Editor’s Note: Howard Yu is the author of LEAP: How Businesses Thrive in a World Where Everything Can Be Copied (PublicAffairs; June 2018), LEGO professor of management and innovation at the IMD business school in Switzerland, and director of IMD’s signature Advanced Management Program (AMP). The views expressed are his own. View more opinion articles on CNN.
Even Donald Trump understands he can’t win his trade wars across all fronts, from China to Mexico to Canada. The White House is now set to restart trade negotiations with Europe and to work toward “zero tariffs” on various industrial goods. Still, the President’s belief that “the US has been ripped off by other countries” is a line of reasoning that only comes naturally to a former real estate developer
In real estate development, land grabs are a zero-sum game: When you win, it means someone else loses. In the same line of thinking, imports result in trade deficits; trade deficits destroy jobs and, consequently, lower citizens’ standard of living. But what if trade deficits have nothing to do with our economic well-being, which in fact relies on a healthy dose of foreign competition?
A generally accepted measure for a country’s standard of living is the GDP per capita – the output of goods and services produced in a year divided by everyone within the country’s borders. It’s a measure of economic growth and well-being used by the White House.
By this measure, Harvard psychologist Steven Pinker shows in his book, “Enlightenment Now,” that China, once a famine-stricken nation, had achieved in 2008 the same per-capita income that Sweden had in 1950. And China’s progress has hardly been made at the expense of the United States. The US has grown richer still, during the same long boom in the late 20th century, along with South Korea, Taiwan, and Singapore and other developing nations, including Bangladesh, Ethiopia, Georgia, Rwanda, Vietnam and others. Everyone has been winning big. The world has never been more abundant.
Nevertheless, some rightly point out the rising inequality of the United States. Income among the top 1% has steadily crept up, and the cohort now control nearly 20% of all income, reaching levels similar to the “Gilded Age” before World War I. But if the administration is truly worried about the suffering of middle-class Americans, the real answer is to increase social support for re-skilling the labor workforce. Trade and technology, in and of themselves, are merely the precondition for wealth and progress.
According to Pinker, in 1800, an Englishman in Britain with an average wage needed to work six hours to earn enough to purchase a hand-dipped candle that burned for an hour. Any non-natural light sources were preciously expensive.
Eight decades later, in 1880, with the invention of the kerosene lamp and the refinery technologies of Rockefeller’s Standard Oil, the average American needed to work for 15 minutes to afford an hour of artificial lighting. Then, incandescent bulbs, introduced by Thomas Edison, could be lit for an hour at the cost of a mere eight seconds of labor. Later, fluorescent bulbs cost only half a second, and solar-powered LED lamps are practically free in terms of fuel costs.
Whereas Americans spent more than 60% of their disposable income on necessities in 1929, people are spending less than a third nowadays. The prices of running water, electricity, automobiles, personal computers, mobile phones, washing machines, vacuum cleaners, stoves, air conditioners, dishwashers, and refrigerators have all plummeted. How much an average person earns matters just as much as how much a fixed amount can purchase. Our material advancement, when measured by purchasing power, is indisputable.
What Trump forgets is that innovation and progress are often triggered by foreign competition, which is needed to force domestic companies and industry titans to be inventive. Without foreign competition, corporations grow fat, CEOs become lazy, consumers suffer, and the economy stagnates.
This might be bad news for big companies, but it’s a boon for consumers. Thanks to the advances in computer storage and its plummeting cost, laptops are becoming cheaper, mobile phones more versatile, and cloud-computing a reality.
Seagate – an American hard-disk maker – probably hates the stiff competition it’s facing from Asian manufacturers in a narrowing market for hard drives. But at the same time, the spill-over effect of cheaper storage has powered the growth of Google, Facebook, Apple, and countless American firms that thrive in the information age. Would anyone seriously want to trade the brilliantly inventive Silicon Valley for a coal-burning, smog-smearing, pollutant-choking heavy industrial sector that even the Chinese government is desperate to get rid of?
That brings us to the question of international trade. How and why do foreign manufacturers paradoxically power the growth of American firms and then further secure America’s preeminence in technological innovation?
Take Apple, the world’s biggest export company, with sales reaching over $200 billion in 2017, pushing the rise of the Dow Jones Industrial Average through the longest uptick since the last recession. The central processor inside an iPhone is designed in the US, but its battery, displays, and most of its other parts are produced abroad. The iPhone contains hundreds of components, approximately 90% of which are produced with the help of workers in Germany, Singapore, South Korea, Taiwan, China, and elsewhere.
So, who’s the biggest winner in the rise of computing power, supported by this intricate network of foreign suppliers? Corporate America. Kenneth Kraemer, a researcher from UC Irvine, together with two other researchers from UC Berkeley and Syracuse University, estimated that from an iPad sold for $499, Apple retains about 25% of the sales price as income, while LG and Samsung, by supplying the display and memory chips, receive 7% of the retail price. Since China only provides manual labor, a mere estimated $25 is spent on the Chinese workers.
In other words, while each iPad sold in the US adds about $250 to the trade deficit (the import factory cost declared at customs), the value captured by China from an iPad sold at $499 is, according to Kraemer, “at most about one-tenth that amount, and probably less.”
Trump’s core belief that America is the victim of global trade is therefore a curious one; global trade helped establish America’s lead in advanced technologies – a sector that generated 200,000 jobs in 2017, with an estimated 11.5 million workers, valued at $1.6 trillion, providing the US with almost a monopoly of the world’s most valuable companies. The technological advances that have fueled the rise of our laptops, smartphones, and self-driving cars all hinge on this expansive global supply chain.
Nearly 70% of US GDP is comprised of consumer spending. The other three components of GDP are business investments, government spending, and net exports. But consumer spending alone can never be the sole engine for sustainable economic development over the long run. If the US administration is truly concerned about its nation’s industrial competitiveness, then it should urge its domestic industry to invest in the next generation of technologies, rather than constantly redistribute earnings back to shareholders in the form of dividends or stock buy-back.
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If it is concerned about the protection of intellectual property, then it should, for instance, enforce a punishment on ZTE and not back off. (ZTE, a Chinese telecom giant, was found violating sanctions by reselling American technologies in Iran and North Korea.) And if the administration is worried about the suffering of middle-class Americans, the answer is to increase social support FOR providing new skills for the labor workforce. What’s truly remarkable is that the administration would choose tariffs as the cure-all.
Land is a finite resource. That’s why people are obsessed over winners and losers. International trade, by contrast, is a non-zero-sum game, which creates wealth and progress. The distinction between wealth generation across nations and wealth redistribution within a nation, however, is unfortunately alien to a former real estate developer.