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How China Is Gaining and How America Is Lagging: The Case For a National Advanced Industry Strategy

April 27, 2023
Event Host: ITIF Hamilton Center for Industrial Strategy
Robert D.
Robert D. Atkinson@RobAtkinsonITIF
Information Technology and Innovation Foundation
Keynote Speaker (View Presentation)

ITIF’s Hamilton Center on Industrial Strategy hosted an all-day conference with leading experts and policymakers to explore why and how Washington can look to America’s strong tradition of “national development,” championed by Alexander Hamilton among others, for guidance in how to win the techno-economic contest with China.

Dr. Atkinson’s speech begins at minute 0:41:45 in the conference video. (Download his slides separately.)

Keynote Transcript

Rob Atkinson: I am going to start with some broad generalizations, but for the sake of argument, I think it's important.

This was America from the founding of the Republic. Hamilton argued, as did many others early on, that America needed the government to ensure we were not going to be dependent upon the major techno-economic threat of the time, the UK. One of the things the government put in place was the armory system, and it gained us a 50-year advantage over the UK because we developed precision manufacturing and interchangeable parts 50 years before the UK did, and the only reason we did it is because we had the armory system. If you ever go out to Harper’s Ferry, go look at that machine shop there; that was a key factor.

But this tradition, Hamilton’s report on manufacturing, this tradition of national developmentalism, wasn't just a one-off; it lasted all the way through the 1970s. In 1963, the U.S. government invested more in research and development than the entire rest of the world combined, business and government. So, we've done this before, in fact, this is normal; this is our tradition.

Unfortunately, America went off track and that’s largely, I would argue, and again, simplified way, that's what America is today. We look at the economy through the lens of finance, and if you're on the right your hero is, unfortunately, a British import, Adam Smith. “He’s the gospel, just follow Adam Smith and everything will be fine." And on the left, I could put 30 books up there. On the left, now, it's "Don't worry about economic growth, don't worry about what Lord Sainsbury is worrying about. Just focus on redistribution. You don't need to worry about growth." And you can see those are pretty far apart in terms of the politics.

What we need now is a new vision; what Michael Lind and I have articulated in an article in American Affairs ADD LINK. National Developmentalism or Hamiltonianism.

Now, Lord Sainsbury mentioned the report ITIF wrote where we looked at seven major advanced industries. What you can see is that the U.S. has fallen on virtually every one of these industries, except for other transportation equipment (which is largely aerospace), and IT and other services. This is not a very good trend. You can see, this is the global average of where we would be if we had the same amount of those as the rest of the world as a share of our economy, and now we’re below average. And I think this is really interesting because one of the real core strengths of the US economy is the information services economy part of it. So, think about Google, Microsoft, and those kinds of firms. As you’ll see, we do very well there.

However, if you only look at the hardware side of the economy, we’re almost a developing nation. We have 80 percent of the global average. If for example, we were at the global average, the same amount of car production as everybody, the same amount of machine tool production as everybody, we'd have a location quotient of one, but our location quotient is actually 0.8. So, when people say, "Oh, the U.S. is powerful in advanced technology,” the reality is we’re not. We’re below the global average of about 75 countries, which, as you saw in Lord Sainsbury’s slide, includes countries like Saudi Arabia.

The other problem is that we’re moving in the wrong direction. In pretty much every sector, with the exception of other transportation equipment and IT and other services, we were losing global market share.

Okay, and as you saw before, these are our peers. We’re ahead of Italy, but we’re behind Mexico. Now, that’s not to say that Mexico has more advanced firms; what it is to say is Mexico has more value added in advanced industries than we do as a share of its economy. These are the 10 countries we looked at. This is a very typical slide. You're going to see China way over here, and the US is way over here, and this again, this line, if we were at the global average, we're below half of where we should be for electrical equipment. We're below significantly on motor vehicles. We would need 14 major motor vehicle assembly plants in the US just to get back to that average line. Look at where the Germans are. Look at where Mexico is.

Machinery and equipment, again, below the global average. We hear a lot about Japan as a failed economy. That’s because people don’t look at what Japan’s really doing. They’re a massive global leader in machinery and equipment. And look at China.

Computers and electronics, this is why we passed the CHIPS Act. So, we’re big, yes, because we have a big economy. But look at shares: Taiwan, nine times more. That sector is nine times bigger in Taiwan than it is in the global economy, partly because of TSMC and others. In Korea, it’s about five and a half times bigger. In the US it’s actually right at the global average, even though we invented that industry.

So look at the two U.S. success stories.IT and other services and biopharmaceuticals where we’re above the global average. As Lord Sainsbury talked about, once you lose capabilities, it’s hard to get them back. You got to fight. But when you have advanced industry capabilities you can build on them and you can work to advance them. And what’s striking about US politics in the last few years is the two main sectors we're still healthy in, two of the three, aerospace being the other, public policy in Washington is intentionally trying to degrade our position.

