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The Paradoxical Rivalry of US and China for Industrial Innovation

BUSINESS / INNOVATION / March 23, 2017

By Dan Steinbock                                        

By the early 2020s, rivalry for industrial innovation will accelerate between the US and China. Ironically, the Trump White House has opted for a poor-economy industrial policy, whereas China has a rich-economy policy. The former seeks past glory; the latter cannot wait to get to the future.

 

According to the Trump administration, after the 2008 recession, American workers and businesses have suffered the loss of some 300,000 manufacturing jobs and the slowest economic recovery and since World War II. Consequently, one of President Trump’s key issues is “bringing back jobs and growth”.1

To get the economy back on track, the White House plan is to create 25 million new American jobs in the next decade to restore 4 percent annual economic growth. In contrast, China’s recently-introduced five-year plan is predicated on rapid progress in advanced manufacturing and innovation capacity.

Curiously enough, the U.S. focus is on the kind of industrial policy that usually typifies less developed economies, whereas China is engaged in innovation strategy, which usually predominates in relatively wealthier economies. What will be the outcome?

 

Trump’s Medium-Term Industrial Objectives

The Trump administration is not the first one to seek the revival of US manufacturing exports. “We will double our exports over the next five years, an increase that will support 2 million jobs in America”, President Obama said in his first State of the Union speech in 2010. While Obama’s National Export Initiative increased concern for protectionism and trade friction among America’s big trading partners, it gradually faded away, along with other Obama legacies.

Today, world exports amount to almost $18 trillion annually. Almost half of the total can be attributed to only eight export giants, including the European Union ($2.3 trillion), China ($2.0 trillion), US ($1.5 trillion) and Japan ($0.6 trillion), followed by South Korea, Hong Kong, Netherlands, and Italy.

In order to raise U.S. export strength by a magnitude, Trump chose Harvard-trained economist Peter Navarro to head the newly-created National Trade Council (NTC) in the White House. Now Navarro’s job is to oversee industrial policy, while targeting the trade deficit is expected to pave way to Trump’s “First America” trade protectionism.2

Navarro is a Republican insider who advised President George W. Bush and Mitt Romney’s failed campaign. As I warned over 3 years ago,  Navarro and former Nucor CEO Dan DiMicco, another Trump Trade adviser, represent not just trade protectionism but an effort to mainstream anti-China bias in America.3 In this effort, a key executor of Trump’s mandate is billionaire Wilbur Ross, a bankruptcy expert who made his fortune from bankrupt US companies and offshored jobs.

Until recently, the new industrial policy has been initiated in relatively small scale with relatively narrow impact. Conversely, if it is adopted on a broader basis, the impact could be substantial and unleash – not so much higher but slower growth, due to fewer productivity gains – but rising inflation, retaliation from trading partners and lower equity prices.  There is a historical precedent. In 1930, the US Congress passed the notorious Smoot-Hawley Tariff Act, which sharply raised the cost of foreign imports. While it seemed to work initially, it soon caused other nations to retaliate.4

 
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About the Author

Dan Steinbock is the founder of the Difference Group and has served as the research director at the India, China, and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more information, see http://www.differencegroup.net/

Reference

1. “Bring Back Jobs and Growth”, The White House. See https://www.whitehouse.gov/bringing-back-jobs-and-growth
2. Navarro, Peter, and Ross, Wilbur Ross. 2016. “Scoring the Trump Economic Plan: Trade, Regulatory,& Energy Policy Impacts.” September 29. See https://assets.donaldjtrump.com/Trump_Economic_Plan.pdf
3. Steinbock, D. 2013. “The Quest to Demonize China.” China-US Focus, August 19. See http://www.chinausfocus.com/finance-economy/the-quest-to-demonize-china/
4. Rounds of tit-for-tat retaliation contributed to the Great Depression, and the way was paved for another world war. On Trump’s protectionism and Smoot-Hawley, see Steinbock, D. 2017. “Trump’s protectionism has historical precedent”, China Daily, January 23. http://www.chinadaily.com.cn/opinion/2017-01/23/content_28029557.htm
5. The 13th Five-Year Plan for Economic and Social Development of the People’s Republic of China 2016-20.  NDRC. December 2016. See http://en.ndrc.gov.cn/newsrelease/201612/P020161207645765233498.pdf
6. Steinbock, D. 2015. American Innovation Under Structural Erosion and Global Pressures. The Information Technology & Innovation Foundation. February 9. For more, see https://itif.org/publications/2015/02/09/american-innovation-under-structural-erosion-and-global-pressures
7. Steinbock, D. 2014. Defense Innovation and the Future of American Competitiveness. Information Technology & Innovation Foundation. November 25. For more, see https://itif.org/publications/2014/11/25/defense-innovation-and-future-american-competitiveness











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