Long read: American Disruption

Several critics of Trump have also admitted the need to reorder the current global trade system from an American perspective. Except the way Trump and his advisors have gone about achieving it i.e, through blanket tariffs is something that the critics believe is akin to shooting oneself in the foot. Ben Thompson who writes an excellent blog on all things tech (some of which we have featured in 3L&3S over the years), explains how America got to this stage since World War-II followed by the Nixon shock and China’s opening, in a blog he wrote at the start of the week. He then followed up with this blog looking at the disruption of the global economic and trade system through the lens of Clayton Christensen’s ‘Disruption’ theory i.e, how China the start up disrupted the incumbent that America was.

He begins with how Silicon valley’s offshoring began much before China opened up:

“That history starts in 1956, when William Shockley founded the Shockley Semiconductor Laboratory to commercialize the transistor that he had helped invent at Bell Labs; he chose Mountain View to be close to his ailing mother. A year later the so-called “Traitorous Eight”, led by Robert Noyce, left and founded Fairchild Semiconductor down the road. Six years after that Fairchild Semiconductor opened a facility in Hong Kong to assemble and test semiconductors. Assembly required manually attaching wires to a semiconductor chip, a labor-intensive and monotonous task that was difficult to do economically with American wages, which ran about $2.50/hour; Hong Kong wages were a tenth of that. Four years later Texas Instruments opened a facility in Taiwan, where wages were $0.19/hour; two years after that Fairchild Semiconductor opened another facility in Singapore, where wages were $0.11/hour.

In other words, you can make the case that the classic story of Silicon Valley isn’t completely honest. Chips did have marginal costs, but that marginal cost was, within single digit years of the founding of Silicon Valley, exported to Asia.”

Then the conditions for globalization of trade built up in the run up to China opening up:

“In the years leading up to the 1970s, three technological advances completely transformed the meaning of globalization:

These three factors in combination, for the first time, enabled a new kind of trade. Instead of manufacturing products in the United States (or Europe or Japan or anywhere else) and trading them to other countries, multinational corporations could invert themselves: design products in their home markets, then communicate those designs to factories in other countries, and ship finished products back to their domestic market. And, thanks to the dramatically lower wages in Asia (supercharged by China’s opening in 1978), it was immensely profitable to do just that.”

He then overlays another Christensen concept about how companies that go upmarket struggle to go back down and applies it to the US economy:

“In the context of the United States: every single job in this country, even at the obsolete federal minimum wage of $7.25/hour, makes much more money than an iPhone factory line worker. And, critically, we have basically full employment…
So could Apple pay more to get U.S. workers? I suppose — leaving aside the questions of skills and whatnot — but there is also the question of desirability; the iPhone assembly work that is not automated is highly drudgerous, sitting in a factory for hours a day delicately assembling the same components over and over again. It’s a good job if the alternative is working in the fields or in a much more dangerous and uncomfortable factory, but it’s much worse than basically any sort of job that is available in the U.S. market.

At the same time, it is important to note that this drudgerous final assembly work is a center of gravity for the components that actually need to be assembled, and these parts are all of significantly higher value, and far more likely to be produced through automation. As I noted yesterday, Apple has probably done more than any other company to move China up the curve in terms of the ability to manufacture components, often to the detriment of suppliers in the U.S., Taiwan, South Korea, Japan, etc.; from Apple’s perspective spending time and money to bring Chinese component suppliers online provides competition for its most important suppliers, giving them greater negotiating leverage. From the U.S.’s perspective this means that a host of technologies and capabilities downstream from the smartphone — which is to say nearly all electronics, including those with significant military applicability like drones — are being developed in China.”

For these reasons, he reckons the tariffs are unlikely to fix America’s problem with the current global trade system:
“…the entire premise of these tariffs is that everyone wants access to the U.S. market, and rightly so given the outsized buying power driven both by our wealth and by the capacity for borrowing afforded us by the dollar being the reserve currency. It’s also true that China has an excess of supply; given that supply is usually built with debt that means the country needs cash flow, and even if factories are paid off, the country needs the employment opportunities. China’s hand is not as strong as many of Trump’s strongest critics believe.

The problem with these tariffs is that their scale and indiscriminate nature will have the effect of destroying demand and destroying the capability to develop alternative supply. I suppose if the only goal is to hurt China then shooting yourself in the foot, such that you no longer need to buy shoes for stumps, is a strategy you could choose, but that does nothing to help with what should be the primary motivation: shoring up the U.S. national security base.

Those national security concerns are real. The final stage of disruption is when the entity that started on the bottom is uniquely equipped to deliver what is necessary for a new paradigm, and that is exactly what happened with electronics generally and drones specifically. Moreover, this capability is only going to grow more important with the rise of AI, which will be substantiated in the physical world through robotics. And, of course, robots will be the key to building other robots; if the U.S. wants to be competitive in the future, and not be dependent on China, it really does need to make changes — just not these ones.”

He ends by proposing a ‘Better plan’ which is essentially a more discrete tariff plan (as opposed to blanket tariffs) focused on specific trading partners and specific goods to engineer a renaissance of American manufacturing. Ironically, Stephen Miran, the chief economic advisor to Trump, in his research paper advocating tariffs, also warns of dislocation risks from large across-the-board tariffs. Perhaps, the 90 day ‘pause’ was always part of the plan.