In the waning days of Barack Obama’s administration, one of the president’s advisory councils issued a report warning of China’s plans to snatch control of the critical semiconductor industry. Its recommendation: “Win the race by running faster.” It is sound advice, but the new administration isn’t listening. Donald Trump’s policies, in fact, offer a roadmap for how not to compete with China.
That’s because team Trump doesn’t fully grasp the threat China now poses to the US economy. China is marshaling massive resources to march into high-tech industries, from robotics to medical devices. In the case of semiconductors alone, the state has amassed $150 billion to build a homegrown industry. In a report in March, the European Union Chamber of Commerce in China pressed the point that the Chinese government is employing a wide range of tools to pursue these ambitions, from lavishing subsidies on favored sectors to squeezing technology out of foreign firms.
The only way for the U.S. to compete with those efforts is to “run faster.” Yet Trump’s ideas to boost competitiveness mainly amount to cutting taxes and regulation. Although reduced taxes might leave companies with more money to spend on research and development, that’s not enough. The U.S. needs to do much more to help businesses achieve bigger and better breakthroughs.
Trump is doing the opposite. One reason U.S. companies are so innovative is that they attract talented workers from everywhere else. But Trump’s recent suspension of fast-track H-1B visas could curtail this infusion of scientists and researchers. If his intention is to ensure jobs go to Americans first, he need not bother. The unemployment rate for Americans with a bachelor’s degree or higher — the skilled workers that H-1B holders would compete with — is a mere 2.5 percent.
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This policy isn’t just a threat to Silicon Valley, but across industries. Michael McGarry, the chief executive officer of PPG Industries Inc., worries about the effect visa restrictions would have on his paint-making business. “We create a lot of innovation because of the diversity that we have,” he recently told CNBC. “We think people with PhDs that are educated here should stay here and work for us and not work for the competition.”
China will likely try to capitalize on this mistake. Robin Li, CEO of the internet giant Baidu Inc., recently advocated that China ease its visa requirements to attract talented workers to help develop new technologies for Chinese industry, just the opposite of Trump’s approach.
Trump’s budget proposals are similarly a setback. He wants to boost defense spending by slashing funding for just about everything else, notably education. By one estimate, some $20 billion would have to get cut from the departments of education, labor, and health and human services to accommodate his plan. If Trump wants to contend with Chinese power, he’d be better off reversing those priorities — to create more graduates and fewer guns. He could offer proposals to make higher education more affordable for the poor, for instance, or to bolster vocational training. So far, there’s little evidence he’s making such spending a priority.
China, by contrast, is expanding access to education on a huge scale. Premier Li Keqiang, in his annual report at this month’s National People’s Congress, boasted that the number of youngsters from poor rural areas enrolled in major universities rose by 21 percent in 2016, while almost 8 million students will graduate from college this year, an all-time high.
And while China is focused on building new industries, Trump and his advisers remain fixated on old ones. In a recent essay, Peter Navarro, the director of the White House National Trade Council, lamented the decline of the American steel, aluminum and shipbuilding industries. Yet he had almost nothing to say about developing the industries of tomorrow — whether robotics, biotech or something we haven’t even thought of yet. The protectionist measures he and his boss seem to favor would actually stifle innovation by curtailing competition. If leadership in cutting-edge industries is ceded to China, America stands to lose the foundation of its global power, too.
Of course, China’s industrial policies may not succeed. History tells us that bureaucrats don’t do a particularly good job of driving innovation, as Japan has demonstrated. And China’s own record suggests that the state is often better at subsidizing wasteful projects than creating vibrant new industries.
Betting on China to fail, though, isn’t a sound strategy. The U.S. would be better served if Trump focused more on sustaining what already makes America great — its uncanny ability to invent the Next Big Thing. If not, American CEOs will have to run a lot faster and harder to win this race.