The Trump administration’s mad rhetoric on trade

It seems whenever the United States government has little room to manoeuvre at home, it has historically looked for sideshows abroad, to create an external crisis, a shifting backdrop, so that the public can focus on a new dramatic event.

It was this tactic that contributed to John Kennedy’s increased approval rating after the April 1961 failure of the Bay of Pigs, Lyndon Johnson’s rise after the 1965 intervention in the Dominican Republic, and Ronald Reagan’s rise after the 1983 invasion of Grenada.

The American public has not only accepted but also expected that foreign nations are changeable backdrops in the theatre of domestic politics.

It is no wonder then that the Trump administration has predicted that a war or a trade war among nations is imminent.

What is less comprehensible is the size of the target the White House is willing to pick and the collective damage that it could bring not only to America but to the rest of the world.

The trade between the US and China, measured by financial terms, has been unbalanced for years. The US imported US$506 billion (S$662 billion) worth of goods from China in 2017; China bought approximately US$130 billion worth of goods made in America.

On Twitter, Mr Trump was quick, though categorically wrong, in saying, “When you’re already $500 Billion DOWN, you can’t lose!”

He was wrong not so much because the goods deficit with China is in fact US$375.2 billion, nor because of his belief that China is running out of American goods to slap tariffs on is inaccurate, but he misconstrued how the global economy, and in particular the internet economy, has generated wealth and technological advancement for the US and for the world.

To better understand how global trade has propelled technological advancement it is instructive to go back to 1965, when Intel co-founder Gordon Moore made a bold prediction about the exponential growth of computing power amidst a decrease in relative cost.

From vacuum tube to discrete transistor to integrated circuit, miniaturisation of computer hardware had rapidly progressed. Extrapolating the trend, Moore asserted that the number of microchip transistors etched into a fixed area of a computer microprocessor would double every two years.

Given that transistor density correlated with computing power, the latter would double every two years. Intel has since delivered on that promise and immortalised it as “Moore’s law.”

Hence, whereas the IBM 650—the first world’s first mass-produced computer—could process less information than a single bacterium could, the computing power of the latest Intel Core i7, by the same analogy, would be close to that of a lab mouse.

Exponential growth also explains how a single iPhone today can summon more computing power than that of the entire spacecraft for the Apollo moon mission back in 1969.

If Moore’s law were applied to the auto industry, cars would by now get half a million miles per gallon, go over 400,000 kph, and be so cheap that drivers simply dump a Rolls-Royce than park it.

What the Trump administration has misconstrued is the locale of innovation by believing it all begins in the US.

The White House wrongly believes that China, including a large part of Asia, is either a fast follower or copycat who begs, borrows, and steals. They could not be more wrong

For example, the central processor of Apple’s iPhone is designed in the US, but its battery, displays, and most of its other parts are made somewhere else.

The iPhone has hundreds of components, and approximately 90 per cent of which are produced with the help of workers in Germany, Singapore, South Korea, Taiwan, China, and elsewhere.

Manufacturing of the central processor, or semiconductors, happens in three stages — design, wafer fabrication, and assembly.

In the 1960s, the US started to send low-skilled assembly work to Asia. Skilled wafer fabrication followed in the 1980s, and within the last decade, some of the most complex design works have also moved overseas, mostly because of the sheer size of engineering talents abroad.

The point is that innovation requires a collaboration between the design team and the factory workers.

Today, not just low-skilled jobs are located in Asia; many higher-waged and higher-skilled tasks can also be fulfilled by Asian economies. For example, TSMC in Taiwan and Samsung in South Korea are the critical component suppliers to IBM, Apple, HP, and Dell.

Indeed, the very fulfilment of Moore’s law hinges upon a global supply chain.

Without that globally distributed network of research and development, the very acceleration of computing power would have been all but impossible.

There might still be Google but it will be much less prominent, Facebook will be no more than a college student directory, and there will certainly be no Uber or Airbnb or Snapchat. The entire Silicon Valley could well perhaps be just a little wine valley.

I remember attending a start-up pitch night last December where entrepreneurs presented their business plan to an audience of investors from the Harvard alumni community in New York.

A medical device start-up based in California had just launched a baby monitoring device using imaging technologies to prevent accidental suffocation during sleep.

The founding team was made up of graduate students from MIT who were born in India. Now the team members live in San Francisco and is mostly responsible for design and research.

The entire supply chain, from early prototyping to manufacturing to packaging to logistics, resides in Shenzhen, China.

“They are fast and quick and very flexible. I can’t find anyone prototype my product idea this fast and this cheap in the US,” the thirty-something CEO told me. “I can’t innovate without my counterpart in Asia.”

China of course is no Grenada. It is not the Dominican Republic. It is not, as everyone understands except for the White House it seems, Korea or Vietnam.

China is the world’s second largest economy, the largest trading partner for the US, the biggest international market for American icons such as GM, Ford, GE, Johnson & Johnson, and P&G.

Yet the inevitability of going to a trade war has been accepted by some in American politics as “predestined,” with the “when” entirely driven by political approval ratings and domestic quibble. That rhetoric is a madness of its kind.

ABOUT THE AUTHOR:

Howard Yu is the LEGO professor of management and innovation at IMD business school in Singapore and Switzerland as well as the director of its Advanced Management Programme, an executive education course.