent or skill in American engineers, it's lack of the numbers of talented and skilled people to pursue those specific endeavors. At my company the pay and benefits are great, but we can't hire people to fill positions because there aren't enough people to hire.

American culture can't compete with Asian culture in fields requiring discipline and dedicated work. Creativity we have, ideas we have, but culturally we lack the drive to excel at anything except distraction and entertainment. Of course this isn't universal, many individuals still do excel, but as a culture we've lost it. It's a first world problem that China hasn't had to deal with yet. Hayek's road to serfdom in action. We can get our edge back, but as the quoted author says, it will take at least a generation to get there.

UbuMaccabee said...

"American culture can't compete with Asian culture in fields requiring discipline and dedicated work. Creativity we have, ideas we have, but culturally we lack the drive to excel at anything except distraction and entertainment. Of course this isn't universal, many individuals still do excel, but as a culture we've lost it. It's a first world problem that China hasn't had to deal with yet. Hayek's road to serfdom in action. We can get our edge back, but as the quoted author says, it will take at least a generation to get there."

Very well said.

Ignatius Acton Chesterton OCD said...

I remember Tim Cook gave a big talk about online privacy to the Davos crowd:

Yep. It was a real hit.

Now Apple is teaming up with Google to trace Americans with SARS-CoV-2.

What could possibly go wrong?

A Texan said...

There seems to be plenty of unemployed/under employed technical people on LinkedIn but they are not in their 20's. Of course, Motorola and other electronic manufacturers shipped stuff to China and elsewhere, so no wonder we may be short some people. But it's doubtful to say they are not there.