The weekly trade report with correspondent L.C.
After berating Japan for “it” in the 1980s and China for “it” during the past decade, Congress and the White House have decided to join the party of sinners — “it” being industrial policy. This is a really sexy new idea — only four centuries old. In the good old days it was called mercantilism.
In theory, industrial policy should be a winner. All you need for it to work brilliantly is
- To have a majority of investment geniuses in Congress, the White House, and the ten or fifteen government agencies that will insist on being involved;
- For the geniuses to come together in agreement on the same plan; and
- For the plan to do a better job than the private sector in picking the winning companies and do so free of political considerations and interest-group lobbying.
Yes, it’s that simple. So gentlemen, start your turtles, those industrial policy winners.
And now the details…
Congress looks poised to pass a bill this week to provide government incentives to the domestic semiconductor industry. This is one government effort that has the full support of the US semiconductor industry.
The CHIPS Act (“Creating Helpful Incentives to Produce Semiconductors”) was introduced on June 10th and 11th by senior legislators of both parties including, in the Senate, John Cornyn (R-TX), Mark Warner (D-VA), and Marco Rubio (R-FL); and, in the House, Michael McCaul (R-TX) and Doris Matsui (D-CA).
The objective is explicitly to help US companies compete with China — which has its own massive subsidies and other incentives to boost development of advanced microchips.
The US currently has the lead in the most advanced chip-making. Microchips are the US’s fifth largest export, but US production now represents only 12% of global production.
Chinese advances
China is clearly gaining in what is considered one of the crucial areas of technology that has both economic and national security implications. Rep. McCaul warns that “As the Chinese Communist Party aims to dominate the entire semiconductor supply chain, it is critical that we supercharge our industry here at home.”
The legislation would provide subsidies amounting to about $25 billion from federal and state governments over five to ten years. It would create a National Semiconductor Technology Center to develop advanced chip-making capabilities and fund research through the DOD, NSF, and Energy Department. The emphasis is on expanding research and capacity for the most advanced semiconductors. It would also use the Defense Production Act to spur domestic production capacity and would grant a 40% refundable income tax credit for certain investments in microchip manufacturing through 2024. The goal would be to help companies build new plants or buy new equipment and carry out R&D in “cutting-edge semiconductor” production. Under the legislation, Commerce and the State Department would set up a federal program to match state incentives.
The bill is an exercise in industrial policy, which the US has generally steered clear of but which the administration and US Trade Representative (USTR) Robert Lighthizer, in particular, have been openly promoting.
Industrial policy is not to be confused with specific projects or product orders placed by cabinet departments and independent agencies. The Defense Department’s DARPA generated many beneficial side effects — what economists call positive externalities — as offshoots of its usually well-targeted contracts. So did NASA’s planetary research program.
The Lighthizer doctrine
USTR Lighthizer just made his third foray in four weeks into explaining the ideological basis for his — and by extension the Trump Administration’s — trade policy. His latest article, “How to Make Trade Work for Workers,” appears in the July 2020 issue of Foreign Affairs, the prestigious house organ of the NY-based Council on Foreign Relations.
While the three Lighthizer essays were different in emphasis and content, they promoted similar themes:
- Re-shoring US manufacturing, especially of medical and high-tech products;
- Ending the folly of reliance on foreign supply chains;
- Urging US corporations to stop prioritizing efficiency and profitability over keeping jobs and production in the US;
- Resorting to industrial policy, managed trade, central planning, and trade tools like tariffs, subsidies, and domestic-content rules to prop up US companies and preserve jobs for manufacturing workers; and
- Claiming that trade deficits matter and are harmful.
These are all consistent with ideas Lighthizer has expressed throughout his career, his actions as USTR, the policies of the administration, and statements by President Trump himself. The novel element is that the usually reticent Trade Representative normally shuns giving speeches and interviews. Now he is in “full-court press” as November elections approach. But perhaps he needs to spend time attending to questionable goings-on in his own bureau.
Security vs. protectionism
Congress and the administration not only seem unable to distinguish industrial policy from specific defense orders, they also may be coming up short in distinguishing effective national-security bans from self-defeating protectionism, according to major US technology companies.
On June 8th, the Information Technology Industry Council (ITI) — a lobbying organization representing US tech giants — released a policy paper urging that national security strategies be coordinated with the companies affected before the White House issues executive orders. ITI’s president and CEO, Jason Oxman, said that the government should take two messages from the ITI’s policy paper: not to use national security as a pretext to promote unrelated trade or economic goals and to work closely with industry to assure that actions taken don’t undermine US competitiveness.
