Smoot Hawley, Chinese Style

George Gilder
Forbes.com
May 20, 2005
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In his insightful new book, The World Is Flat, Tom Friedman of The New York Times, though generally disdainful of anything conservative, somehow brings himself to cite an exemplary Heritage Foundation study of U.S. companies with facilities in China. These firms are not an unhealthy set of "Benedict Arnolds," as they were quaintly dubbed by Sen. John Kerry during the last presidential campaign. They are the heart of the U.S. economy and the spearhead of global economic growth.

As Friedman explains, these manufacturing outsourcers together generate 21% of the U.S. gross domestic product, 56% of U.S. exports and 60% of U.S. manufacturing employment. But even these figures understate the significance of these companies, because GDP is full of fluff--Berkshire Hathaway-type dross such as Coca-Cola and reinsurance flimflam and government dependents such as the Washington Post and AIG - while the leading investors in China are our technology leaders, such as Qualcomm, IBM and Applied Materials.

I know that on the market I have recently been slipping and sliding all over the track, but I have held fast to one proposition: China is vital to U.S. technology.

The U.S. economic relationship with China expresses the most fruitful synergy in the entire industrial world. Any systematic attack on trade with China would prove as devastating to U.S. companies, and thus to U.S. prosperity and power, as the Smoot-Hawley tariff was to the U.S. economy at the time of the Great Depression.

The greatest current danger to the U.S. position in the world, therefore, is not the surge of oil prices or the terrorist jihad or the alleged "imbalances" in trade and investment. The direst peril is the current concerted bipartisan attack on the U.S. relationship with China.

Compounded of misinterpreted national security threats and delusional trade gap fears, the bipartisan consensus strangely imagines that China is somehow exploiting us. China is surely a powerful country with a mind of its own and a lot of leftover Communist generals with a Taiwan fixation. If the U.S. is suffering from national security overreach, however, the answer is to improve our economy and our armaments, not to disrupt our most valuable economic relationship.

Nonetheless, with the administration and its congressional minions chiming in with Sen. Hillary Clinton and Sen. Charles Schumer, and with a chorus of Davosian corporate gulls led by Warren Buffett and even sometimes Bill Gates, the American establishment has adopted a near unanimous belief that the dollar is way too strong vis-á-vis the Chinese currency. In response, both Congress and the Administration urge a 27.5% tariff against Chinese goods designed to force a major revaluation of the Chinese yuan.

Nothing that al Qaeda could do to America is as destructive to U.S. interests as this attack on the heart of our economy. Of course, many foreign politicians seethe with envy at the supposed "imbalances" that give the U.S. nearly half of global market cap and some 30% of global GDP. Naturally they want to bring us down. But why on earth do Americans join them? How on earth can the U.S. benefit from compounding the sharply higher prices it now pays for energy by paying sharply higher prices as well for Chinese manufactures and technology?

When John Snow and George Bush agree with Hillary Clinton and Charles Schumer on anything, even such a woebegone whim as a weak dollar as a remedy for supposed excesses of foreign investment in America, you can be sure things are not going well. After all, the Clintons and their agents such as Rubin and Summers, and their billionaire Berkshire Hathaway buddy Buffet, never urged a drastically weaker dollar when they held the power to achieve it. But the Administration remains full of economists who believe that anyone who fails to accept the idea that the U.S. under Bush may be felicitously described as "Squanderville" is a supply-sider practicing voodoo.

Exacerbating the damage of this macro-trade policy, the Administration is pursuing almost equally perverse micro-trade policies. It is moving to ban the U.S. semiconductor capital equipment industry from selling state-of-the-art 90-nanometer gear to China on the grounds of national security. And it is conducting a Federal Trade Commission witch hunt against the dynamic random access memory (DRAM) industry, which is somehow deemed to be charging too much (gouging), or too little (dumping), or just right (colluding), or perhaps all at the same time, in one of the nuttiest notions of criminality since the Salem witch trials. The DRAM witch-hunt fails to notice that this is perhaps the world's most ferociously competitive industry, reducing its price per bit by some 50% per year.

The DRAM follies merely make the U.S. government look silly. But the national security effort is serious. It is based on the assumption that technology is something owned by the U.S. and stolen by foreigners or leaked to them rather than created in tandem on both sides of the Pacific.

Since Asia commands roughly ten times more engineering talent than the U.S. does, and since China alone now graduates more English-speaking engineers every year than the U.S., and since the U.S. neither adequately trains Americans in math and science nor now permits the needed levels of immigration of foreign talent, leading-edge technology skills are no longer anywhere near a U.S. monopoly. Because China makes up roughly half the incremental market for semiconductor wafer fabrication equipment, moreover, the campaign to deny to China state-of-the-art microchips will reliably drive one of our most valuable and coveted industries off shore. So much for national security.

Seeing these policies make their way through the political process, the markets have responded with an exuberantly rational crash of technology stocks. Should these devastating policies hold, they will heavily punish the U.S. technology sector and jeopardize our continued world leadership in the field already suffering from our pathetic inability to deploy real broadband.

These policies are based on the silly socialist view, masked as a "free market" in currencies, that trade should be equilibrated at national borders through gyrations of the value of money. But in a global economy, with capital moving at the speed of light down fiber-optic lines rather than across perilous seas on clipper ships, nothing is less natural than a trade balance. It can only be achieved by constant destructive manipulation of currencies, which are finally determined after all by governmentally run and appointed central bankers.

George Gilder is a Senior Fellow of Discovery Institute and Chairman of the Gilder Technology Report.