Until the mid-2000s, China actively encouraged foreign direct investment through a vast array of incentives, many of them mercantilist and unfair in nature. While the consequences of China’s mercantilist policies might not have always been good for the U.S. economy, and especially for many production workers in traded sectors, U.S. multinational corporations benefited from access to a low-cost production platform. The United States doesn’t need to close its borders to be a vibrant competitor. It must, however, require that other nations like China to play by the rules. And Americans in their role as consumers benefited from lower-cost goods. While China occasionally engaged in policies that brought complaints from U.S. industry, by and large the United States was satisfied with the relationship.
In 2006, that began to change. China made the strategic decision to shift to a “China Inc.” development model, based on successful Japanese and Korean examples, that focused on helping Chinese firms grow by moving up the value chain and gaining global market share, often at the expense of foreign firms.
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The President mentioned many issues ITIF focuses on in his State of the Union address last night. And by in large, we agree with what he said when it comes to economic competitiveness. The President deserves praise for putting these issues, specifically manufacturing, front and center. He helped rally the nation and the Congress to the fact that restoration of competitiveness and a vibrant manufacturing sector are, indeed, the pillars on which rests our economic future. However, in some cases, we wish he had gone just a little further, maybe clarifying, maybe being a little bolder. Here are a few examples: Funding R&D: “Innovation is what America has always been about,” he said. Absolutely. We laud him for prodding Congress to maintain basic research funding budgets. However, the President should have included applied research in his prod. To understand why, look at Germany. Its manufacturing sector accounts for 20% of the country’s GDP as opposed to the United States 11% and German manufacturing workers earn 40% more in hourly wage compensation than U.S. manufacturing workers. Its exports of research-intensive high-tech products are seven times greater than the United States’ as a share of GDP. One reason is that the country spends six times as much on industrial research and production technologies as does the United States.
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A lawsuit by the Air Transport Association of America (ATA) against the U.S. Export-Import Bank (Ex-Im Bank) has raised broader questions about U.S. policies to help U.S. companies remain competitive, specifically the critical role of the Ex-Im Bank. Last fall, the ATA filed a lawsuit in the U.S. District Court of the District of Columbia to block the Ex-Im Bank from providing $3.4 billion in loan guarantees for aircraft financing to Air India. Air India has placed orders for a total of 68 Boeing jet aircraft, 38 of which have already been delivered, and this financing assistance would enable Air India to complete its purchase of the final 30 aircraft. The ATA claimed that without injunctive relief their member airlines and pilots would suffer irreparable harm. ATA argued that “if Air India places just one new Bank-backed aircraft into service pending resolution of this suit, U.S. airlines will be forced to cut routes, cut capacity on other routes, and layoff employees.” The ATA argued that the Bank’s guarantees could give Air India a competitive advantage in the aircraft financing markets that could enable it to expand its international routes, thereby harming U.S airlines’ market share and further claimed that this injury happened to one ATA member, Delta, in 2008 when it was forced to cut its New York to Mumbai service after Air India used Ex-Im Bank financing to increase its passenger capacity on that route.
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The following is one of two cross-posted contributions from ITIF to National Journal.
Job growth in clean energy is a tricky subject. As Brookings found, green sector employment has increased substantially in recent years, and this trend is to be applauded. But a key economic challenge is to make sure that we aren’t just swapping green jobs for fossil energy jobs, and are actually achieving netjob growth. And an important way to do that is to look beyond the US market.
Think of it this way: over the past 40 years, energy expenditures have tended to account for less than 10 percent of GDP, only rising above that threshold in the crisis-riddled 1970s. There is little reason to expect energy consumption to account for an increasing share of the economy; in fact, we want the opposite to happen, through lower energy costs and ever-declining energy intensity. But if we’re using less energy, and paying less for it, then relying on domestic consumption for green job growth will have its limits.
So while the domestic market is important, we also need to place major emphasis … Read the rest
The Obama Administration is wisely moving forward with a landmark trade agreement, the Trans-Pacific Partnership (TPP). With origins in the Bush Administration, the TPP would increase regional economic integration between the United States and eight other Asia-Pacific nations: Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam. The TPP represents a great opportunity for the U.S. to strengthen its trade ties with growing and dynamic markets but only if it truly raises the bar for fair, market-based trade. As spelled out in Gold-Standard or WTO-Lite?: Shaping the Trans-Pacific Partnership, a new report from the Information Technology and Innovation Foundation, as it stands the TPP unfortunately runs the risk of enabling, rather than curbing, a continuation of some of the rampant mercantilist trade practices that have hurt economic growth and invited skepticism of global trade.