The administration’s protectionism has been damaging US competitiveness — as a drop in the country’s international ranking has just made evident.
Section 889, Part B
But Congress has been considering and is passing laws that set even stricter bans on some transactions with China than the President’s executive orders. The ITI is particularly concerned with an amendment — section 889, part B — to the National Defense Authorization Act (NDAA), as its August 13th start date nears.
As explained by Bloomberg News,
The broadly written [NDAA provision] could implicate virtually all companies that count the federal government as a customer…. [It] would require companies to certify that their entire global supply chain – not just the part of the business that sells to the US government – is devoid of gear from Huawei,… ZTE Corp., surveillance provider Hangzhou Hikvision Digital Technology Co., and other Chinese surveillance companies.
Tracing a relationship of any kind with these companies anywhere in the world would be a highly burdensome and in some cases impossible task, leaving US companies financially liable if they overlook something.
Trying to make Part B work
The White House Office of Management & Budget is now developing regulations for how companies can comply with the law. That effort is reportedly stalled as companies are seeking to have Congress limit the scope of the law. It isn’t clear if the White House will agree to this, while on Capitol Hill, no one wants to do anything that makes them appear soft on China.
If the current law does take effect on August 13th, some companies are reportedly considering dropping their business with the government to avoid having to trace and then stop all relationships with Chinese enterprises.
A year’s delay proposed
That would appear to be the opposite of the legislation’s objective. In April, industry associations wrote to Congress warning that “If Part B is implemented as written, many businesses with international and domestic operations will be forced to halt their work providing key products and services to [government] agencies, including equipment that is needed to fight the coronavirus pandemic today and in the coming months.” Therefore, “The effective date of part B should be postponed until at least August 13, 2021.” This would provide time for “our associations… to work with Congress and agencies to make part B achievable.”
Showing the depth of concern spanning the high-tech, defense, and automotive sectors, the letter was signed by 10 associations representing such major companies as Amazon, Lockheed Martin, 3M, and Ford. The signatory associations included the US Chamber of Commerce, Semiconductor Industry Association, Aerospace Industries Association, Alliance for Automotive Innovation, American Automotive Policy Council, CompTIA, Information Technology Industry Council, National Defense Industrial Association, and Motor & Equipment Manufacturers Association.
Anti-theft
Separately on Capitol Hill this week, a bipartisan bill was introduced to slap sanctions on foreign companies and individuals involved in the theft of US companies’ trade secrets and intellectual property. Sens. Chris Van Hollen (D-MD) and Ben Sasse (R-NE) introduced the Protecting American Intellectual Property Act, which would require that the President report to Congress every six months on foreign violations of American trade secrets and penalize — through visa denials, asset freezes, and other sanctions — the individuals, companies, and corporate officers involved in the theft.
EU moves ahead with Vietnam but not US
Meanwhile, talks for a US-EU trade agreement are not going anywhere. EU Trade Commission Phil Hogan told a June 9th meeting of EU trade ministers that talks with the US probably won’t get anywhere until after the November 3rd election. The White House, he said, is now focused on President Trump’s reelection.
The EU has not been idle, however. The EU-Vietnam FTA is about to take effect. On June 8th, Vietnam ratified the agreement, which was approved by the European Parliament in February. The FTA ends duties on about 99% of goods trade within 10 years, liberalizes services, cuts regulations, protects the EU’s coveted “Geographical Indications,” has labor and environmental provisions, and has an enforcement component. As one EU official said when the EU completed its ratification process in March, “This agreement is the second one we are concluding with a Southeast Asia country, after Singapore. It is also the most ambitious FTA ever concluded with a developing country. We are opening up new trading opportunities, but we are also creating new tools to give impetus to the enforcement of basic freedoms and labor rights in Vietnam.”
TPP withdrawal repercussions
Bernd Lange, head of the EU Parliament International Trade Committee, commented, “We are making the EU a major player in Vietnam and the region, offering an alternative to unilateral dependence on China.” This could be viewed as bad news for the US, which since withdrawal from the TPP has already seen some of its exports destined for the Asia-Pacific lose competitiveness and now will find European rival exporters also facing lower tariffs in the region.
L.C. reports on trade matters for business as well as Founders Broadsheet.
Photo credit: Wikipedia (Pedro Xing).
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