Losing jobs en route to Honolulu

So I’m on my way to Honolulu to attend the Asia Pacific Economic Coordination (APEC) Leaders Meeting and CEO Summit that will take place later this week and over the weekend. I know it’s trite by now to say so, but someone really does have to do it.

Actually, as I’ve noted before, it’s not likely to be much of a meeting. In fact, it’s kind of a continuation of the G-20 extravaganza in Cannes last weekend. Nearly half the players will be the same (U.S., Canada, China, Japan, Mexico, Russia, Indonesia, South Korea, Australia) and while the Greek drama will be absent, the main topics of discussion will be very similar – how to adjust the enormous global trade and debt imbalances, how to regenerate growth in the wake of the housing/ financial crisis of 2008-09 and the recent European debt crisis, and, most of all, how to create jobs in both developing and developed economies.

In preparation for his part in the jobs discussion, President Obama might want to talk with my friend Jeff Ferry who I happened to see just before leaving Washington. Ferry is Founder and President of high tech consulting firm Palomar Associates and is an expert on optical switches and the optical networking industry. This is an industry at the heart of the Internet and of modern communications that was invented in the late 1950s and early 1960s by scientists at Bell Labs and Columbia University who developed the first lasers. It is at the cutting edge of technology, is essential to national security, has a high capital and technology content, and requires highly skilled rather than ultra inexpensive labor. It obviously is also tightly linked to the health of the U.S. high tech infrastructure. In short, it is precisely the kind of industry  that the President along with America’s top political, economic, and business leaders always say must provide the jobs of the future for American workers. Yet Ferry says that on the current trajectory the industry is likely to go on the U.S. industrial endangered species list in a very short time.

He points out that in the year 2000, 60-80 percent of the production of all optical components worldwide took place in the United States. Today, 80 percent takes place in Asia with the remainder split between the United States and Europe. In 2000, the largest optical networking system supplier was Canada’s Nortel. It controlled 33 percent of the market and did its manufacturing and R&D almost entirely in the U.S. and Canada. Joining Nortel among the top five producers were the American companies Lucent (which also controlled Bell Labs at that time) and Ciena.

Today, explains Ferry, China’s Huawei , which hardly existed in 2000, is the top global supplier of optical networking systems with about 24 percent of the market and it is followed by ZTE, another fast growing Chinese firm. According to industry publications The Register and Light Reading, Huawei aims to become a $100 billion company, a feat that would make it larger than U.S. leader Cisco and EU leader Alcatel combined.

A key point is that this erosion of North American leadership in optical networking  did not occur as a result of the financial crisis or by reason of low Asian labor costs (because labor cost is not a major cost factor in the production of optical networks). On the contrary, this is the kind of industry in which one would expect to see North American leadership. It is the kind of industry that is supposed to be expanding and generating the jobs of the future in North America rather abroad in Asia or elsewhere.

Why that is not happening is, of course, the key question to which the answer is pretty straight forward. Ferry notes that Huawei is the object of a targeted industrial policy in China and has therefore been the recipient of $30 billion in Chinese government support in the form of low interest loans, tax breaks, subsidies, and preferential government contracts. The United States, in contrast, has shown no interest in matching that kind of support and is thus not able to hold onto the future jobs that should stem from rapid global expansion of optical networks.

Nor is this an isolated case. I have noted recently the examples of GE moving much of its avionics production and development to China and of Intel opening a new Pentium chip fab in China.  The point is that all of these and others are examples of situations in which production and jobs are moving off-shore not because production in the United States is uncompetitive but because the industrial development policies of other countries combine with the absence of any such policies in the United States to create a series of incentives and disincentives that gradually but surely move production out of America.

Nor is anything on the APEC agenda likely to even address much less solve this problem. Yet if Obama can’t preserve and expand these kinds of jobs at the top of the skills range, it is difficult to see how the United States can even dream of approaching full employment again much less rebalance its enormous trade deficit.

To make this meeting more than a regurgitation of hoary conventional wisdom with no results  and another pep rally for yet more marginally effective trade agreements, the President must inform his APEC counterparts that while the United States will not criticize the efforts of other countries to support development of key industries and technologies, it will match them.