The broad US stock market gave up an early rally and fell over 5% after President Trump’s announcement of punitive tariffs of 25% on steel and 10% on aluminum, the highest in US history. US Steel, the country’s largest producer of the metal, rose 6.4% on the news and aluminum producer Nucor gained 2.4%, while the S&P 500 average lost 1%. General Motors fell almost 4%, Ford fell 3%, United Technologies fell 2.8% and Boeing fell 3.4%.
Raw materials prices have little to do with the erosion of America’s industrial base. Chronic underinvestment in capital-intensive manufacturing is the underlying problem, and American manufacturers avoid big capital commitments because they can’t compete with Asian subsidies for industrial plant and equipment. Asian economies view a $10 billion semiconductor fabrication plant the way Americans view a bridge, stadium or airport, as a public good that merits taxpayer support. China’s economy is so big that its subsidies distort capital investment around the world.
By protecting raw materials exporters while ignoring the decline of American high-tech capacity, the Trump trade policy nudges the US economy towards the economic profile of a Brazil: a producer and exporter of agricultural goods and raw or semi-finished materials with an atrophied industrial base.
Trump announced the tariffs in offhand remarks to reporters at the White House, after a day of conflicting signals. The White House had planned an announcement as of Wednesday night, but postponed it until this morning. Trump tweeted early Thursday, “Our Steel and Aluminum industries (and many others) have been decimated by decades of unfair trade and bad policies from around the world. We must not let our country, companies and workers be taken advantage of any longer. We want free, fair and SMART TRADE!”
As the equity market plunge suggests, Trump’s announcement is anything but smart. America’s greatest commercial challenge comes from China, which dominates many categories of high-tech manufacturing and has committed tens of billions of dollars to a campaign for supremacy in semiconductors. But China’s steel and aluminum exports to the US amount to less than 1% of the total; America’s main suppliers are Canada, Brazil, South Korea, Mexico, Russia, Turkey and Japan, in order of importance. China has been accused of depressing world prices of industrial metals, although aluminum prices have risen by 60% and steel prices have doubled since the Nov. 2015 low. US Steel’s stock price has jumped from $7 a share in early 2016 to $43 before Trump’s announcement.
US Steel’s 29,000 employees won’t determine the outcome of any major election, but the White House evidently believes that it needs to show the flag on trade to maintain credibility with its working-class supporters. If Trump’s trade announcement was a cynical political gesture with domestic politics in mind, the damage will be limited. But earlier this week, the president promoted trade warrior Peter Navarro to a rank equal to that of Economic Policy Council head Gary Cohn, which suggests that other shoes are likely to drop.
In two recent essays for the Journal of American Affairs, I examined the decline of innovation and productivity in the US, and the impact of this decline on US trade. Starting in the 2000’s, US venture capitalists stopped investing in manufacturing.
The reason has to do with return on capital. In the United States, return on equity is negatively correlated with capital intensity. In China, it is positively correlated, and strongly so. That is the result of government subsidies for capital investment.
The charts below show the capital intensity (total assets per unit of earnings before interest and taxes) vs. return on equity of each company in the China MSCI Index and the S&P 500 respectively.
As I wrote in the Journal of Economic Affairs, China dominates the key digital technologies:
- Liquid crystal displays, which are employed in a wide variety of products, with $100 billion in annual sales. South Korea controls 35% of the market, Taiwan 25%, and China 20%.
- Light-emitting diodes (LEDs) are produced mainly in China and Taiwan.
- China and Taiwan dominate the production of semiconductor lasers, the energy source for fiber optic communications.
- Solid state sensors, which generate images in digital cameras and related devices, are produced mainly in Taiwan and Japan.
- Flash memory is produced mainly in South Korea, Japan and China, with only 10% of world output coming from the United States.
- Integrated circuits are a $270 billion global industry. Most are produced in Taiwan and South Korea, and China has undertaken an aggressive investment program in the industry. Less than a quarter of world output is produced in the United States.
- Solar energy panels, a $30 billion industry, are dominated by China.
On several occasions the US Department of Defense has had to abandon high-tech research projects that require sophisticated micro-manufacturing because it could not find an American manufacturer capable of executing the task. Defense Department rules exclude the use of foreign manufacturers, and in some fields the only technical capacity is located in South Korea, Taiwan, or other countries.
Restoring the US industrial base would require a radical departure from past policies. Requiring domestic content for high-tech defense goods, for example, would compel US manufacturers to create onshore capacity, but the taxpayer would have to support the effort. The government would have to persuade US companies to restore the R&D capacity they abandoned during the 1990s, when Bell Labs, RCA Labs, GE Labs, IBM Labs and other major industrial facilities still functioned. The Federal R&D budget stands at half of its Reagan-era level in terms of GDP. Even if the government were to restore funding, it lacks the corporate and national laboratories who know how to spend it effectively.
