Instead of realizing its own Sputnik moment, it is triggering one in China

Tuesday, January 19th, 2021

The US responded to the rise of the USSR and Japan by focusing on innovation, Dan Wang says, but so far the US is responding to the technological rise of China by kneecapping its leading firms:

So instead of realizing its own Sputnik moment, it is triggering one in China.

This year, the US doubled down. It produced two rounds of novel restrictions on Huawei, threatened wider restrictions on Tencent and ByteDance, forced the sale of TikTok to a US consortium, and limited technology exports on SMIC, DJI, and dozens of other companies. Aside from Alibaba, it’s hard to name many big Chinese tech firms that have not faced sanctions or the threat of one from the US.

The actual effects of these regulatory actions have been uneven. Designation to the entity list hasn’t always had a major impact on every company’s operations. Federal courts have tied up the bans on Tencent’s WeChat and ByteDance’s TikTok. At the same time, Huawei is trying to work through major difficulties, especially in its smartphone business. TikTok, China’s most successful tech export, still might be sold off. And more generally, Chinese firms are starting to be locked out of developed markets. Lack of access to the richest and most discerning consumers makes it more difficult to make the best products in the world.

The US can revel in Huawei’s pain. But its actions have not been costless to itself. By withholding components that Chinese companies have relied upon, the US government has turned American firms into unreliable suppliers. These restrictions can sometimes block non-American firms from making sales too. In an extraordinary assertion of extraterritoriality, the US declared in August that any company, anywhere in the world, needs to apply for a license to sell a product to Huawei if it is produced on the basis of US technologies.

Nothing can be easier to destroy than trust. Chinese companies have responded by de-Americanizing their supply chains because they have no choice. US politicians can observe the sometimes-devastating impacts of sanctions. What they don’t seem to realize — or want to believe — is that they’re simultaneously pummeling the American brand writ large. I’ve documented for Dragonomics the uncomfortable questions American companies tell me they’re starting to face on whether they can credibly be long-term suppliers. Elsewhere, the Economist has reported that even poultry farmers in China are wondering if they’ll be able to import baby chicks from the US. And there are now multiple reported instances of Japanese companies marketing themselves as more reliable than their American competitors. Moreover, I hear growing unease from companies in the rest of Asia and Europe on buying American. Can everyone really be sure that this denial campaign will be limited to a handful of bad Chinese actors? Or is a better model of the US government that once it has found a fun new toy, it will keep playing with it until it is no longer fun?

With these regulations, the US has initiated one of the greatest and strangest antitrust actions ever, against potentially all American exporters. The US Treasury has for years expressed worry about the potential decline of the dollar’s dominance following excessive use of blocking sanctions. This fear is turning into reality for the real economy. One might expect alarm bells to be going off in DC, but it doesn’t appear that there’s much pushback against these regulations, except for murmurs from trade associations. It’s possible to defend these moves as correct — for example by justifying that the costs on American firms are worth it for the chance to slow Huawei down right now — but the government does not appear to have had a vigorous debate about the tradeoffs. Instead, the strategy seems to be a result of bureaucratic kludges, pushed forward by whichever faction has the upper hand, made mostly because the financial sanctions office has resisted dealing a serious blow to Huawei in a single stroke.

For the most part, the control hawks faction of the government has had a run of the table, shown by the fact that US agencies have been more focused on taking down Chinese firms than extending US strengths. At a time when it’s more important than ever to advance its semiconductor companies, the government is crippling their sales to their largest or fastest-growing market. When research capabilities at US universities need to grow, the government is denying them students. And when the US should be attracting more talent to its shores, the government has made it more difficult for people to immigrate. Thus the US looks committed to a strategy to destroy the scientific and industrial establishment in order to save it.

Meanwhile in China, these actions have triggered a surge of interest in mastering technology. For the first time arguably since the industrial rise of Japan in the 1950s, a major country is committed to thinking deeply about the invention of its own tooling. A whole generation of scientists and engineers must examine foundational problems like to build leading tools (like lithography machines) and create the best materials (like wafers and chemicals). And the state is fully behind that effort. After steady calls from Xi throughout the year to master technology, the Central Economic Work Conference announced in December that science and technology work will be the top priority in 2021; the conference has never broken science and technology out as an independent item, never mind give it top spot.


  1. McChuck says:

    Breaking the dependency upon China is absolutely necessary. It will, of course, be painful in the beginning. But we will eventually build high tech industries in our own nation again.

