ECONOMY

Competition and concentration

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Amid the new Biden administration supply chain report, the G7 debates over global trade and competition with China, and the Build Back Better World or “B3W” plan which represents a first US led step towards countering Beijing’s One Belt One Road initiative to bring developing countries into its orbit, there has been much talk in recent weeks of the dangers of deglobalisation and protectionism. Our colleague, Martin Wolf, wrote a smart piece on the topic, here.

I want to use this Swamp Notes to argue something different — that a certain amount of deglobalisation will actually be quite good for the global economy, because it will decrease concentration, increase competition and reduce points of geopolitical conflict.

Let’s take semiconductors as an example, as they are the first strategic industry in which the US is actively trying to reshore and regionalise production. According to a recent Boston Consulting Group report:

“About 75 per cent of semiconductor manufacturing capacity, as well as many suppliers of key materials — such as silicon wafers, photoresist, and other specialty chemicals — are concentrated in China and East Asia, a region significantly exposed to high seismic activity and geopolitical tensions. Furthermore, all of the world’s most advanced semiconductor manufacturing capacity — in nodes below 10 nanometres — is currently located in South Korea (8 per cent) and Taiwan (92 per cent). These are single points of failure that could be disrupted by natural disasters, infrastructure shutdowns, or international conflicts, and may cause severe interruptions in the supply of chips.”

This concentration will have a big tailwind in the form of China’s recent 14th annual five-year plan (from 2021 to 2025) which specifically targets domestic semiconductor production. Indeed, many people in the defence community feel that China will at some point try to annex Taiwan because of the semiconductor issue. No wonder that not only the US, but European countries, are trying to build more local supply. The EU’s “Digital Compass Plan” aims to double chip output by 2030. Europe also wants to double its market share in global semiconductor production by 20 per cent in that same period.

The US Senate has passed a bill offering $52bn to boost domestic semiconductor production, and you’ll likely see the Biden administration use the procurement process of the defence department and other federal agencies to build domestic demand. You’ll probably also see the US start to work with allies like Japan, South Korea and even the Netherlands (which via conglomerate Philips is an important part of the semiconductor supply chain) to create even more demand for US made chips.

This isn’t an overnight process — building a chip foundry and rewiring supply chains is a decade long turn, and it could shift if a new administration takes a different view. In an ideal world, the US and EU would work together on common industry standards to create an even larger common market in which incremental innovation can occur, with each side making back and forth improvements in the most strategic industries, and sharing ideas and even some intellectual property. As I’ve argued in a past column, this is an important part of any new alliances of democracies.

Regionalism isn’t the same thing as nationalism. Not every country can, or should, have a chip foundry. But the idea that 92 per cent of a certain industry is concentrated in one of the world’s most contentious geopolitical regions isn’t just bad politics, it’s bad economics. As my friend Barry Lynn, the head of Open Markets Institute, will argue in an upcoming essay in Foreign Affairs, these sorts of global trade shifts can also function as antimonopoly policies, reducing concentration of power in certain companies and countries, and thus creating a more even playing field.

Ed, would you agree with my analysis? And what are the chances we’ll see a Chinese annexing of Taiwan in the next five years? What would the geopolitical result be if so?

Recommended reading

  • I thought my colleague Jamil Anderlini’s take on Xi Jinping’s hubris was on point.

  • Like Felix Marquardt, I’d be happy if I never had to drive up the Magic Mountain again.

  • My friend Meghan Daum is taking on the things nobody wants to talk about in her new podcast “The Unspeakable”. I love her frankness.

  • The deep dive by The New York Times on Amazon’s work practices is a sobering read.

  • I recently watched and really loved this series about the famous music producer Rick Rubin (he founded Def Jam, and helped launch Run-DMC, the Beastie Boys and Public Enemy) and his LA studio Shangri-La. In my next life I want to be a singer and be produced by him. Listen to Johnny Cash’s Hurt and you get a sense of what he can bring out of a great artist.

Edward Luce responds

I share your point of view Rana. Many years ago I did a series of interviews with Andy Grove, the late co-founder of Intel, and author of Only the Paranoid Survive. Grove convinced me that America’s insouciance toward what we then referred to as outsourcing was badly mistaken. The 1980s financialisation of the US economy created a mindset that manufacturing did not matter — and that it should therefore be shifted to lower-cost labour markets. The high value-added stuff, including R&D, would remain onshore. It didn’t turn out like that. Like any other activity in life, manufacturers learn by doing, which means that the most effective innovation usually takes place alongside production. That’s why so many of America’s most impressive companies, including Intel, shifted a lot of their R&D to China. 

My one quibble with what you write is that I don’t necessarily see this as deglobalisation, or protectionist, though the devil will be in the detail. The US Innovation and Competition Act ought to provide strong incentives for America’s chip industry to reshore innovation to the west — hopefully including Europe, as you point out. This makes both strategic and economic sense. It would be good, however, if the Biden administration refrained from repeating false promises about a new dawn of manufacturing employment. These will be highly-skilled and well paid jobs. The age of mass blue collar factory jobs is never coming back — neither here, nor in China, where manufacturing employment is also shrinking. The sooner we talk honestly about the future of work the better.

Your feedback

And now a word from our Swampians . . .

In response to: ‘The strategic unexcitingness of Joe Biden’:
“Completely agree that ‘Biden is a transitional president,’ but the listed agenda items raise the question: transitional in what way? After all, if the list of tasks is ‘turn back financialisation, bring back industrial policy, make the . . . party one that can run on both diversity and appeal to working people — and perhaps most profoundly — rethink America’s place in the world,’ that describes Republican programmatic aspirations 2017-2021 as well. In that light, perhaps your policy list illuminates something surprising: areas of broad political concurrence, which each party is racing to claim. The winner will not be who wants to do it, but who does it best.” — Joshua Treviño, Austin, Texas

Your feedback

We’d love to hear from you. You can email the team on [email protected], contact Ed on [email protected] and Rana on [email protected], and follow them on Twitter at @RanaForoohar and @EdwardGLuce. We may feature an excerpt of your response in the next newsletter

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