The US share of global high-tech exports has fallen from just below 20% in 1999 to barely over 5% in 2014, while China’s share has risen from 3% to 26% during the same period.
The United States has never encountered a competitor like China. Old-fashioned remedies like tariffs are not effective. I wrote in the Journal of American Affairs:
Solar panels are a case in point. China decided to address its urgent pollution problem by shifting to solar power during the early 2000s. It also sought to exploit growing global demand for clean energy. The technology to manufacture solar panels was developed in the United States and Germany, and German production equipment was available on the open market. China meanwhile directed investment into the components of solar panels such as polysilicon and glass frames, dominating the supply chain for solar panel production. As a result the U.S. share of solar panel production fell from 50 percent in 2007 to 6 percent in 2011. The largest Chinese solar panel producers are unlisted and do not publish their financial data, so it is impossible to gauge their profitability. The United States responded by imposing stiff tariffs on Chinese solar panel imports, up to 239 percent in the case of some companies. The European Union, Australia, Canada, India, and Turkey also imposed tariffs against Chinese exporters. The Chinese responded either by absorbing the tariffs, or by shifting production to other countries.
There is no indication, though, that Trump will attempt to protect high-tech manufacturing, for the simple reason that it has already left, and there are few jobs left to defend. Instead, the president will concentrate on labor-intensive, low-tech industries. That’s the way to give America the economic profile of a Brazil.
Less expenditure supporting the military complex will be helpful.
China has good reasons to develop its semiconductor industry.
For once, some thing I can agree with.
Informative. If China subsidized critical industries and those it wants to develop and succeeds to get a fair return or a windfall on their investments then it is all fine. That is still good business. The thing is it has been peddled that gov’t are the worst business owners or that gov’t should not get into business but the Chinese model debunked that. I guess each country would just have to continuously seek what works for them.
The fundamental question of existence is Survival, Growth, Evolution. When the latter 2 are not possible one must revert to the first.
Trump is a realist. He is the child who blurts out that the Emperor has no clothes. He knows that the American School System is churning out youth that can neither read nor count, so the growing Trump Nation is unfit for a technologically modern industry required for Globalization, and Free Trade.
Therefore, walls around USA and protect Agriculture and Resources makes eminent sense. America is blessed with enough land, water, and sun to feed its people, and does not need the world. Russia, China, EU, Iran can go to hell.
Great job, Trump.
The problems that the US face is not unique to the US. It’s the end of the road of all industrialized nations. And if China continues to grow, it will have the same issue.
One solution could be the Universal Income that some Nord European country has tried with satisfactory results. Hopefully, human race will soon succeed in the nuclear fusion technology so that energy is almost free and the Universal Income would be feasible to all humanity.
If what you said is true, it means that Trump just wants to pick a trade war with China for his(or some higher power’s) geopolitical reasons.
Yeah — but nobody’s complaining in the case of Brazil. Sometimes, I think that, for the global capitalist class, Brazil would be a better place if they got rid of the Brazilians – or simply use them as slave labor.
The internet was developed by us defence department. the problem is US label anything by government as socialist welfare, and US government runs very inefficiently.
Wesley Ye
Nuclear energy is on a totally different scale than other sources of energy, especially nuclear fusion could in principle bring the cost down to almost nothing.
Also, I think prosperity of a nation is not just about the easy access to resources. It has to do with the culture and philosophy of the people as well. Actually, the ease of access to resources could on the contrary lead to impoverish a people because their culture has evolved over time to become uncompetitive.
Wesley Ye The thorium reactor on the other hand is very feasible.
So Mr Smarty————you lay out some of the problems facing the fading empire BUT not even one solution to counter the Chinese, Koreans, are the Japanese——–and I know the reasons———if you told the "TRUTH" you would not have a job in Mainstream Media are wandering the halls of some University that employs you. So keep sending out articles on why Trump is the MAN are now why Trump has veered off course———–because one thing is for sure——-DUDE———you are a FAKE!!!
but thats not what goldman said. he wants more r&d labs for defense so as to expand defense spending . .
goldman says the u.s spends on bridges stadiums and airports.yes they do bridges and airporst to get to the stadium. thats the pathetic american mentallity a sporting event [[nfl/nba/mlb]] etc. thats what is important to the insouciant american public.
Trump’s protectionism is the flip side of Obama’s placation system. The "placate other nations while America does badly" has been tried. During Obama’s 8 years of tyranny not only outsourcing was encouraged but US companies fleeing the 35% Corporate tax was equally bad.
Then Obama adds salt injury by flinging open our borders to one and all.
As for Solar energy it is rip off. We have the technology to allow each house or business to be energy independent from the national grid. When it comes to energy from the sun it should be free to all living things on the planet. Without the sun the earth not only will be dead it would have spun into deep outer space.