In the old days, mercantilism and protectionism was as simple as erecting high tariffs and imposing import quotas. Now, it has become more sophisticated and complex: intellectual property theft, extensive use of non-tariff barriers, and abuse of anti-trust, regulatory, and tax policies are on the rise. The aim for the countries that use … Read the rest
Stop the madness! Purge “tax and spend liberal,” and “corporate welfare proponent” from your label lexicons. Don’t use phrases such as “industrial policy” and “cut spending across the board” and “big business giveaways” unless you really know what they mean. The near-death experience with the economy in 2008-9 and painfully slow recovery are the result of often well-intentioned but ultimately flawed policies championed by Democrats and Republicans alike over the last 30 years. Individual consumers also bear some of the burden. Times and circumstances have changed. We must rethink our economic policies and realize that bumper stickers don’t amount to thoughtful policy debates. We need a Chinese menu approach for reviving our economy in the years ahead.
It is time for both liberals and conservatives to acknowledge that their respective orthodoxies are not enough to jumpstart American innovation and competitiveness. Both sides need to revisit their assumptions about taxes, trade, regulations, public research and development investments and education. Business and labor groups need to stop fueling the partisan divide and make it easier for political leaders to think about national interests not groups’ interests. Maybe even have a joint U.S. … Read the rest
In recent months, Japan has been getting increased attention; not for its economic success, but its supposed failure. Jeff Kingston’s “Contemporary Japan: History Politics, and Social Change since the 1980s” tells a story of Japan in stagnation since the bursting in the early 1990s of its economic bubble (like us, based on excessive real estate values). “The Economist” describes Japan as being in a state of “gentle decline.” The “New York Times” has been running a series on “Japan’s slow disheartening decline.
This is a critically important topic, not only for its implications for the United States and other developed economies, but also for the future of the global trading system and for nations like China that are taking a page out of the Japanese development play book.
First, the stories on Japan. It’s long been popular among the Washington economic punditry to sneer at the Japanese economy. Japan, Inc. (the idea that business and government should work collaborative to grow the economy) has long been a threat to the so-called “Washington consensus” that holds that markets, not governments, should be the sole determinate of an economy’s … Read the rest
In the software business, we learned a decade or so ago that the right level of abstraction at which to “export” software design ideas was the design pattern.
Taken from Christopher Alexander’s classsic, work on pattern languages for architecture, the idea of a software design pattern is an abstraction from details of implementation to the gist of the software algorithm. Software design patterns are widely used to disseminate innovations in software (they should, in a rational world, be the only form in which algorithms can be patented, but we digress).
The same kind of abstraction – a process pattern, if you will – is the right way to bundle up our innovative DC processes for export. Iraq may not want a Senate complete with two representatives from each state, but the nation builders among the Iraqi local countrybuilders may well want the Committee with Expert Staff process pattern as a model for how to digest complex policies for a generalist legislative body.
Who in the technology policy community speaks the language of design patterns and the language of policy process? That’s the crew who needs to work … Read the rest
As it’s becoming clearer every day that innovation is the central driver of economic growth, more and more countries are trying to be innovation leaders. Unfortunately, in that quest all too many countries are choosing to go down a path of “innovation mercantilism” by implementing beggar-thy-neighbor strategies designed to gain advantage at the expense of other nations and overall global innovation progress. These nations see the royal road to prosperity as through expanded technology exports and the best way to do that they believe is through gaming the international trading system through a number of mercantilist practices, including by manipulating their currencies, distorting technology standards, providing export subsidies, forcing technology transfer as a condition of market access, pirating intellectual property, and favoring indigenous over foreign technology products and services in government procurement.
While China is perhaps the most egregious example of a country practicing innovation mercantilism, it is by no means the only one, as similar (if not as prevalent) practices can be found in Brazil, Argentina, India, Japan, Russia, Singapore, South Korea, and a host of other, even European Union, nations. As these countries bend and break the rules, … Read the rest
As Director of Research at Valhalla Partners (my day job), a venture-capital firm in Northern Virginia, I’ve thought quite a bit about sources of regional advantage in the Washington, DC area.
One thing we understand very well in Washington is process, although many of us are frustrated with it more often than excited by it. But to my mind, it can be a source of strength.
Many of our processes are pretty good. Consider, for example, a process we might call “Forming Consensus Among Disparate Factions”. That’s a specialite of DC, and one which is in short supply in, say, Iraq, or Zimbabwe, or even Malaysia.
What if we could export some of our DC processes as innovations to the rest of the world?
We’ve tried it, of course, in the form of grafting our legal system onto Afghanistan or our commercial code onto Iraq. But we’re exporting the wrong thing here. We need to export not the details of our processes but the “process pattern” of them.
More on this in a subsequent post.