Drug price controls, repeal of the Bayh-Dole Act, and limits on patent protection all harm biopharma innovation and U.S production. In IT and other services the tech lash leads policy makers to support policies harming U.S. companies in this sector.In antitrust, the narrative is how we need to break up these companies, even though if you look at data on R&D spending from the EU, five of the top six companies are American tech companies. Their R and D is bigger than entire UK R and D spending. So, we have these wonderful champions who are out there fighting globally, and yet we’re saying wehave got to tear them down, like Algernon Bergeron in Kurt Vonnegut. Well, they’re doing so well, we better put lead weights on them.

Now again, we’re big, but look at China, and China is going to keep going up. Taiwan, Korea, Germany, Japan. Now you can say, “Well, they’re smaller than we are.” Of course they're smaller because they have a smaller economy, but those countries are much more specialized in these industries, they're in a much better position going forward to be competitive there.

Interesting slide here. 38% of all advanced industry output growth from 2006 to 2018 came from China.

So why is there so little Hamiltonianism? We had a nice rebound, if you will: Congress passed the Chips and Science Act, in which Senator Coons and Senator Young played a key role in that. So, we’ve done some things, but we really haven’t embraced Hamiltonianism. And so, why?

Couple things. One famous line, Michael Boskin, “Potato chips, computer chips, what’s the difference?” I don’t even explain that to this group because, you all know, but you can laugh at that, but that is what most neoclassical economists think today. There is no reason to pick a sector, one sector is as good as another sector. If you believe that, right away you can’t do advanced industry strategy, because advanced industry strategy is saying there are key sectors that US has to be healthy on. Mike Brown is here and has talked about 19 strategic technology sectors the White House Office of Science and Technology Policy has identified. 19 key sectors that we have to do well in if we’re going to thrive, and 17 of them are largely commercial. So if you believe that potato chips and computer chips are equally important, you’re not going to focus on industrial strategy.

The second reason why there is so little Hamiltonian policy is the belief that economic policy should not cause distortions. If you’re an economist, the worst thing you can do is distort the economy, because under neoclassical economic theory, price signals maximize allocation efficiency. So if we tax these chairs, and we subsidize the tables, we’re going to have too many tables and too few chairs. Now you can say, “Well, that’s useful.” The problem is it’s largely irrelevant. When you look at new growth theory, people like Romer and others, what really drives growth is not you have a bit too many chairs and a bit too few tables; it’s you produce the chairs in a highly productive way and are you’re producing innovative tables? And neoclassical economics just ignores that.

Now, why am I saying this, by the way? I should frame that. Because the single most important battle that we have to fight is an intellectual battle. It’s not a political battle, it's an intellectual battle, because every time we argue this, you will see economists scoff and look down their nose and say, "Well, these people clearly are not economists.” As if that’s the proving point. It’s like, “I’m not a chiropractor either."

Those are domestic policy conceptual issues. There are international ones. If you remember Ricardo: Portugal makes wine, the UK makes textiles, and that’s the way it should be. This leads to the belief that whatever industry mix a nation has, you were destined to have that. For some bizarre reason, we’re the global leader in wastepaper. That’s because we have a competitive advantage in waste paper because we have a lot of rain, and a lot of forests, but that’s the theory.

And the last component of the theory is we don’t compete. Paul Krugman once said that international competition is a myth, it’s a farce. And he would say, “Well, Intel might compete with TSMC, but we don’t compete with Taiwan or China.”

Now you put all of that together, which is the dominant view now today in Washington, and the result is nothing. The result is nothing. “Well, we’ll make sure we have good IP system." Of course. “We’ll make sure we don’t have a distortive tax system.” Of course. “We’ll make sure we fund science.” Of course. “We’ll make sure we fund infrastructure.” Of course. But that’s as far as you’re allowed to go.

Now, what do we need to replace that with? Number one, we need to replace it with this view that computer chips are more important than potato chips. The 19 sectors that OSTP has identified, that’s what we need to be focusing on.

Second, we need to stop thinking about the economy as a market for exchange that is determined by price signals. So Janet Yellen last week at a speech at CSIS, she said, “An economy is an aggregate of the choices people make.” No, it’s not. An economy is an aggregate of the capabilities of firms and entrepreneurs. And Lord Sainsbury did not mention the other part of his book, which is to me, really powerful where talks about how countries gain capabilities. David Teece, from UC Berkeley, has also stressed this point, particularly about dynamic capabilities. So we need to shift from this notion that the market is about exchanges mediated by price that policy should not distort it and that leads to these beautiful outcomes. Instead, what we is an approach focused on the need for dynamic capabilities in firms, and organizations, and entrepreneurs. What are dynamic capabilities? Well, capabilities are the ability to produce stuff, whether it's a good or a service, in an innovative, highly productive way that can win in global market competition. Dynamic means that you’re not just doing it this way, but you’re constantly improving, whether it’s a process, technology, a business model, or a new product. So what we really have to be focused on, centrally, is dynamic capabilities, and that is all in this complex ecosystem, this system of innovation. So stop thinking about markets and prices and let's start thinking about dynamic innovation capabilities and ecosystems.