  2. CMOT says:

    Wang lives in Beijing and writes for Bloomberg. This essay is textbook illustration of how sometimes you *can* serve two masters …

  3. Gavin Longmuir says:

    McChuck — I hope you are right about rebuilding those industries, but history tells us there is no guarantee.

    England was the Workshop of the World in the 19th Century. Then their politics and elite stupidity and general arrogance resulted in their failing to notice as their former commanding lead slipped away. England never again achieved their former greatness, and now essentially is irrelevant.

    Today, the regime of the incoming Usurper China Joe is focused on stopping development and on imposing transgendered bathrooms. Lefties are intent on following England’s path to irrelevance. Unless “We the People” can flush out the DC nomenklatura, they will drag the rest of us down with them.

  4. Gavin Longmuir says:

    The most enlightening comment in Dan Wang’s fascinating 2020 letter is towards the end (p 27/35 on the pdf):

    “The west this year made a political decision to direct stimulus to consumers, while China offered minimal support to households and concentrated on helping production. Its implicit view is that production is more valuable and more difficult to stimulate than consumption.”

    This is effectively a rejection of Keynesian economics, and a rediscovery of the capitalistic Say’s Law — Production creates Demand.

    Earlier in the letter, Mr. Wang notes: Xi declared this year that while digitization is important, “we must recognize the fundamental importance of the real economy… and never deindustrialize.”

    One of the reasons that Keynesian stimulation of demand has failed to improve the US economy is that the effort to increase consumption in the US by “stimulus” has served only to increase demand for Chinese imports, not to create new jobs and a positive multiplier effect within the US.

    Unfortunately, Beijing Biden will be unable to recognize this.

  5. LGC says:

    I wonder how much the author was paid by the CCP?

  6. Lord Hawhaw says:

    Communist propagandist pumps out puff piece for bosses and Bloomberg promotes it globally. I hope he’s paid more than Tokyo Rose.

  7. Bob Sykes says:

    China will be manufacturing high resolution chips and the machines needed to make them in two to three years. Companies like TSCM will lose market share. And Huawei is still in business in Europe.

    Both China and Russia are being driven by US sanctions to become completely self-sufficient in all key technologies regardless of cost. These are not economic decisions; they are national defense decisions.

    And actually, both countries are more nearly technology self-sufficient than the US or any of its allies.

    P.S. Russia is building a petro-chemical industry so that it can export high value petro-chemical products and reduce the export of oil and gas.

  8. Sam J. says:

    “…The US responded to the rise of the USSR and Japan by focusing on innovation, Dan Wang says, but so far the US is responding to the technological rise of China by kneecapping its leading firms…”

    This is because the present owners of US companies are only interested in looting the country They have no long term competitive plans. Their abilities lie in knowing the right people to raise capital and financialize companies. The CEO’s function they install is to kiss their ass and siphon off as much cash as possible.

    We have examples of what a good knowledgeable executive can do given relentless focus and reinvestment instead of financialization games and spreadsheet management. Musk is a prime example of this. People keep saying Americans can’t do anything and are not capable but his employees are Americans. It appears to me the executives we have go to the right schools, know the right people and are hired and then they think they’ll just rake in the cash by going to meetings every day. They’re not our best. Someone from the factory floor even if not as smart would be better.

    “…the US declared in August that any company, anywhere in the world, needs to apply for a license to sell a product to Huawei if it is produced on the basis of US technologies…”

    Some of this should have been done a long time ago in certain cases. There’s quite a few tech firms who have sold off tech paid for by the taxpayers and given to them for basically free. I’m for the nation to do r&d and spread it into US firms but not if they turn around and sell it to China. The executives get big payouts and we get screwed. We should claw back all of these intellectual assets. Asian countries are a tech black hole that takes it in but never let’s it out again.

    People say Asians can’t innovate and I bet they are wrong. They haven’t been accustomed to it because their economy didn’t have the financial slack to foster that kind of thinking for individuals. As they become more prosperous individual Asians will start deciding that making novel new stuff is worth the risk.

  9. Kirk says:

    You can’t succeed as a nation when the very people entrusted with running it don’t believe in it or in its foundational philosophies. The US has been run by a cabal of its own self-created internal enemies and looters since about the end of the 1960s, and until they are discredited and removed from the levers of power, the US is doomed to decline, much as the Chinese did under the Manchu Dynasty did (although, for different reasons…).

    You want to “fix” the US? You’re gonna have to get rid of the entirety of the so-called “leadership class” and most of the “elites” coming out of the Ivy League intellectual ghettoes. Doing that? LOL. No idea how it’s going to happen, but I can tell you that if it does not, we’re in for a long, long period of decline, completely irrespective of what goes on in China or elsewhere.

