How to make it in America

In its Room for Debate feature on Sunday, the New York Times ran a discussion of whether Apple and other manufacturers could and should produce more in the United States. As one of the featured discussants, I argued the case for.

Specifically, I noted that things like iPhones that we think are made in China actually aren’t. They may be assembled in China but the bulk of the value in the products is in their high tech components (digital signal processors, memory chips, displays,etc.) which are mostly made in Japan, South Korea, Taiwan, Singapore, and Germany. While the assembly of the products is labor intensive and thus particularly suited for a country like China with a lot of inexpensive labor, the production of the technologically advanced components is not. It is capital and technology intensive which is precisely the kind of production America is supposed to be good at. Think "Intel inside." The countries noted above are not low wage payers. Indeed, some of them are among the highest wage payers and Germany is a welfare state that some Americans describe as socialist. Moreover, production of the high-tech components stimulates R&D, acquisition of high-tech education and skills, and innovation — all things that economists and business and political leaders say are the keys to America’s future. Thus it seemed obvious to me that America can and should make every effort to get more of this kind of production done in the United States.

The debate gave rise to a number of counter arguments and questions some of which deserve a general response.

One argument made by M.I.T. professor Yasheng Huang was that what worked with Japan in the 1980s won’t work with China. What Professor Huang meant was that the threats to limit access to the U.S. market or to impose penalties for "unfair" trading that led the Japanese auto and electronics makers to invest in U.S. factories won’t work in the same way with China. While I largely agree with this because, unlike Japan in 1980, China today is not a client state of the United States, I suspect that the argument is not entirely correct. Because of national security concerns, companies like Huawei (big telecommunications producer) have been unable to establish a real beachhead in the U.S. market on the basis of China based production. It may be that their only real hope of getting into the market is by, in fact, doing most of the production in America.

George Mason University economics professor Donald Boudreaux says it’s best to apply only broad policies like reductions of marginal tax rates and regulations while relying on free markets to determine which jobs are best done by Americans. He may be right in some ideal universe, but we don’t live in such a place. Let me give you just one example. Intel makes about 85 percent of the semiconductor micro-processors used to power personal computers. It makes most of those chips in America. By all economic indications, America has a so called "comparative advantage" in the production of those micro-processors. Yet Intel has just opened a plant in China. The operating cost of production will not be less in China nor will the quality or productivity be better in China. There was no  market reason for putting the production and the high-paying, high-tech jobs attached to it in China. Indeed, the market decision would have been to put the fabrication facility in America. But China did two policy things to get the plant. Its top officials constantly made it clear to Intel that it would be better for Intel if it put a real production facility in China, and it offered special tax abatements and other financial subsidies that amounted to more than $1 billion to sweeten the pot. That’s how the real world in which we live works to determine where the good jobs go.

One commenter said America’s strength is innovation and the quality improvement and low cost production should be left to China. But innovation is iterative rather than linear. Much innovation comes from interaction between R&D and the production floor, and, of course, companies don’t typically invest in a lot of critical human-skill development necessary for innovation unless they are also doing the manufacturing.

Another commenter said that America must put renewed emphasis on education in scientific and critical thinking. Amen to that, but again, without doing the actual production of technological things, it is unlikely that this kind of education will be increased or improved.

Finally, one commenter asked specifically what I would propose to do while another noted that the United States no longer has the industrial infrastructure and skill base for a lot of the subject production. Let me take a crack at both these issues.  I’d look at what other countries including our own have done and are doing. Professor Huang may be largely correct that we can’t exert pressure on China as we did on Japan in persuading it and its companies to move auto and electronics production to America. But South Korea, Taiwan, Japan, and other Pacific and Asian nations remain our client states. We are now in the course of negotiating a so called Trans Pacific Partnership (TPP) free trade agreement for purposes of demonstrating our "commitment" to the security and prosperity of a number of these countries and we have just concluded a free trade agreement with Korea. The deal with Korea has already led to a substantial increase in the U.S. trade deficit with Korea and the TPP will surely do the same in the case of several other Asian countries.

It is true that the United States has suffered a decline of skills and industrial infrastructure. But let’s look at China. U.S. infrastructure is overall better in high-tech than China’s, and Intel just put a major plant there. Indeed, China wanted Intel because it knew that the coming of Intel would help build the infrastructure. South Korea’s Samsung is a major semiconductor maker and is the leader in several important categories. America is still a major semiconductor manufacturer and Samsung could certainly produce competitively in the United States. By doing so it would help rebuild and enhance the U.S. industrial and high tech infra-structure. Samsung and Korea owe the United States big time and depend on America for a lot of things. The U.S. Ambassador to Korea and top U.S. officials from the President on down should be all over the Koreans, incessantly reminding them of how nice it would be to see some reciprocity. No South Korean official should ever leave the White House without being told how important it is for Koreans to invest and produce more in America. The same holds for other key economies like Germany, Japan, Taiwan, and France.

I’d look at what the Chinese, Singaporeans, Israelis, French, Irish, and others do to entice investment with tax holidays, free land, capital grants, and breaks on utility costs. The Singaporeans are the world champs at this. I’d copy their Economic Development Board and put together a modest fund for the U.S. clone to use in conjunction with the funding already available in the economic development agencies of each state to match the packages of the other players.

I wouldn’t constantly talk about other countries being unfair and cheating with their currency manipulation. A substantial number of countries are engaging in this practice and it is very much distorting trade and investment flows. I’d call a meeting under the auspices of the International Monetary Fund (IMF) and World Trade Organization (WTO) to attempt to negotiate a new set of global currency valuations while at the same time making clear that if such a thing cannot be done, the United States will have no choice but to take counter measures such as intervening itself in global currency markets to offset manipulation or imposing certain kinds of capital controls and even tariffs under emergency provisions of the WTO.

Finally, let me explain that in the early 1980s,  as counselor to the secretary of commerce, I was personally called on by top Apple executives to help the company with its problems in Japan. I helped. I was therefore disappointed to read the recent statement by a current top Apple executive in the New York Times saying that Apple doesn’t "have an obligation to solve America’s problems." Apple and other U.S. companies need Uncle Sam in a lot of ways they may not always themselves recognize (such as to help protect intellectual property). If I were president or a top U.S. official I would never let them forget it. I would be calling them all the time, asking about their strategy and plans and what they might need to do it in America, and, of course, I’d remind them from time to time of what I was doing for them in a myriad of ways.

Finally, I’d be promoting public-private partnerships as we did in the case of SEMATECH during the Reagan administration. At that time, the U.S. semiconductor industry was taking a bad beating from the Japanese. SEMATECH was created as a 50/50 partnership between the U.S. government and the semiconductor industry to promote revitalization of the critical U.S. semiconductor equipment development and manufacturing capability. It worked. Yes, this was the conservative Republican Reagan administration.