Internationally, the reason that TSMC is the global leader is not because Taiwan beaches have incredible amounts of sand, and they mine that, and they create the best silicon in the world. Perhaps it was because the Taiwanese government decided that they were going to lead in this industry through a thing called ITRI, the in-industry Industrial Technology Research Institute, which by the way, was originally funded by the US government through AID back in the sixties, and they worked their way up, and Morris Chang left there and was given a really good foundation to build on. So this notion somehow that competitive advantage is just given, no, it’s not given, it’s fought for.

Once you buy into that, then it’s like, “Well, we do care that we specialize in waste paper, maybe we shouldn’t specialize in waste paper. Maybe we should specialize in three-nanometer chips.” And Mike Schmidt’s going to talk about that a little later today, head of the chips program office. So the notion is we have to think about these industries globally, and as Lord Sainsbury said, we’re in a competition, and it's a win-lose competition. There’s only going to be so many chip fabs in the world, there’s only going to be so many jet airplanes made in the world, there’s only going to be so many advanced robotics made in the world. Now we want everybody to innovate, but at the end of the day it’s a zero-sum game and we want to win.

And lastly, competition. This is about competition. About a decade ago, ITIF worked with Senator Klobuchar, and she got a provision introduced to establish a national advanced innovation strategy. And this was assigned to the Department of Commerce. And I was honored to be appointed to an advisory committee. One of the very first discussions we had, which unfortunately lasted more than three seconds, was, “Is it really fair for us to compete? Because we don’t want to hurt those other countries.”

They want to hurt us. They want to take value-added advanced industry share for themselves. Nothing wrong with that. And the idea that we have that, “We don’t want to compete.” If you don’t want to compete, you’re going to lose. So thinking about the global economy as a competitive arena, now again, you can compete by cheating, which is what the Chinese do, or you can compete fairly, but aggressively, which is what we need to do.

All right, so let me wrap up by saying, “What would Hamilton do? What are the big things we have to do?" Number one, it’s really fundamentally, it’s just, do we want to do this: win globally in the techno-economic competition? Is this an important mission? It’s not clear that we’ve decided that, but if we ever do decide that, I have every faith in the world that we will do it well and we will succeed, but it’s not clear to me that we will define that as the most important mission.

Secondly, going back to that, if we’re going to have that as the mission, we need a set of guideposts, we need a set of principles to guide us, and that cannot be neoliberal or progressive economics. It has to be this notion of national developmentalism, and what Lord Sainsbury talked about at the last slide, how you would help firms that want to do that. And then this goes to the key point here. If we’re going to do that, then we need to help businesses in America. And I say that specifically because I don’t mean American businesses. American businesses can do something overseas and that’s fine. I’m talking about businesses in America. They can be foreign, they can be domestic, but they need to be businesses in America that are committed to building high-value-added production systems here. We need to help them gain global market share in these industries.

One last problem with that is if you listen to some Republicans, they will say, “No, no, that’s crony capitalism. Why should we help companies? They can do it on their own.” The reality is they can’t and they won’t. And on the left, you hear the same thing. “Why should we help companies when we have people who are homeless?” The reality is, unless you help companies, we’re not going to be able to solve these other problems.

I remember a long time ago when I headed up the Rhode Island Economic Policy Council, Rhode Island, very Democratic state. So we came up with a whole plan. It was also the worst-performing economy in the country at the time when I went up to lead this group. And we had a whole bunch of initiatives like the highest R&D tax credit in the country, an investment tax credit, all these programs, and some of them obviously helped business. So we went down to the Senate Democratic retreat one weekend, and I took my board member, George Nee, who was head of the AFL-CIO, to help sell the plan. And so we get down there and George and I give our plan of what we want to do in Rhode Island, and the first question from a Democratic senator was, “Look, this is really great, but is there any way we could do this without helping business?” George, to his credit, says, “Senator, I really wish there was as head of the AFLCIO, but there's not. If you want to help my members, you have to be able to help business.” And that doesn’t mean random helping businesses do whatever, but it means aligning business goals with what we want.

We have to limit China’s ability to profit from predatory innovation, mercantilism. That’s what it is, it’s predatory, it’s unfair. Not every Chinese company, I'm not saying that, but many of them. We need to integrate politics and geoeconomics, geopolitics, and geoeconomics. We separate them. Mostly what we’re doing is geopolitics, we need to put geoeconomics into that and think about all our foreign policy through this lens.

Thank you so much. I appreciate it. And I’m going to call on the next panel to come up.

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