    We have a situation where the people running the country haven’t just lost cultural confidence, they’re actual inimical to the root culture, hate it, and are working to destroy it. Look around you, and ask “Would anyone but an enemy of the United States be doing this…?”.

    Answer is, no, they would not. Most of our “elite” are actually our enemies, barbarians we raised up inside our own gates, and to who we’ve given the keys to the kingdom. Were this a fairy tale, the situation would be analogous to one where the evil villain is the corrupt and conniving adviser to the “good king”, who is an inept idiot blind to his adviser’s machinations.

    Unfortunately for said adviser class, the decline and fall of the nation is not going to leave them as heroes to the successors that supplant the US. Instead, they’re going to wake up and find that they’re pretty much the despised traitor class for everyone, including the new masters of the house.

    It’s like the left-wing Communist sympathizers I knew back in the 1980s, who were constantly railing against the US, saying we could not win and that Communism would inevitably triumph. My question to them then was “Yeah? And, then what? Do you think you’re somehow earning yourself exemption from the camps, when they do win? Are they gonna give you a medal, or something? You might wanna take a look at the history of a group known as the “Menshiveks”, my friend, for a preview of your eventual fate…”.

    Same-same with the “Black Lives Matter” crowd–They think that by putting the “White Man” down, they’re gonna earn exemptions from the new regime, having signaled their virtue. All I can do is laugh–My ancestors were pretty strong abolitionists, in the day, but that’s gotten me nowhere when it comes to discussing how evil I am for repressing and exploiting the black man…

    Fact is, I’ve now learned the reality of it all: Taking your foot off the neck doesn’t earn you respect or brownie points, all it does is enable the supposed oppressed to knife you in the back. Better to never take the foot off, is what I’m being taught.

  10. Sam J. says:

    This is a really good article on trade. It’s about a guy who at one time was a major influential figure in economics whose very name is now buried. Someone linked it at unz. Simon Patten once led the Wharton School. Now they refuse to even acknowledge him.

    “…was a pioneer of the economics of abundance…”

    And Hudson has a new one. Damn he is good. My beef is not with people who make money making things or personal services people choose to buy but with the financialization of the economy where everything you do you have pay the central banks. They are ripping us all off and the Biden regime will supercharge it.

  11. Lucklucky says:

    “Breaking the dependency upon China is absolutely necessary. It will, of course, be painful in the beginning. But we will eventually build high tech industries in our own nation again.”

    So how will you sell stuff to the world? Stuff that consumers want?

    Neo-Marxism/Statism is the dominant thinking in the US; the political-education complex is destroying kids.

    The US looks like France in The 1930′s — and I’m probably even being soft about that.

    For example, I can’t stand any movie or TV series that comes from the US today; they are unwatchable.

    What products Does the US sell to the world? Increasingly like the decadent Soviet Union: weapons.

    US capitalism went protectionist and rent-seeking much earlier than the whole country. I see US corporations frowning supplying consumers’ needs, so they’re in fact exiting free market competition and preferring to supply governments and other companies. But look at what happened in shipyards: they got so much time out of world competition that they are unable to design a frigate, so to get a new frigate USN had to get an Italian-French design.

  12. Lucklucky says:

    There are two negative forces in the US: the character of US capitalism between The two extremes of very high profit or just rent seeking, and the cultural ideological destruction by the Left of personal, individual value, and its corruption and fascistic way of life.

    The US does not care to make 150-euro Xiaomi phones, but Xiaomi phones go to millions and millions of people that will be much nearer Chinese culture than US culture. Hollywood and US TV make anti-white (western culture) racist movies that not many in The world care for; the universal appeal of The US is being terminated.

  13. Sam J. says:

    Many years ago, I mean many, like 38 years ago, I argued with a business major as the Japanese were moving into memory chips subsidizing them and wiping out the US producers. He was adamant that it was better because the price of memory chips would lower cost for thew US. I told him that soon we would not any computer chips made in the US if this went on. He could not fathom the end run of this. He could not get it. Refused to see anything but cheaper is better no matter where it came from or how much it cost US producers. He was a sort of a friend at the time but I decided someone so dense was not someone I should acquaint myself with so I stayed away from him.

    The single most important thing we could do for US competitiveness is to shoot all the economist.

    A law that will never be passed but would focus the mind of our executives would to declare any company that imports finished parts or goods could only pay their executives 20 times what the lowest paid worker made in their company including work by contractors. Any higher profits from wage arbitrage they made could be passed on to their shareholders they always pretend to serve.

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