A 10-Point Plan to Grow Your Economy Through Innovation Mercantilism (Part 3)

By Robert D. Atkinson

To the commerce minister of a developing nation:

Now that I’ve laid out the 10 easy steps to grow your economy through innovation mercantilism (check back here and here if you missed them), it’s time to explain how you’ll be able to get away with all of this…

If your prime minister is going to be happy, you will need to show results and that is a lot easier if the leading technology countries don’t understand what you are doing, or better yet, don’t care. How could this be? Won’t it be obvious what your game is? Won’t the leaders fight back? Thankfully, the world leader is the United States, and frankly, at least until November 8, 2016, when Donald Trump was elected president, it didn’t worry too much about this. In part, this is because the U.S. establishment persists in four key beliefs that lead them to give little attention to fighting innovation mercantilism.

Reason #1 why the U.S. doesn’t fight innovation mercantilism: It thinks it doesn’t compete economically.

The first and most important belief for your competitor to hold is that you are not competing with them. In the United States, this is a matter of doctrine for mainstream economics. Intellectually, U.S. economists still live in the 19th century before the rise of global competition. And so they tell U.S. policymakers that countries do not compete, only companies do. For example, economist Paul Krugman made the astounding — but quite conventional (at least among neoclassical economists) — contention that “the notion that nations compete is incorrect . . . countries are not to any important degree in competition with each other.” Likewise, the lead economist at the Congressional Research Service, the body that advises the U.S. Congress on such matters, tells members of Congress that international [economic] competitiveness is a “term without rigorous meaning.” And conservative economist Kevin Hassett claims that, “Non-economists regularly appeal to competitiveness when motivating a wide array of policies, while economists protest or look the other way.” Since the United States doesn’t compete, it really has no concern over what you are doing to maximize your global share in high-value-added, technology-based industries. So have at it.

Reason #2 why the U.S. doesn’t fight innovation mercantilism: It thinks even if it competes, it will always win.

Even if some in America acknowledge that America may compete with other economies, it’s easy for them to ignore any threats because many in America believe that America is the true innovator, and everyone else is just a copier. There’s no question that in the half-century after World War II, the United States fielded the world’s leading economy. President Harry Truman boasted that “American industry dominates world markets and our workmen no longer need fear the competition of foreign workers.” In 1953, the President’s Advisory Board for Mutual Security called for the unilateral elimination of U.S. tariffs on automobiles and consumer electronics imports because “U.S. producers are so advanced no one can touch them.” Clyde Prestowitz, counselor to the Secretary of Commerce in the Reagan administration, notes that State Department attitudes in the 1950s were well captured by one official who stated that “the U.S. trade surplus is a serious problem and we must become really import-minded.” The State Department even took the extraordinary step of instructing its officers abroad to promote foreign exports to the U.S. market (but not for automobiles, of course, since others could never make them as well as we did). While American officials were looking down on Japanese economic capabilities, they were at the same time encouraging them to export to America so as to help their economy and thereby keep Japan from “going Red.”

The view that the United States must by right continue to lead the world in innovation persists to this day. Economist Irwin Seltzer forthrightly declares: “America remains the source of most of the world’s innovations and the home of most of its great entrepreneurs.” RAND confidently affirmed that “despite perceptions that the nation is losing its competitive edge, the United States remains the dominant leader in science and technology worldwide.” New York Times columnist David Brooks asserts that if you’re a member of the global creative class, whether in 2010, 2025, or 2050, you’ll want to come to America. Even the Council on Competitiveness asserts that “America is better positioned than perhaps any other country to benefit from the forces that are reshaping the global economy.” So there’s no need for America to put real pressure on you to scale back your innovation mercantilist policies.

Reason #3 why the U.S. doesn’t fight innovation mercantilism: It emphasizes consumer, rather than producer, welfare.

You also want your major competitor to believe that consumer interests (as in, low prices today) are the only thing that matters. No need to worry about the economic health of producers. As one leading Obama economic official stated early in the Obama administration when told that the Chinese government was massively subsidizing solar and wind power exports to the United States (decimating the U.S. industry), “if the Chinese want to give us discounted prices on products who are we look a gift horse in the mouth?” But the reality was that these export subsidies led to massive output and job losses in the U.S. solar and wind energy production industries.

This myopic focus on consumer welfare, coupled with the overarching belief in U.S. economic superiority, is why U.S. antitrust agencies have a long track record of going after leading U.S. technology companies to hobble them and impose a unique penalty: requiring that they give their intellectual property to other firms, including foreign firms. In this sense the U.S. government has been your best ally. U.S. antitrust ministries pursued this policy for over 40 years, forcing or pressuring world-leading technology firms such as RCA (televisions), AT&T and Western Electric (transistors), Kodak (film processing technology), and IBM (mainframes), to license technology. For example, in 1958, the U.S. Justice Department forced RCA to license its entire patent portfolio for free to all U.S. firms, and to license at a price to foreign firms. Because RCA could no longer make money licensing to U.S. firms, it aggressively sought to license its TV technology to foreign, mostly Japanese firms. In the 1950s, to resolve a U.S. government antitrust case against the then-market leader IBM, the company agreed to license “its existing and future patents” to any “person making written application” even if that “person” was foreign. U.S. officials were focused solely on consumer welfare, arguing that America needed to import more foreign tech products to help U.S. consumers. Indeed, the Justice department emphasized that these patent licensing decrees were “to open up the electronics field” even to foreign firms. What a gift! As Harvard economic historian Alfred Chandler writes, the decree to weaken IBM “became and remained central to the evolution to the computer industry worldwide.” Today we are seeing a new version of this where the U.S. firm transfers it to the foreign nation, as is happening with U.S. semiconductor firm AMD licensing chip technology to the Chinese; technology it gained originally from Intel only after the Department of Justice required Intel to share with AMD.

