The United States has an annual trade deficit of a trillion dollars because it has lost most of its manufacturing industry. Although we created all the industries of the digital age, most of them have migrated overseas.
The result is not only a chronic trade deficit, but also a lower growth potential. Our most important export goods are agricultural products. This is a return to our 19th century export profile before we became a manufacturing power.
We had growth with software companies like Google, Facebook and Amazon. These companies generate international revenues, but they do not replace the profits of lost export industries.
This chronic condition has not led to an economic crisis – not yet – because we have unrestricted access to cheap dollar loans. The world is willing to exchange its goods and services for dollar loans, which it holds as portfolio investments and as an international medium of exchange. The dollar remains the world’s leading reserve currency.
But such a privilege will inevitably come to an end, as it did for the United Kingdom before us. The underlying imbalance must be corrected, and this cannot be done quickly or easily. It has taken many years to get into this hole and it will take years to get out.
A solution requires a fundamental change in attitude towards industrial policy.
Industrial policy – government measures to promote American production and protect it from international competition – is unpopular in the United States, at least in peacetime. But some important industries are already the subject of government planning, such as the protection of automobile manufacturers through international trade agreements.
In many other cases, however, the absence of an industrial policy is simply an illusion. It is not that the US has no industrial policy, but rather that America is governed by China’s industrial policy.
Donald Trump tried to reduce the trade deficit by introducing tariffs. But tariffs are not much use when domestic production has already stopped, when skills and supply chains have atrophied.
Tariffs could boost domestic production by encouraging foreign brands like Samsung to build domestic plants. In fact, foreign car companies set up assembly plants in the US after Washington imposed import restrictions. Other measures, such as import restrictions, are not the best solution because they protect inefficient companies. The best approach would be to incubate innovative new industries that are economically viable and not indefinitely dependent on subsidies and keep them in the US.
Private innovation and risk-taking, not the dictates of the government, have built the great American companies of the digital age. The government played a role by funding basic research through national laboratories and their corporate counterparts such as Bell Labs and RCA Labs. But corporate funds and private capital markets shifted these innovations from the laboratory to the commercial market.
But that was decades ago. The global economic environment has changed. There is much more global competition that is keen to exploit American innovations. Promising new markets have international competitors in the starting blocks. With China’s rise to a growing player in technology sectors, private capital often has to compete with government funds in the introduction of new industries, even those that are important for the long-term well-being of the country. This represents a severe handicap for Americans trying to build domestic high-tech industries that may take many years to become profitable, such as telecommunications infrastructure and renewable energy. Such a problem can easily discourage private capital.
In some cases, the United States has no good choice but to use subsidies to offset Chinese subsidies. Whether these should take the form of tax credits for capital investment, research and development or direct subsidies depends on the industry.
One example is the $30 billion solar cell panel industry. The solar cell, which converts sunlight into electricity, was invented in the USA in the 1960s. These devices were expensive at first, but cost reductions over time made them a practical source of renewable energy.
From the early 2000s, the USA and other countries offered consumers subsidies for solar energy.