By Jeff Ferry, CPA Chief Economist
On Sept. 23rd, Apple announced that its Mac Pro computer will continue to be manufactured in Texas, rather than China, Taiwan, or southeast Asia, as the company was previously planning. The Mac Pro is currently the only Apple product assembled in the United States.
This is good news for Austin, Texas, good news for Apple, and good news for the US technology industry. But most of all, it marks an important evolution in our tariff and industrial policy toward what I hope will be a new, higher level of sophistication.
In striking a deal with Apple, the Trump administration agreed to exclude a series of Mac Pro components from its China tariffs. These components were tariffed at 10 percent as of September 2018 (part of the so-called “List 3” tariffs). The tariff rate rose to 25 percent in May, and the rate is scheduled to rise further to 30 percent next month.
The Section 301 tariffs are achieving their objective of reducing US dependence on China. Imports from China are down by more than 10 percent from last year even as US economic growth is outperforming other major economies. The tariffs create leverage to persuade China to correct its unlawful policies of blatant and persistent intellectual property theft, protectionist industrial policies, and other violations of international rules. The China tariffs are also stimulating the relocation of dozens of multinationals to new sites outside of China, further diversifying the US industrial base. Finally, the tariffs are stimulating a number of US companies to move production back to the US, with standout examples in the furniture industry as well as Stanley Black and Decker’s announcement that it will build a brand new greenfield Craftsman Tool production site in Fort Worth, Texas.
However, more needs to be done to get more firms to relocate production back to the US. We need to increase our sophistication in trade and industrial strategy to give the US economy a lasting boost and get us back onto the trajectory of rising living standards for the working class and the middle class. And of course, we need to reinforce our national security by making us less dependent on parts and products made 5,000 miles away by strategic competitors.
It’s the Logistics, Stupid
For 30 years, China has implemented a policy of undermining US manufacturing through government-influenced, subsidized industrial supply chains. The Chinese Communist Party recognizes that global power rests on civilian and military economic strength. It is no exaggeration to say that China would like to destroy US manufacturing power, to ensure that China never returns to what it sees as the weakened, humiliated condition it endured in the 19th century at the hands of greedy western powers.
China has already achieved the destruction of much of America’s manufacturing strength, helped along by other nations who have taken advantage of a blithe disregard by US leaders of the laws of global power and the principles of economic growth.
Winning back the industries we have lost requires a highly targeted, intelligent strategy. First, it is essential to recognize that some industries are more valuable than others. An industry is particularly worth supporting if it meets three conditions: (1) the workers it will hire will get paid more than they would have received in their previous jobs; (2) the products and supply chains involved are part of a technology that offers future economic growth, i.e. a path towards more innovation, high-value products, and higher wages, and (3) the products or technologies involved make some contribution to US national security, even if only indirectly.
Many industries meet those criteria, including basic materials like steel or aluminum. But the computer industry meets all three criteria in spades, because the growth prospects are huge as computers take a role in ever more products and activities and because computers are involved in almost every element of defense and national security.
Next, it is crucial to recognize that today the main reason so many once-great US industries stay in Asia is not labor costs but logistics. Today, most industries are not dominated by labor costs. They are dominated by the cost (and risks) of moving components around, storing them, and then getting them to the right place at the right time. Just-in-time manufacturing, the standard today, is a very unforgiving taskmaster with its strict measurement of the daily costs of storing and moving inventory around.
The way to bring industry back is to target the most logistically important components. The supply chain will follow.
The US effectively lost the computer industry in 1985, when a Texas Instruments superstar manager, Morris Chang, was hired by the Taiwanese government to run its flagship research institute. In1987, he was made CEO of a new company, Taiwan Semiconductor Manufacturing Corporation (TSMC). Chang succeeded beyond his, and the Taiwanese government’s, wildest dreams. Today TSMC is a $34 billion giant and the manufacturer of most of the chips designed by US chip companies. US hardware companies, from Hewlett-Packard to Apple to Cisco Systems, began to migrate to Asia in the 1990s as soon as it became clear that this was where the most high-value components of their finished products were being made. Of course, the aggressive policies of China, South Korea, Japan, Malaysia, and Thailand all sweetened their incentives with extravagant subsidies. But they were jumping on the bandwagon of industrial strategy first pioneered by Japan and then brought to the technology industry by the brilliant Mr. Chang.
Simple, But Not Easy
So how do we bring back US technology manufacturing?
Answer: we target key products and components that will create the gravitational pull to bring back other components and assembly work. The Mac Pro is far from Apple’s most popular product. It is a short, dumpy, high-powered desktop used mostly by artistic and Hollywood types to create computer-animated graphic movies and similar projects. It’s known colloquially as the “Trash Can” because, when it’s sitting under a desk, it looks just like one.
But that’s not important. The Mac Pro is a key product that requires other companies to produce components to build it. The new plan for manufacturing it in Texas will increase the value of US-made parts inside the Trash Can by a factor of 2.5 as compared to today’s Mac Pro. Apple says that components made by 12 American companies will go into this new improved Trash Can. Those component makers are located in New York, Vermont, and elsewhere, not Asia.
That ain’t trash. The Trump administration achieved this by concessions on certain tariffs and holding a firm line (soon 30 percent!) on others. This is how Japan, Taiwan, South Korea (and perhaps soon China) won manufacturing leadership in an industry they did not invent. Can we do the same? Of course we can. The US also enjoys the huge added benefit of having invented most of these industries and components, and we understand the underlying technologies better than anyone.
The administration should now target other Apple products, other tech companies, and companies in other industries in a similar fashion. In tech, the ultimate goal is to get the chipmaking back here in the US. Once that key component is being made in volume within our shores, we will once again be the world leader, and our research and development capabilities will make us unbeatable.
Like many things in manufacturing, it’s simple…but not easy. It’s simple to see what needs to be done, but not easy to find the persistence and the national unity to get it done.