To defend ourselves against China, we must change
In dealing with China, the United States has a fundamental problem.
China has used a variety of tactics – from mispriced currency and subsidized competition to industrial espionage – to advance its industries and has announced its plans to dominate many of them by 2025. There’s no reason to believe China will change.
America’s profit-focused companies are free to accept Chinese subsidies to move their manufacturing or even their research and development (R&D) to China. By doing this, they can make great short-range profits. But they quickly yield years of hard-earned know-how to Beijing, costing us both jobs and manufacturing ability.
In a military war, we wouldn’t allow the companies that make our weapons to sell their best weapons to the enemy just because the enemy was offering them a better deal. In this economic conflict, however, that’s exactly what we’re doing.
This isn’t working The same economic models that show that mutual gains from trade are likely when a developed country trades with a relatively undeveloped one also show the likelihood of economic conflict when two developed countries take aim at dominating the same desirable industries. And China has moved from being an undeveloped country to being a significantly developed one.
Every year the U.S. trade deficit with China deepens, adding hundreds of billions of dollars to the debt we owe Beijing. These annual deficits have handed two to three trillion dollars to the Chinese government. This money then becomes available to the Chinese to buy up American companies, influence U.S. universities and lobby our government, as well as to increase its worldwide economic and political influence.
Although China is the most extreme case, many countries compete by subsidizing corporations in important industries to be their national champions. But that has not been our history.
In the U.S. we have used two basic approaches to improve our competitiveness with other nations.
The first is simply to make it more rewarding for corporations to produce in the U.S. rather than go abroad. Throughout our history, starting with Alexander Hamilton’s Report on Manufactures, we have done this with tariffs and also with tax incentives.
When Congress was concerned that U.S. companies were not doing enough R&D, they voted for the R&D tax credit, lowering the income tax on companies that did more R&D.
We can take the same approach to reward companies that add most of their value in the U.S. rather than abroad. If one company does most of its work abroad and another company in the same industry does it here, the first should pay a higher income tax and the second a lower one. The tax can be made as strong as is needed to get the desired results. In addition, as the tax is raised on some companies and lowered on others, it would have minimal or no impact on the federal budget.
The second basic approach is to reject the present norm that makes shareholder profit the only goal and instead return to the idea that corporations should take into account the effect their actions have on a larger community. Historically, that has included employees, suppliers, local communities and the country, in addition to shareholders.
This way of running corporations has a long history in our country. While this seems like a radical idea today, it was the norm in our country as recently as the early 1980s as the papers of the Business Roundtable clearly show.
One way to move away from the profit-only focus was recently proposed by Sen. Elizabeth Warren (D-Mass). Another approach is now being advocated by Sen. Marco Rubio (R-Fla.), so there is support for change on both sides of the political aisle.
The fact that corporate behavior, until recently seen as only an economic issue, has finally surfaced as a political issue is a huge and necessary step forward. We cannot count on China to change its system when it is working well for them. Instead we must respond by making our own economic system work better for us.
Ralph Gomory is well-known for his mathematical research and his technical leadership. He has been awarded the National Medal of Science. For 20 years he was responsible for IBM’s Research Division, and then for 18 years was the president of the Alfred P. Sloan Foundation. He is currently a research professor at New York University.