For one human being to harness this free energy and then sell it to another is Odious. A few humans become filthy rich selling free energy from the sun to others NO Thank you. Solar energy should be free for all mankind. It is our natural heritage. Any technology to make that into reality is also the heritage of mankind.
The only other energy open to all mankind is the heat from the earth’s core which is hotter than the surface of the sun. Technically speaking Thermal energy should be limmitless, availabe on any spot on earth and generate enough energy for all mankind.
I think it was Lenin that said " The Capitalists will sell us the rope with which we will hang them "
Looking at your charts Mr. Goldman that looks to have already happened.
Richard Arlen
Thats not what he said at all. He said that the US has given away it`s high tech industries and the R and D along with it for short term gain.
Richard Truong
I agree with your point, but the problem with the poor countries of the world is the ever lasting damage colonialism has done to them. It will take a couple of more generations and the influence of China to raise the countries of Africa to first world status.
American eh? Can`t bear to look at the truth. This was an excellent column that lays out the facts for all people who do not have their head up their azzes. He simply showed where, why, how and in what the US has fallen behind the world. And because most Americans are like you ,will continue to fall farther and farther behind. I will tell you something and that is with a jaugernaut like China and even Russia at full steam and charging ahead, the US better soon get it`s house in order or it is going to be left on the scrap heap of history.
LOL@Syed Abbas. Your piece certainly makes good sarcasm.
quote: "He is the child who blurts out that the Emperor has no clothes."
Well, compared to what his family can afford to wear, the rest of the country probably shouldn’t call what they are wearing "clothes."
quote: "He knows that the American School System is churning out youth that can neither read nor count,"
He should know. He’s one of them.
quote: "Therefore, walls around USA and protect Agriculture and Resources makes eminent sense."
Yep. By removing environmental protection codes and promoting virtually irreversible pollution of farm soil, ground water, and other natural resources, nobody will even bother to think about taking them away from America. Trump is not only planning to build "the wall", he is also going to build bridges — not the diplomatic ones (he’s destroying those) — it’s the realist, physical ones, you know, the kind that Americans can sleep under and jump off of.
Great job, Abbas. I’m saving your post as an excellent example of sarcasm. I’ll be sure to credit you as the original author when proper occasions arise for reposting it.
You forgot " Dancing With The Stars" The "Superbowl "and that all American passtime shoving food down their throats and "Tailgating."
Shawn Napper
LOL. Except for the last line, the rest is dead serious.
Many thanks for your kind elaboration.
My goodness. An article by Goldman that I actually agree with, head to toe.
Now let me ask you, Mr. Spengler – do you have any buyer’s remorse for your support for this buffoon of a President? Or is your anti-muslim bigotry more powerful than your economic sense?
Sir, President Trump’s punitive tariffs of 25% on steel and 10% on aluminum caused run on Bear Market at Tootsie and NY stock Exchange! Chronic underinvestment in capital-intensive manufacturing is the underlying problem in US! In the light of possible military threat from Russia and US foreign policy disaster Mr Trump have the biggest challenge to overcome economic and military decline that his voters are afraid of!
Wesley Ye You’re out of date buddy. Smal US firms are engaged in very productive fusion reactor R&D.
LPPFusion of Middlesex NJ has built an experimental aneutronic fusion reactor (FF-1).This IS NOT the standard tokomak design, but is an approach to fusion using other configurations and physics ("Dense Plasma Focus"). The company is now in the final phase of reaching fusion, including use of the pB11 (hydrogen-boron fuel)
The FF-1 device has hit 3 Billion degrees C (which is necessary to preclude radioactive waste or contamination as a by product)… and held that temperature long enough for a reaction. The last step is to eliminate random molecules during the heating phase of the reaction from contaminating the plasma and thwarting the fusion process.
The LPPFusion team is currently installing the designs and materials for reaching fusion and should have definitive results by Fall- 2018. The FF-1 is currently #5 on the Fusion leader board and expects to hit net fusion output with the final, planned upgrade. The company is privately funded (crowd sourced) and the total budget since inception is $5 M. Recently research agreements were signed with UC San Diego (which is building a replica of FF-1) … and two national labs in Poland which specialize in Dense Plasma Focus.
Details
Fusion Leader Board:
The LPP Fusion reactor (FF-1) is currently #5on the fusion output leader board.
http://lppfusion.com/wp-content/uploads/2016/05/ntauT-chart.png
How it works
video/211492763
Reaching ignition
video/212111841
Complete Album of Videos
Device video:
video/211492763
Wesley Ye You’re out of date. New fusion reactor designs will directly generate electric current. Hyper-cheap. see LPPFusion.com
Richard Arlen: Prescription for drunk drivers is consumption of more drink of alcohol!
