by Marco Octávio de Meneses
New political-economic environment
In their October 2022 National Security Strategy, the Biden-Harris administration identified China as the major threat to international order, characterized by Falk as “the arrangement of power and authority that provides the framework for the conduct of diplomacy and world politics on a global scale” (2022), in the 21st century, and this decade as a critical juncture for the survival of that order. For them, dealing with this threat means working more closely with allies and strengthening multilateralism, as well as steering critical supply chains away from China. This is supported by public opinion, perhaps suggesting that paying more for goods, to acquire more security and jobs, is a trade-off common Americans are willing to make. But this is also emblematic of a shift in global tendencies, away from globalization, preferring to instrumentalize production towards national power, rather than efficiency, as the market would prefer. Widespread geopolitical competition is back, in a period of weakening multilateralism. This means great power competition becomes more and more present in different spheres of international affairs, especially the economy (WHITE…, 2022a).
The US posture towards trade has been through different periods. During the unipolar phase, free trade and multilateralism was the name of the game. This led to a decrease in American manufacturing capabilities, job losses, and the hollowing out of entire cities that relied on factories. With a lot more unemployment in manufacturing, urban decay and the opioid epidemic, along with migration created prime conditions for right-wing populist rhetoric (EDELMAN, 2021). Bringing back American jobs meant the price of goods would increase, since supply chains had moved out of the US, a trade-off most presidents were unwilling to make, up until Donald Trump came along. The American political economy seems to go down a trend of reducing the room markets have to steer the economy, Biden hasn’t done away with Trump’s trade tariffs, and has assigned an even more active role to the State, seen with the Bipartisan Infrastructure bill, the recent CHIPS and Science act, and more export restrictions to China.
More and more attention has been brought to semiconductors, or microchips, since they are fundamental components of any electronic good, and have, thus, become emblematic of this shift towards geopolitics. However, how adapted are American financial institutions to provide the semiconductor industry with the goods and services it needs, like long term investments, unconcerned with short term profit margins? This question seems central, since Biden’s plan for projecting power starts with a healthy domestic economy.
Reshoring incentives and trade restrictions
Biden’s new Export Restrictions to China came into effect after the CHIPS and Science act was approved, both initiatives sought to remove semiconductor manufacturing ties from China, at any point in the supply chain, since semiconductors were identified as a key supply chain for national security (WHITE…2022b). The CHIPS and Science act essentially offers tax credits and financing by the federal government for firms that have completely China-free supply chains and will continue to do so for a decade. To receive financial support, any expansion of manufacturing has to be in the US,, as long as the company isn’t owned by North Korea, Russia, Iran, or China, as listed in section 4872 of the US Code (LII, 2022).
On top of the US$52 billion government investment from the CHIPS and Science act, new export restrictions were announced aiming to strangle certain Chinese firms’ ability to access supercomputer, semiconductor, and advanced computer manufacturing items. Access to capital goods that maintain or produce any of these products is being limited, these restrictions don’t apply if firms are able to prove they won’t use any of the restricted export goods for manufacturing in China at any point. These measures signal towards US-China economic distancing on the technological frontier, less cooperation and interdependence in these areas could reduce the costs of aggressive conduct, and potentially decrease the stability of world politics.
How prepared is the US to keep its lead
This begs the question: are tariffs and distancing really the best idea? Manufacturing jobs returning to the US could breathe new life for certain communities, and do wonders for tech innovation. However, is the US government stimulus enough to maintain or get an edge in critical tech areas? Let’s take a look at what the varieties of capitalism literature has to say.
Looking at five main institutions: industrial relations, corporate governance, training and education, interfirm relations (keeping other firms at arm’s length and race for new markets) and the internal structure of the firm. This literature investigates how institutions contribute to the formation of comparative advantages in a specific political economy. It proposes two main categories, liberal and coordinated market economies, with most countries having a mix of their traits. The liberal market economy is great at radical innovation, fundamental for staying ahead of tech standardization, this is supported by interfirm relations based on competition, creating races for new markets, strong Intellectual Property (IP) laws, dynamic stock markets that trade based on public information and low worker training and capacitation (HALL and SOSKICE, 2001).
However, altering the access to finance with government action needs to come with more monitoring, because this form of financing requires more performance indicators than what is available to the public, as suggested by Deustch and Moniz (FOREIGN…, 2022). Moreover, it could be beneficial to go further than R&D by investing in improving manufacturing efficiency. If manufacturing is to stay in the US at minimal cost for consumers, US production must invest in incremental upgrades (look at product differentiation), not just radical innovation. This is especially the case for semiconductors. This would mean expanding training and capacitation inside the firm, going for longer contracts, and having some interfirm collaboration to avoid poaching of qualified employees.
To stay ahead, the US must preserve multilateral institutions' power, maintain UN and WTO mechanisms to protect intellectual property, and keep profits from tech advances inside US firms, since their goal is to increase national power. In a time of increasing competition, sustaining multilateralism and close relations with allies will be fundamental for containing the PRC’s technological capabilities.
Why not cooperate?
Do US-PRC relations have to be this way? According to the American electorate, it does. A PEW Research Center poll conducted in March this year found that 53% of American adults support getting tougher with China on economic issues. When asked how they view the PRC, 10% answered as a partner, 62% as a competitor, and 25% as an enemy (PEW, 2022). On top of that, in congress, democrats and republicans seem to agree on the need to protect the US’s technology edge, suggesting that the electorate agrees at least somewhat with this (VOA, 2022).
Having said that, we can draw a few conclusions about the US’s position as a technological power in the world: toughening their stance on the PRC, working more closely with allies, and using supply chains and tech innovation as a power tool. More interestingly, structural challenges for the US have bipartisan support, meaning decisions that need to be made to maintain US power are mostly popular, even if internal division on the role of NATO and how the US should interact with its allies may occur. Biden seems to have picked up where Trump left off with regard to China, only being more effective in applying pressure and rearranging supply chains. In this case, it appears structural necessities are met with domestic support and a model of capitalism reasonably suitable for addressing technological innovation. The challenges will probably be around allies who will have to pick or split their supply chains to sell to the PRC or the US, and for the domestic economy, maintaining an edge on manufacturing will require extra care in picking firms to invest, given the competitive advantage the US has on radical innovation.
Going forward
If supply chain interdependence goes down, along with energy interdependence, States will have less at stake in waging war with one another, this is a basic assumption of liberal IR theory. Take the European Coal and Steel community, this treatment of markets attempted to bog down german potential for aggression, and ended up being a step towards the European Union, a bastion of international peace and democracy, with all its problems. Thus, the decoupling approach gives reasons for uncertainty in the coming years, furthermore, in a time of high inflation, further increasing the prices of consumer goods could lead to more monetary tightening by the FED, not particularly conducive to economic growth.
To stay ahead, the US must preserve multilateral institutions' power, maintain UN and WTO mechanisms to protect intellectual property, and keep profits from tech advances inside US firms, since their goal is increasing power. In a time of increasing competition, sustaining multilateralism and close relations with allies will be fundamental for containing the PRC’s technological capabilities.
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