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Sunday, Nov 8, 2009
The boom in the Chinese microchip industry has Americans worrying about lost jobs and national security. We should be praising it as a model of how globalization is supposed to work.
Aug 3, 2005 | In 2004, more than 40 tech companies staged public offerings of their stock on Wall Street. Ten were domestic Chinese firms. A microchip company led the way; in one of the largest initial public offerings of the year, China's Semiconductor Manufacturing International Corp. raised $1.8 billion.
If chip industry experts across the globe weren't already obsessed with China, SMIC's IPO riveted the attention of the remaining holdouts. Five years ago, China hardly had a chip industry to speak of. Each year since then, led by SMIC, production has exploded. Today, China makes about 8 percent of the world's chips; by 2010, that number may be up to 20 percent.
From nowhere to world domination has been the story of China and globalization for the past decade. Textiles, toys, televisions and cellphones -- one global industry after another has been battered by Chinese competition. Why should chips be any different?
Because the chip industry can be an example where globalization works right.
Predictably, China's increasing economic power has sparked a sustained anti-China backlash in the United States. In the last week of July, the House of Representatives approved a bill that would make it easier for U.S. companies to seek restrictions on Chinese imports into the United States. And over the past month, U.S. politicians mounted an extraordinarily successful campaign to oppose a Chinese energy company's bid to buy the U.S. oil and gas company Unocal. There's no mystery why: If you're looking for examples of the downside of globalization, China offers them in abundance. China's low-cost workers are depressing wages for manufacturing employees all over the world. Its incredible appetite for raw materials and energy has warped commodity prices and raised fears of a global struggle for resources that could lead to the 21st century's defining showdown.
China's emerging push into chips would seem to jack up the stakes and has fed the growing backlash. Chips are a crucial link in the global tech economy, essential to nearly every modern electronic device but also critical to national defense and the entire global digital infrastructure. The chip industry's health is symbolically resonant, a marker for high-tech prowess. In the 1980s, Japanese inroads into chip manufacturing provoked an orgy of alarm and self-criticism in America. Today, the Chinese high-tech push is being compared to the Soviet Union's launch of Sputnik, which set off the fabled space race in the 1960s.
Defense hawks are now warning that the United States may soon be dependent on a potential enemy for the production of next-generation chips and are calling for increased controls on the export of advanced technology to China. (Last week, the Bush administration appeared to heed those calls as it announced plans to significantly tighten such restrictions.) U.S. chip company executives, even as they pack their bags to move yet another part of their operations offshore, decry Chinese government help for domestic chipmakers (while holding out their hands begging for their own government's assistance). Labor advocates fear that more good, high-paying jobs for American workers are set to vanish.
But there's a little fact that gets lost in the larger to-and-fro over China: Right now, in the face of a vast trade deficit with China, chips are one of the few sectors in which the United States enjoys a surplus. Thanks to China's emergence as the world's manufacturing headquarters for high-tech devices -- computers, DVD players, cellphones, iPods and just about everything else -- U.S. companies currently sell far more chips to China than they buy from that nation. The United States is at the top of the food chain in both chip design and chip-making equipment, and China is potentially its largest growth market.
It is entirely true that Chinese ambitions have no limit, and given China's astonishing surge forward as a high-tech powerhouse, perhaps one day China will rival the United States. But increasing controls on technology exports or pumping up protectionist tariffs is likely to do little more than slightly slow China down, say economists and China experts, while simultaneously hurting American consumers and companies doing business with China. In the meantime, the anti-China crusaders may be missing the real threat, the enemy who lives at home rather than across the Pacific.
In a perfectly working global economy, each country prospers by doing what it can uniquely do best, by, in technical terms, relying on its "comparative advantage." For decades, the United States' comparative advantage has been the excellence of its own science and technology. The chip industry offers a classic example -- U.S. chip makers maintain their edge by pouring high percentages of revenue into research and development.
But federal spending on basic science and R&D in the United States, as measured by its percentage of the gross domestic product, has been flat or in decline for 30 years. So too has federal support for science and engineering education. As a result, the basic infrastructure that supported fantastic achievements in science and technology for generations is fraying.
At the same time, U.S. corporations and investors are pouring billions of dollars into China. And if last year's IPO statistics are a sign of what's to come, the flow will only increase. By itself, that might not be a bad thing. But in conjunction with the U.S. failure to nurture its own comparative advantage, the China gold rush presents quite the paradox of globalization. The United States has done more to push global markets and free trade than has any other nation. But now it seems to be forgetting how to play its own game. Instead of looking to punish China for doing well, policymakers should be looking at the U.S. chip industry, figuring out why it is thriving and applying those lessons to the rest of the economy.