Jo Snow : US Govt is hostage of few corrupt corporations owned by people that have loyalty elsewhere!
Syed Abbas Reading Shawn’s comment did not strike up a mental picture of him at a table with like minds debating the issue. Something in his words and the way he "spoke" conjured up an image of a nerdy, spoiled, ignorant, Prick. Maybe its me and i am reading it after a long shift, but the way he talks down to you in his wording makes me want to throttle him if this was a face 2 face discussion and i have Low T and quite passive now-a-days….xoxoxo
America now follows a form of economics sometimes referred to as "predatory Capitalism". It is an economic system meant to benefit the elite at the expense of the rest.
Till recently the cheapest labor was the aim. The way to get that is out source our labor to the cheapest market, where ever that maybe. Today it could be China, tomorrow it could be Mexico.
Another aspect of pedatory capitalism is that profit becomes the only goal. Insurance companies collect for years then spend an inordinate of time finding ways not to pay when a catastrophe hits. Laws force the person to buy insurance.
That kind of practice is applied across the board.
We have to look at the board of directors of each company and see if they are doing well because predatory capitalism is set so that these CEO’s and the stockholders siphon the money from the rest of us.
Read an article of Harvard University’s investment porfollio making really bad decisions. Those handling Harvard’s multi billion investment portfollio lost millions yet together they were earning over 200 million dollars.
An average worker, say a computer programmer, makes bad decisions are usually fired and the replacement gets the same pay. Not with Corporate CEO"s. The New comer often gets millions more in a salary package than the one who just retired. (they are seldom fired).
I agree with Mr. Goldman, those who now control the US economy are about to ruin it in the same manner when they controlled Germany’s and Russia’s economies. They like parasites will siphon the money for themselves and leave the host nation bone dry.
"Raw materials prices have little to do with the erosion of America’s industrial base." Neither has Trump, for decades the geniuses in government, economics, academics, domestic and external policy have built the American circumstance. Trump’s tarriffs are designed to strip away the union/laboe vote from status quo democrats and republicans, Rebuilding the myriad of neglected sectors may be a bridge too far for America at this point. Dragging Trump into is of liitle use.
Donald Ward – Read it again after all traces of drugs & alcohol have left your body. I wonder how often that happens — twice a year? LOL.
quote: "i have Low T and quite passive now-a-days….xoxoxo"
It should read "i have Low IQ and quite confused now-a-days….xoxoxo"
Sorry to tell you that damages to the brain from use of drugs and alcohol are irreversible. But then you don’t seem to be the thinking or reading type that need a good brain. Why are you reading Asia Times anyway?
Price controls never work. And minimum wage laws never work. Along with a foot loose fancy free fiat money system. The economy needs to be free to flourish. And it needs to be shackled to the gold standard to be stabilized. That economic truth is ironclad, and when the dollar gasps it’s last breath. The truth whether heeded or not will be alive and standing.
Karl Marx had predicted back in 1867 (Das Kapital) the inherent instability and contradictions of we generally refer to as Western Capitalism.
Any wonder why the Cabal / Establishment and their wholly owned propaganda apparatus (the mainstream media) have been running a century-long campaign to besmirch him worldwide.
Works of Karl Marx were deemed anti-Establishment in his days.
Shawn Napper
Marx and Engel also wrote "The Communist Manifesto" where the economic solution proposed in Das Kapital was and is "Collectivism". Collectivism is a belief that wealth should be equally distributed, but because the wealth tends to be concentrated at the top of an "economic pyramid" and the mass number of poor at the bottom of that pyramid it is easier to lob off the top elite and distribute their wealth than raise the standard of living for the massive bottom half of that pyramid. what you end up is that everyone is "equally poor"
Hi Mr. Goldman or should I say Spengler.
I have been an avid reader of your articles on here and PJmedia since at least 2002 and I agree with much of what you have to say. ‘How Civilisations Die’ is a great read even if much of it is familiar from your work here.
I know you sometimes reply to comment on here so I wanted to ask you about some of the ideas you stated in your article ‘A Path Out of the Trade and Savings Trap’ in the American Affairs Journal.
In it you recommend that the USA should:
-Increasing funding into future technologies to stop China from catching up.
-Refocus on Stem subjects at university.
-Use a range of measures to force parts of the high-tech supply chain back to the United States. For instance requiring 100 percent American content for semiconductors, flat panels, sensors, and other key components of defense equipment.
-Work with Japan in communications technologies.
I was wondering have you managed to suggest any of these ideas to the Trump administration? I wholeheartedly agree with these ideas and I remember reading that you have met Steve Bannon and have discussed these with him. I really think you lobby hard the administration to get them to take up these measures. I would add that a 10% corporation tax would also be great help.