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Biomedical Science
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The U.S. Balance of Trade, China, and the
Olympics
The opening ceremony of the Beijing 2008 Olympics
presented many elements of an extremely complex and evolving society, China’s
adaptation to modernity. The ceremony illustrated China’s traditions and its
hopes for a better future, including high technology.
How does China’s high rate of economic growth, 12.8%/yr in
the last five, affect the United States? Like the Olympics, modern economic
relations involve both competition and cooperation. If (some ears will perk up
on this irrelevence) we were at the State Department, we would say that a major
goal of U.S. foreign policy has been attained, China’s peaceful integration into
the world system. If we were considering the balance of foreign trade and
financing the deficit, we would be concerned. A recent 8/20/08 Washington Post
article by Robert Samuelson points to China’s rising economic power and the
disruptive effects of a “predatory”
trade policy enabled by an undervaluation of their currency and raw material
supply lockups. But China’s competitive economic advantage is enabled by a lot
more than an undervalued currency. The remainder of this essay discusses
economics, productive processes, and the decisionmaking of American companies.
Contrary to a major assumption of the theory of
comparative advantage, the mobility of capital has resulted in the
multinationals’ relocation of investment closer to their growing markets abroad,
sometimes as a condition of their entry. If the mobility of capital is assumed,
the formal analysis of national economies will probably become more like the
analysis of regional economies. Some regions will prosper and others won’t.
Central to the creation of wealth in modern economies is manufacturing. Economic
prosperity requires a balanced economy; it cannot be created by speculating in
houses or by exporting CDOs.
Manufacturing is of vital importance to modern economies.
According to the Commerce Department, the U.S. balance of trade in goods turned
massively negative in 2002, due to the increasing federal deficit. We do not
factor out energy imports, that have to be paid for, and add the subcategory,
the balance of trade in advanced technology goods.
U.S. Balance of Trade in Goods and Services
(billions of dollars)
Year
2000
2001
2002
2003
2004
2005
2006
2007 Goods a -455 -430
-485
-551
-670
-787
-838
-819 Services 75
64
61
54
62
76
85
119 Technology b 5
5
-17
-27
-37
-44
-38
-53 a Includes consumer electronics. b
Advanced technology goods is a U.S. Census Bureau category
that includes biotechnology, communication, and aerospace products that
are at the core of the U.S.’s economic growth. U.S. Census Bureau, Foreign
Trade Division.
High tech manufacturing matters very much, not only for
the highly trained people it employs, but also for its ability to increase
productivity in the rest of the economy and to generate new products and
services. New products, Richard Elkus (2008) points out, do not grow out of
nothing but in the technology industry, are convergent developments from
existing technologies and products, an infrastructure of suppliers, and –above
all – existing employees (entrepreneurs) at high tech companies. It is this
infrastructure that is crucial for the U.S.’s economic future, because it
translates research into commercial products.
For instance, the U.S. government developed the Internet
as a fail-safe communications network in the event of nuclear attack. Its
commercial development required the perception of an initial problem – linking
disparate computer networks at Stanford, the development of routing computers
from existing semiconductor technology, the setting of standards, the training
of technical personnel to operate the network, and the existing
telecommunications infrastructure. On this base grew the companies: Amazon,
Ebay, and Google.
In 2002, the U.S. balance of trade in advanced technology
products turned negative. In Winner Take All, Elkus, former division manager at Ampex and then founder of several technology companies, describes in
detail what happened to the company that developed the pivotal technology of
video recording, a technology that required a lot of semiconductors and
eventually sophisticated television displays:
Almost from its inception, Ampex developed a management
style that was oriented towards new technological concepts. But Ampex
never created the kind of engineering and manufacturing structure that
would enable it to take advantage of the market potential inherent in
those technological concepts. As Ampex grew during the 1950s, it never
mastered the controls necessary to assess its financial position or the
resources needed to advance from a small business with limited
manufacturing expertise to a corporation that could meet the challenges
presented by the potential (our emphasis) for audio and video
recording. 1
The millions per year in licensing revenue that Ampex
collected from sales of video recorders made by foreign manufacturers in
the 1980s and 1990s was a pittance compared with the billions those
manufacturers received from the worldwide sales of video recorders,
cameras, displays, and television sets that this market generated. By the
end of the ‘80s, the United States had virtually abandoned these and
related markets, creating a situation that now threatens our entire
industrial base. 2 …Japanese business strategy does not reject a product
on the basis of its profit potential, but rather assumes that every
product becomes the basis for another, and every technology becomes a
stepping-stone for the next. The resulting efficiencies of scale are
enormous. 3
Elkus is saying that the Japanese think strategically. He
established a relationship with the late Akio Morita, chairman and founder of
Sony, and found him (of course) an expert in global competitiveness. He writes,
“Three consistent thoughts lay at the heart of every discussion I had with this
illustrious man: First, nothing good happens overnight; it takes time and
significant investment not only in financial resources but a focused commitment
of individual effort. Second, this effort can succeed only by building on a
foundation of past knowledge and achievement to advance the state of the art.
And finally, any success that might result from a significant investment of time
and effort is dependent upon a well-thought-out strategy.”
4
Elkus suggests government 5 involvement in
targeting technologies for further development, because individuals tend to
invest for the short-term. 6 The government originated the Internet
and many new drug formulations. He further suggests adopting the best practices
of the competition.
The state governors are concerned with regional economies.
The state
of Michigan, for instance, confronts the decline of the U.S. auto industry.
It is emphasizing biotech innovation, and indeed U of M is a major center for
biotech research. If you visit the main campus, its north side is about one mile
long; about ¾ of a mile is devoted to biotech and medical research
facilities.
We received a souvenir from the Beijing Olympics, a mug in
a tin box. What struck us was not the mug, but the incredible fit and finish of
the tin box. We thought, such a box had to be manufactured to ISO
standards. We looked up the website of Hunan Hualian China Industry Co., Ltd, in
Mao’s former home province. As it turned out, the factory in inland Hunan was
compliant with ISO standards and looking towards expanding its export markets.
The website also contained a message from the company’s president after a visit
to Japan that we quote verbatim; what is important is not the grammar, but the
idea:
This trip gave a deeply feelings to the president, it
is shocking soul journey. The implementation of Japanese, details of
awareness, dedication left a profound impression to the president and his
entourage, Hualian, compared with the Japanese companies. Not only the
work efficiency, work style, but also mentality, there is a wide gap, we
should seriously realize it. President explicitly demanded that if hualian
want to win in a competitive situation, we must humbly learn from the
Japanese enterprises…hualian will boldly select the outstanding management
of cadres and staff…to visit
Japan.
__
Flashforward from Japanese consumer electronics of the 1980s and 1990s to 2012. As described above, Sony, Panasonic and Sharp captured billlions in revenues from developing leading edge consumer electronics devices. But a 9/28/12 Washington Post article writes, "...Japan's consumer electronics makers find themselves in an increasingly perilous fight for relevance and, in some cases, survival....The companies still have famous brand names, and tech analysts say they still produce some of the world's highest-quality hardware devices. But they face a fundamental problem: It's been years since they've turned out products that people feel they need to have."
Specializing in stand-alone devices, they could not adapt to the growth of the Internet and its demand that products work in harmony according to open standards. They were furthermore unable to work with the sophisticated programming necessary to integrate their hardware into larger systems. As an example, the open-source Android smartphone platform currently has over one million lines of code.
Free markets result in the creative destruction that enables entrepreneurs to assemble new products. But, the inability of the U.S. to build what it uses has resulted in a massive $738 billion 2011 deficit in tradable goods. Obviously, real markets do not always equilibrate.
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