Innovation and the Loss of Technology
Everybody agrees that America’s future economic growth and international competitiveness depend on our capacity to innovate, and the key to an innovation strategy is R&D. But what most people don’t know is that manufacturing funds 70 percent of all private R&D and as manufacturing declines, so does the strategy of innovation. The only real hope for an innovation strategy is to stop the decline of manufacturing and protect the advanced technology industries which have been running deficits for 20 years. The government needs to do a lot more to protect the advanced technologies using national security restrictions or tariffs, and the multinationals need to reduce signing technology transfer agreements with their foreign competitors.
In 2015, President Obama said, “America’s future economic growth and international competitiveness depend on our capacity to innovate.” His plan, The Strategy for American Innovation also said, “Innovation-based economic growth will bring greater income, higher quality jobs, and improved health and quality of life to all U.S. citizens, and provide a multifaceted, common sense, and sustained approach to ensuring America’s future prosperity.”1
A strategy of innovation is a noble idea, but does not address the issue of losing the new products and technologies through outsourcing and technology transfer agreements. If new technologies are invented in the United States and then the manufacturing is outsourced to a foreign country, the inventing company eventually loses control of the technology and the market. If we can’t reverse this trend, then a strategy of innovation is a moot point. One of the most obvious examples is the semiconductor industry.
In 2021, the United States was faced with a shortage of semiconductors which interrupted the auto industry and many other manufacturing industries. It appeared that we were blindsided by the shortages, but this industry has been moving its manufacturing overseas for decades. U.S. chip producers account for half of the world’s microchip designs, but only 12 percent of the global chip manufacturing. Why? Because almost all of them chose to outsource their production. In fact, Intel is the only U.S.-based manufacturer of microprocessors.
To explain what it would mean in the long term to lose industries, one need only look at America’s technologies and inventions in the second half of the 20th century. America has been the source of new inventions for the world for most of the 20th century. The following is just a partial list of some of the inventions by the year they were patented: Microwave oven (1945), transistor (1947), defibrillator (1947), compiler (1949), bar code (1952), hard disk drive (1955), industrial robot (1956), video tape (1956), integrated circuit (1958), laser (1960), electronic spreadsheet (1961), light emitting diodes (1962), plasma display (1964), compact disc (1965), hand calculator (1967), laser printer (1969), charge coupled device (1969), microprocessor (1971), resonance imaging (MRI) (1972), global positioning (1973), mobile phone (1973), digital camera (1975), Gore-Tex (1976), personal computer (1981), Internet (1982).
The Problem
Unlike most of the inventions prior to World War II, most of the inventions listed above are no longer manufactured in America. So, American companies did the research and development of the original products, but then allowed them to be manufactured in foreign countries. The same process goes on today, but we are now not only losing the technologies but also losing whole industries. This scenario begs the obvious question. How many technologies and industries are we willing to lose, before we lose our ability to compete using innovation as our primary strategy?
Microprocessors are just one example of a technology invented in the United States but outsourced to Asian manufacturers. The semiconductor industry has lost 681 establishments (10 percent) and 157,041 workers (30 percent) since 2002 (Table 6.1). One of the big problems is that when the manufacture of semiconductors moves overseas, research and development goes with it. If the decline in semiconductors continues, the United States is in danger of losing its innovative edge in electronics and computers.
In an open letter to President Biden, Bob Swan, the CEO of Intel, asked Biden to pursue a manufacturing strategy for the semiconductor industry, which was bailed out by the federal government to the tune of $52 billion. So, one might ask, how did we get to this point in the semiconductor industry where the industry needs a bailout, and how many more outsourced industries will need the same?
Advanced Technology Industries
Semiconductors are part of a government designation called the advanced technology industries (ATIs), which are industries that are at the forefront of economic growth. The sector includes 50 industries: 35 manufacturing, 3 energy, and 12 service industries. They range from oil and gas to aerospace, biotechnology, life sciences, optoelectronics, communication, weapons, computer systems, nanotechnology, and software. These industries also include most of the disruptive technologies, such as additive manufacturing, advanced materials, advanced robotics, big data analytics, cloud computing, and the Internet of Things.
Why Are They Important?
ATIs are very important to the American economy because they are our best shot at maintaining competitive advantage against foreign competitors—especially China.