Reason #4 why the U.S. doesn’t fight innovation mercantilism: It makes global security goals paramount.

On top of all this, one of the best things you have going for you is that America is willing make its economic interests subservient to its global security goals, in part to protect your nation. Since the advent of the Cold War, the United States has made trade-offs that subordinated its own trade and economic interests in pursuit of its geopolitical and national security objectives. The United States has cut favorable trade deals with countries we wanted as allies, provided them foreign aid and technology transfers, reduced tariffs on goods exported to America, and even encouraged U.S. companies to locate activity overseas, all in the great geopolitical struggle against the Soviet menace. For example, in the 1950s, through the U.S. Agency for International Development (U.S. AID), the United States assisted Taiwan in launching the China Productivity Center, which helped its manufacturers become more productive (and compete better with U.S. manufacturers). Likewise, a 1969 U.S. AID report, Expanding Exports: A Case Study of the Korean Experience, documents how U.S. AID assisted Korea in developing its export program and was instrumental in helping Korea launch the Korean Productivity Center and the Korean Industrial Research Institute. In essence, assistance from U.S. taxpayers helped Taiwan and Korea develop their technology-oriented export machines. Of course, the United States never anticipated it was helping a competitor; all it cared about was keeping Taiwan and Korea from going Red.

Perhaps the archetypal example of the United States favoring its geopolitical interests over its economic interests comes out of the trade conflicts with Japan in the late 1970s and 1980s, as Japan pursued a mercantilist, export-led economic growth strategy (just as China does today). Japan had implemented a number of policies designed to skew trade in its favor and to limit U.S. companies’ access to Japanese markets, including placing high tariffs, import quotas, and onerous regulations, inspections, and standards requirements on U.S. products; limiting U.S. ownership of Japanese enterprises; manipulating the yen’s value; and shutting U.S. companies almost entirely out of strategic markets, including autos, semiconductors, and mainframe computers. All while it was dumping its products on U.S. markets. Pressure mounted from business, labor, and Congress for the White House to file unfair trade complaints under the General Agreement on Tariffs and Trade and to declare Japan an unfair trader under then existing U.S. law. However, the U.S. policy community was torn over how much to pressure Japan, with the national security agencies (State, Defense, and the National Security Council) and neoclassical economist agencies (Treasury and the Council of Economic Advisers) on one side, and the more pragmatic economic agencies (Commerce and the United States Trade Representative) on the other. The attitude of diplomats and military leaders was that “Japan was our unsinkable aircraft carrier” and that U.S. trade and economic interests should take a backseat to geopolitical concerns. As Assistant National Security Advisor Gaston Sigur insisted at the time, “We must have those bases. Now that’s the bottom line.” The economists piled on. Alonzo McDonald, a Carter administration trade negotiator, complained about resistance from the neoclassical economists at the Council of Economic Advisers and the Treasury for a more activist policy against Japan (exactly what they continue to do today), saying economists there had “lost all touch with reality; it’s heart surgery handled by a biologist.”

As Clyde Prestowitz concludes, “Although negotiations [which resulted in the previously mentioned Reagan-supported voluntary import restraints on Japan] were declared a great success, most of the issues were left unresolved. Eventually a number of U.S. chip makers closed up shop, and more than one hundred thousand Silicon Valley workers lost their jobs. Even more important, the United States lost technological leadership in production of several important kinds of semiconductors.” After 50 years, it’s still the same story. All too often, U.S. policymakers continue to trade U.S. economic interest for global foreign policy concerns because, just like the rich person who can afford to be altruistic, the U.S. establishment thinks its economic position is so secure that it can afford to make concession after concession. The cumulative effect of so often trading economic interests for geopolitical ones has only further contributed to long-term structural U.S. economic decline, which ironically over time will only weaken our relative military security.

So sit back and have at it. But you might want to get cracking because even though the Washington trade establishment continues to turn a blind eye toward foreign innovation mercantilism, the new Trump administration is not likely to hold such sanguine views. They are likely to push back. So here’s some tips when you are in bilateral or multilateral meetings on these issues. To buy yourself some breathing room, try a few of these stock phrases: 1) “We are still a developing nation and are learning to be more market oriented, so please just us more time;” 2) “We may engage in some mercantilist practices but so do you” (and point out that a small percentage of government procurement in the stimulus package was subject to “Buy America” provisions); 3) “We did nothing different than America did when it was at our stage of development” (and don’t mention that you are in the WTO and purportedly bound by their rules, whereas America was not); 4) “We need the jobs and if we don’t get them we may descend into chaos, and Muslim fundamentalists might even take over;” and finally; 5) “We a poor nation, have pity on us.” Not sure how effective this kind of spin will be now with U.S. administration that has committed to getting tough on foreign mercantilism, but it can’t hurt.

One last thing: Since it sounds like you are following the playbook here and are committed to go down this mercantilist road, would you at least have the decency to pull out of the World Trade Organization? After all, you can’t believe in the rules and norms of the WTO if innovation mercantilism is the centerpiece of your economic strategy.

Robert D. Atkinson (@RobAtkinsonITIF) is president of the Information Technology and Innovation Foundation, a think tank focusing on the intersection of technological innovation and public policy.