Biomedical Science Research Building

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           University of Michigan

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                        The U.S. Balance of Trade, China, and the Olympics



The opening ceremony of the Beijing 2008 Olympics presented many elements of an extremely complex and evolving society, China’s adaptation to modernity. The ceremony illustrated China’s traditions and its hopes for a better future, including high technology.


How does China’s high rate of economic growth, 12.8%/yr in the last five, affect the United States? Like the Olympics, modern economic relations involve both competition and cooperation. If (some ears will perk up on this irrelevence) we were at the State Department, we would say that a major goal of U.S. foreign policy has been attained, China’s peaceful integration into the world system. If we were considering the balance of foreign trade and financing the deficit, we would be concerned. A recent 8/20/08 Washington Post article by Robert Samuelson points to China’s rising economic power and the disruptive effects of  a “predatory” trade policy enabled by an undervaluation of their currency and raw material supply lockups. But China’s competitive economic advantage is enabled by a lot more than an undervalued currency. The remainder of this essay discusses economics, productive processes, and the decisionmaking of American companies.


Contrary to a major assumption of the theory of comparative advantage, the mobility of capital has resulted in the multinationals’ relocation of investment closer to their growing markets abroad, sometimes as a condition of their entry. If the mobility of capital is assumed, the formal analysis of national economies will probably become more like the analysis of regional economies. Some regions will prosper and others won’t. Central to the creation of wealth in modern economies is manufacturing. Economic prosperity requires a balanced economy; it cannot be created by speculating in houses or by exporting CDOs.


Manufacturing is of vital importance to modern economies. According to the Commerce Department, the U.S. balance of trade in goods turned massively negative in 2002, due to the increasing federal deficit. We do not factor out energy imports, that have to be paid for, and add the subcategory, the balance of trade in advanced technology goods.



                                  U.S. Balance of Trade in Goods and Services

                                                      (billions of dollars) 

Year           2000      2001      2002      2003      2004      2005      2006      2007

Goods a      -455      -430       -485       -551      -670       -787       -838      -819

Services         75         64           61          54          62          76          85        119


Technology b    5           5         -17         -27        -37         -44         -38        -53


a  Includes consumer electronics.

b   Advanced technology goods is a U.S. Census Bureau category that includes biotechnology, communication, and aerospace products that are at the core of the U.S.’s economic growth. U.S. Census Bureau, Foreign Trade Division.

















High tech manufacturing matters very much, not only for the highly trained people it employs, but also for its ability to increase productivity in the rest of the economy and to generate new products and services. New products, Richard Elkus (2008) points out, do not grow out of nothing but in the technology industry, are convergent developments from existing technologies and products, an infrastructure of suppliers, and –above all – existing employees (entrepreneurs) at high tech companies. It is this infrastructure that is crucial for the U.S.’s economic future, because it translates research into commercial products.


For instance, the U.S. government developed the Internet as a fail-safe communications network in the event of nuclear attack. Its commercial development required the perception of an initial problem – linking disparate computer networks at Stanford, the development of routing computers from existing semiconductor technology, the setting of standards, the training of technical personnel to operate the network, and the existing telecommunications infrastructure. On this base grew the companies: Amazon, Ebay, and Google. 


In 2002, the U.S. balance of trade in advanced technology products turned negative. In Winner Take All, Elkus, former division manager at Ampex and then founder of several technology companies, describes in detail what happened to the company that developed the pivotal technology of video recording, a technology that required a lot of semiconductors and eventually sophisticated television displays:


Almost from its inception, Ampex developed a management style that was oriented towards new technological concepts. But Ampex never created the kind of engineering and manufacturing structure that would enable it to take advantage of the market potential inherent in those technological concepts. As Ampex grew during the 1950s, it never mastered the controls necessary to assess its financial position or the resources needed to advance from a small business with limited manufacturing expertise to a corporation that could meet the challenges presented by the potential (our emphasis) for audio and video recording. 1










The millions per year in licensing revenue that Ampex collected from sales of video recorders made by foreign manufacturers in the 1980s and 1990s was a pittance compared with the billions those manufacturers received from the worldwide sales of video recorders, cameras, displays, and television sets that this market generated. By the end of the ‘80s, the United States had virtually abandoned these and related markets, creating a situation that now threatens our entire industrial base. 2


…Japanese business strategy does not reject a product on the basis of its profit potential, but rather assumes that every product becomes the basis for another, and every technology becomes a stepping-stone for the next. The resulting efficiencies of scale are enormous. 3


















Elkus is saying that the Japanese think strategically. He established a relationship with the late Akio Morita, chairman and founder of Sony, and found him (of course) an expert in global competitiveness. He writes, “Three consistent thoughts lay at the heart of every discussion I had with this illustrious man: First, nothing good happens overnight; it takes time and significant investment not only in financial resources but a focused commitment of individual effort. Second, this effort can succeed only by building on a foundation of past knowledge and achievement to advance the state of the art. And finally, any success that might result from a significant investment of time and effort is dependent upon a well-thought-out strategy.” 4


Elkus suggests government 5 involvement in targeting technologies for further development, because individuals tend to invest for the short-term. 6 The government originated the Internet and many new drug formulations. He further suggests adopting the best practices of the competition.


The state governors are concerned with regional economies. The state of Michigan, for instance, confronts the decline of the U.S. auto industry. It is emphasizing biotech innovation, and indeed U of M is a major center for biotech research. If you visit the main campus, its north side is about one mile long; about ¾ of a mile is devoted to biotech and medical research facilities.


We received a souvenir from the Beijing Olympics, a mug in a tin box. What struck us was not the mug, but the incredible fit and finish of the tin box. We thought, such a box had to be manufactured to ISO standards. We looked up the website of Hunan Hualian China Industry Co., Ltd, in Mao’s former home province. As it turned out, the factory in inland Hunan was compliant with ISO standards and looking towards expanding its export markets. The website also contained a message from the company’s president after a visit to Japan that we quote verbatim; what is important is not the grammar, but the idea:


This trip gave a deeply feelings to the president, it is shocking soul journey. The implementation of Japanese, details of awareness, dedication left a profound impression to the president and his entourage, Hualian, compared with the Japanese companies. Not only the work efficiency, work style, but also mentality, there is a wide gap, we should seriously realize it. President explicitly demanded that if hualian want to win in a competitive situation, we must humbly learn from the Japanese enterprises…hualian will boldly select the outstanding management of cadres and staff…to visit Japan.





  The 2008 U.S. presidential campaign will discuss many issues: economics, healthcare, education, and foreign policy. An effective economic program will have to address considerable structural problems.




Flashforward from Japanese consumer electronics of the 1980s and 1990s to 2012. As described above, Sony, Panasonic and Sharp captured billlions in revenues from developing leading edge consumer electronics devices. But a 9/28/12 Washington Post article writes, "...Japan's consumer electronics makers find themselves in an increasingly perilous fight for relevance and, in some cases, survival....The companies still have famous brand names, and tech analysts say they still produce some of the world's highest-quality hardware devices. But they face a fundamental problem: It's been years since they've turned out products that people feel they need to have."


Specializing in stand-alone devices, they could not adapt to the growth of the Internet and its demand that products work in harmony according to open standards. They were furthermore unable to work with the sophisticated programming necessary to integrate their hardware into larger systems. As an example, the open-source Android smartphone platform currently has over one million lines of code.


Free markets result in the creative destruction that enables entrepreneurs to assemble new products. But, the inability of the U.S. to build what it uses has resulted in a massive $738 billion 2011 deficit in tradable goods. Obviously, real markets do not always equilibrate.