The China Endgame: Let’s Build USA 2025

March 29, 2018

By Jeff Ferry, CPA Research Director

President Trump has just made what could be the biggest gamble of his presidency: he’s betting that he can make a significant difference in the US economy by taking action against Chinese mercantilism.

As usual, the hordes of commentators in the liberal media, conservative establishment, and the economics profession have misunderstood his goals and objectives.

There is a never-ending cacophony of noise about “trade wars.” It’s a pointless distraction. The Trump administration is not interested in a “trade war” with China or anybody else. It is interested in cutting our imports from China to boost the US economy. In fact, the administration has two goals: in the short term, it wants to cut Chinese imports to create additional demand for US manufactured goods and generate much-needed jobs and income for America’s depressed heartland; in the longer term, it wants to cut off China’s widespread exploitation of America’s intellectual property, i.e. our world-leading research and development. If China’s exploitation were to continue unchecked, many more US companies would find themselves outflanked in world markets and both our prosperity and our national security would be deeply compromised. China is not an ally. It is an adversary. Other Asian economic powers already recognize this and want the US to be a strong counterweight to growing Chinese muscle.

China’s audacious ‘China 2025’ plan to achieve self-sufficiency in 10 high-tech industries, including semiconductors, aerospace, and advanced manufacturing, is an important threat to the US that should not be underestimated. According to a McKinsey report, China’s target is to build the capability to meet 70% of its own semiconductor demand domestically. Not only is that the opposite of free trade and a threat to our economy, it is a substantial threat to the economies of Japan, Korea, and Taiwan.

USA 2025

Trump’s real battle is in the USA. Call it ‘USA 2025’: Can the USA revive economic growth and bind the deep split between those who profit from the so-called “free trade” system and those who suffer from the associated decline of tradable goods industries, especially manufacturing? Trump recognizes the significance of this issue. Last Thursday, he described his China plan this way: “We’re doing things for this country that should have been done for many, many years. It’s probably one of the reasons I was elected. Maybe the main reason.”

Trump and his trade advisors decided to headline the battle over China’s trade practices with the Section 301 intellectual property issue. But the plan to impose tariffs of some 25% on around $50 billion of US imports from China will have more immediate impact.

Below is a table showing the major sectors of last year’s imports from China. The administration should target the sectors that can produce the most significant and relatively quickest bang for the buck in terms of bringing production back to the US. The president appears to have recognized the political challenge in this policy when he said he was exempting the iPhone (presumably all smartphones) from the tariffs. Americans love their smartphones so much that a tariff raising their price might not be wise. Cellphones make up the bulk of the largest sector of Chinese imports, worth $72 billion last year.

The next sector, Data Processing Machines, refers to servers, laptop computers, and mostly corporate IT systems like storage and networking. These are good candidates for tariffs. We have a comparative advantage in this sector in the true sense of the term, i.e. much of the leading edge innovation in this sector still occurs in the US. It is logical that we manufacture those products here, so the industry could provide jobs not just to development engineers but also to manufacturing employees. If we could bring back roughly $25 billion of this production, that could create some 125,000 high-paying jobs. Equally important, it would help us maintain the R&D base in this country instead of allowing it to follow the manufacturing to Asia, a very real threat. Finally, more high-tech manufacturing in this country would mean a more secure IT infrastructure for both civilian and military use.

However, the technology industry may not be quick to comply with such a policy. Last week, Apple CEO Tim Cook in effect defended his China-centered supply chain when he told the president to “embrace” free trade and diversity. So far, the most noteworthy member of the Apple supply chain to invest in US manufacturing has not been an American company at all, but Taiwan-based Foxconn, now building a large plant in Wisconsin. Foxconn does not have to answer to US shareholders. Still, Cook recognizes that Apple has a responsibility to the United States. Last year, he told the New York Times: “I think we have a moral responsibility to help grow the economy, to help grow jobs, to contribute to this country and to contribute to the other countries that we do business in.” But he went on to highlight the mindset in Silicon Valley that stops tech executives from investing in the US, when he told the Times: “I think there’s still probably a more significant group that feels my sole responsibility is to Wall Street.” Unlike his predecessor Steve Jobs (who suffered from a persecution complex), Cook probably has the breadth of vision to be moved to a more US-centric point of view by a combination of tariffs and persuasion.

It might yield a quicker return in terms of US production to apply tariffs to some of the low-tech sectors like furniture and plastics as a means of encouraging the reshoring of US production. Those companies are more likely to be privately held and so less influenced by the short-termism of public company managers and Wall Street investors. Also, these jobs are more likely to be concentrated in the industrial heartland where Trump needs to deliver results.

A combination plan of tariffs on $25 billion of high-tech imports and $25 billion of low-tech imports could ultimately lead to the reshoring of some 250,000 manufacturing jobs. These new facilities would in turn lead to perhaps a million support jobs in the service sector. So it’s no surprise that many Democrats are already supporting Trump’s Section 301 strategy. And more will jump on board as soon as it begins to deliver results.

Competitiveness Strategy

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