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.
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.
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.
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.
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.
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.
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.
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.
but thats not what goldman said. he wants more r&d labs for defense so as to expand defense spending . .
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!!!
Wesley Ye The thorium reactor on the other hand is very feasible.
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.
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.
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.
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.
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.
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.
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.
For once, some thing I can agree with.
China has good reasons to develop its semiconductor industry.
Less expenditure supporting the military complex will be helpful.