From Barron's, August 23:
The U.S. could face a second version of the “China shock” that hollowed out parts of the U.S. manufacturing sector, according to Dan Wang, a veteran China technology analyst. Whether that happens depends on whether policymakers rethink their approach, he says.
The first China shock kept prices low for Americans and boosted corporate profitability. But it came with costs, namely the vanishing of thousands of particularly lower-skilled U.S. manufacturing jobs. It also helped China transform into a more formidable rival, feeding the current frictions in the U.S.-China relationship.
While the Trump administration’s trade policy is, in part, an effort to address that damage, the U.S. needs to take a different tack to avoid ending up in worse shape, he says.
Wang, who emigrated from China to Canada when he was seven, has spent about a decade analyzing China’s technological capabilities as an analyst at Gavekal Research and as a fellow at Yale Law’s Paul Tsai China Center. Along the way, Wang, now a research fellow at the Hoover Institution, built a following for his insights about China’s transformation.
In Breakneck: China’s Quest to Engineer the Future, out later this month, Wang offers a framework for understanding China’s emergence as an economic powerhouse, its growing rivalry with the U.S., and where its weaknesses lie. Barron’s spoke with Wang about the next phases of U.S.-China competition, the export restrictions affecting Nvidia and others, and why the U.S. may want to take a page from China’s playbook. An edited version of the conversation follows.
Barron’s: What’s a good way to look at the U.S.-China rivalry?
Wang: The U.S. has tried to confront China’s rise through a series of legalisms, most notably the tariffs created through Section 301 investigation in Trump’s first administration, and technology export controls administered by Department of Commerce that designated Chinese companies to blacklists no one had heard of before. The Biden administration continued those.Xi Jinping’s response wasn’t to get good lawyers around him but rather surround himself with even more engineers, elevating a lot of people from the military industrial complex, including those who manned the rocket and aerospace programs. China’s response to the trade and tech war was to build more electrical power, manufacturing capacity and infrastructure.
Excess capacity and a flood of Chinese goods already underpins trade friction. What’s next?
The U.S. is good at laying scientific ladders in important industries, and China is much better at climbing them.
For example, the U.S. will always have bragging ranks that Bell Labs invented the solar industry in 1954. But the U.S. treated solar as mostly a scientific project and the Chinese completely overran them. It is much more important to look at scale and manufacturing, not just what we design in the labs.
China is weak on aviation and somewhat weak in semiconductors, but in almost any other manufacturing area it is already or almost a world leader. All the high-end manufacturing that remains in the U.S., Japan and Germany, which is relatively efficient producing things like medical devices, will be threatened in the way light manufacturing and steel production was threatened in the first “China shock.”
What should policymakers do to avoid this?
There could be a more robust debate about whether tariffs are the right move. I suspect not: U.S. manufacturing employment four months since Liberation Day is down 40,000 jobs.
The U.S. should have a more vigorous debate to encourage and invite Chinese companies to set up shop in the U.S. China did this, inviting Apple and Tesla, as well as 1,001 other big American companies to produce goods domestically and train their workforce to produce better iPhones or electric vehicles.
It may make sense for the U.S. to invite the world leaders, say in electric batteries, to train its domestic workforce in Michigan....
....MUCH MORE
One of the stated goals of the tariff regime is to encourage foreign companies to establish and/or increase their manufacturing footprint in the U.S. We have seen European companies, big pharma in particular respond to this aspect of the changing world of trade.
For their own reasons, some idiosyncratic, some policy driven, we have not seen Chinese companies react in the same way. The only recent large investment announcement that comes to mind is Chinese-owned (Haier) GE Appliances:
GE Appliances shifts more production to US as part of a $3 billion investment