These industries employ more than 12.3 million workers or 9% of total U.S. employment. U.S. advanced industries produce $2.7 trillion in value added annually—17 percent of all U.S. GDP. That is more than any other sector, including healthcare, finance, or real estate. At the same time, the sector employs 80 percent of the nation’s engineers; performs 90 percent of private-sector R&D; generates approximately 85 percent of all U.S. patents; and accounts for 60 percent of U.S. exports.2
Figure 5.1 Trade in advanced technology products
Source: Census Bureau, Trade in Goods with Advanced Technology Products, U.S. International Trade Data, August 2021.
The ability to create these new technologies, particularly digital technologies, has implications for national security, economic growth, and the standard of living of most American citizens. You would think that the contribution of the advanced industries is so vital that the government would go all out to protect them as a vital national asset. But as important as ATIs are, there are big problems emerging. Figure 5.1 shows that America has been running trade deficits since 2002 (a total of $1.5 trillion in deficits over 20 years). In 2020, the ATI deficit was $191 billion, which was 28 percent of our total trade deficit in 2020. In 2002, the ATI deficit was only 4 percent of the total. So, why did this happen.
Why Are We Running Deficits?
The first reason for the deterioration of our advanced technology trade balance is the outsourcing of technology production. American manufacturers do the R&D to invent these new technologies but then move the production to foreign countries to lower their production costs. According to Alliance for American Manufacturing, American high-tech companies that supply computers, software, routers, and printers such as Microsoft, Intel, Hewlett Packard, IBM, Dell, and Cisco “rely on Chinese factories for an average of 51 percent of the components used to make their products.”
This is a problem for three reasons. First, their imports increase the deficit in advanced technology products. Second, it makes America susceptible to cyberattacks since we are relying on components made overseas. Third, it gives China and other foreign countries access to American technologies.
The Real Threat Is China
China has already swallowed the low-tech products we use to make. What they want now is our advanced technology products and production processes that were developed in the United States. The technologies they are after are all listed in their Made in China 2025 plan. China’s primary strategy to get a hold of U.S. technology is to use joint venture and technology transfer agreements as a condition for companies to access Chinese markets. China also accesses our advanced technology secrets using security reviews of competitive technologies, product testing for safety reasons, acquisition of U.S. companies, and cybercrime. China’s industrial policy is heavily dependent on fortifying their state-owned enterprises (SOEs). The United States and its partners should be a lot more aggressive in challenging subsidies of SOEs by using antitrust reviews for SOEs that eliminate competition.
Figure 5.2 shows the volume of imports of advanced technology products in 2019 by industry sector. The imports in these 10 product categories total $498 billion. The biggest ATI deficits are in information, communication, and telecommunications (ICT). Former President Trump issued an executive order to secure the ICT supply chain because purchasing these products from foreign countries is considered a national security risk. The executive order said that “foreign adversaries are increasingly creating and exploiting vulnerabilities in information and communications technology and services, in order to commit malicious cyber-enabled actions, including economic and industrial espionage against the United States and its people.” The order said that these actions “constitute an unusual and extraordinary threat to the national security, foreign policy, and the economy of the United States.”
Figure 5.2 Trade in information, communication, and telecommunication products
Source: Wayne M. Morrison, June 23, 2019, U.S. China Trade Issues, Congressional Research Service.
China is the largest foreign supplier of ICT equipment to the United States. In 2018, ICT imports from China totaled $157 billion or 60 percent of the total ICT imports. A May 2013 study by the Commission on Theft of American Intellectual property estimated that China accounted for up to 80 percent (or $240 billion) of U.S. annual economic losses from global Intellectual Property (IPR) theft.
We are losing the trade war for our advanced technology products, and we are losing it badly. The only thing that has offered some protections are the 25 percent tariffs under Section 301 of the 1974 Trade Act.
I began this chapter with a quote from President Obama about how a strategy of innovation was going to ensure the nation’s prosperity, but neither he nor his economic advisers seemed to understand we can’t have an innovation strategy without manufacturing. Seventy percent of our exports are industrial products not services, and the key to an innovation strategy is R&D and manufacturing also funds 70 percent of all private R&D.
In addition, the only real hope for an innovation strategy is to protect the advanced industries which have been running deficits for 20 years. To have any chance of reversing the current situation will depend on American MNCs and the government. The government will have to limit access to the advanced technologies using national security restrictions or tariffs. The multinationals will have to stop or reduce licensing arrangements that give their competitors easy access to their technologies who are likely to compete with them in the future and take their markets. They have taken a short-term profit approach and have ignored the long-term consequences to themselves and the U.S. economy.
1 The White House. October 2015. A Strategy for American Innovation (National Economic Council).
2 J. Rothwell and H. Wial. February 06, 2012. “The Outsized Benefits of U.S Advanced Technology Industries,” Brookings Institute, p. 2.