The launch of Sputnik I on October 4, 1957, caught America by surprise. In the face of President Eisenhower’s support of the Vanguard proposal, the Soviet Union’s unexpected milestone shocked us into accelerating our aerospace program, led to the creation of NASA, and ultimately delivered three astronauts to the moon on July 20, 1969.1
While Sputnik provided the impetus for the research and development efforts that led to Apollo 11, we were uniquely poised to accept the Soviet challenge because of technological advances necessitated by World War II and the ensuing Cold War. If a similar challenge presented today, would we be up to the task?
President Obama mentioned Sputnik at the National Academy of Sciences Annual Meeting on April 27, 2009, suggesting that “There will be no single Sputnik moment to break our dependence on fossil fuels.” The president’s statement is not entirely true. Overseas advances in the same “green” technology funded by our stimulus plan, and the damage done by two post turn-of-the-century recessions, have chiseled away at the knowledge base of our manufacturing sector. While companies shore up their bottom lines at the expense of vital domestic R&D, we are experiencing “Sputnik moments” that we cannot afford to ignore.
China announced a $586 billion stimulus plan on November 9, 2008.2 Production had slowed significantly by the fourth quarter,3 and first quarter 2009 GDP growth was the slowest in 10 years.4 How did China respond, and how was their response different from the steps taken by the U.S.?
China supports “pillar” industries selected on the basis of their ability to contribute to the overall economic goals of the country, in accord with the central government’s development plans.5 China’s package to fight the recession included measures to protect vital industries with supportive measures that included tax cuts, export tax rebates, subsidies, fiscal support, bank financing directives, and funding for overseas investment.6 Special incentives are also being offered to foreign companies to encourage investment in China’s pillar industries.7
The Chinese Central Government’s control over the economy enables initiatives to be enacted more rapidly than would be possible in the U.S. When the central bank instructs banks to lend, they lend.8 Historically, China has kept its lending rates low, which has the effect of subsidizing manufacturing, and also keeps the value of its currency, the RMB, artificially low.9 China’s recession strategy was to increase lending to encourage production even while demand decreased.These measures allowed manufacturers to retain more workers, who in turn were able to continue consuming.10
In the United States things work differently. Funding for small business dried up as the recession dragged on, despite the fact that 97% of the exporters in the U.S. are small to medium-sized businesses11. There was no requirement in our stimulus package for banks to loosen their lending, even after receiving massive financial infusions from taxpayers and the small businesses that employed them. The result is best demonstrated by example. Despite receiving up to $50 billion in taxpayer assistance, and stimulus-backed guarantees for small business loans, Bank of America reduced lending to U.S. small businesses through the SBA 7(a) program by nearly 90%.12
The effect of China’s support for its strategic industries can be seen in the success of its steel industry. Steel production in China doubled by over 266 million metric tons from 2003-2007. When the recession struck and demand flagged, growth slowed but production increased. By comparison, U.S. production increased by 3.5 million metric tons during this same period, but decreased in 2008.13 By 2008, China’s steel exports to the U.S. were twenty times greater than in 2003.14
There have been huge increases in capacity in China over the past several years. This excess capacity means that China can flood foreign markets and undercut foreign industries with low prices maintained by manipulating the RMB.15 This increases China’s foreign exchange reserves, estimated at over $2 trillion. These stockpiles are used for political and economic clout, and to ensure a steady supply of ever-diminishing raw materials from other countries.16
China has made great advances in reducing its reliance on low-value-added products in favor of high value exports.17 To that end, seventeen “megaprojects” have been outlined, focusing on endeavors that include high-tech machinery and spaceflight.18 An integral part of China’s strategy is acquiring foreign technology, and our efforts are helping China to realize this goal.
The U.S. excels in producing high technology, high-value-added products. It may be difficult for us to compete against imports of lower-cost consumer goods, but rather than advocating protectionism,19 we should focus on fostering and protecting our intellectual property and associated high technology R&D.
The U.S.-China Economic and Security Review Commission’s 2008 Annual Report showed that “… between 1998 and 2003, investment in R&D by U.S. majority-owned affiliates increased twice as fast overseas as did all corporate R&D investments in the United States (52 percent and 26 percent, respectively).”20 Incentives for moving R&D and manufacturing to China are broad, and include a large, low-cost supply of labor and land, and less than consistent enforcement of applicable laws and regulations.21
In 2002, the U.S. experienced its first global deficit in advanced technology products. By 2008, projections estimated a $124 billion deficit with China in machinery and computers, and the U.S. global deficit in advanced technology products was expected to be as high as $50 billion.22
Not only have we invested substantial sums on R&D in China, the U.S. has no effective federal policies to retain domestic R&D.23 China’s trade surplus in high technology is growing, while we are running up a high tech deficit. This is entirely in keeping with the Chinese National Development and Reform Commissions’s 11th Five Year Plan for Use of Foreign Investment, to-wit: “[We shall] encourage foreign enterprises — especially large-scale multinationals — to transfer the processing and manufacturing processes with higher technology levels and higher added value and research and development organizations to China, … to develop a technology spillover effect, and strengthen the independent innovation ability of Chinese enterprises. [emphasis supplied]”24
In the push to develop its aerospace industry, China provides incentives to foreign companies for R&D investment, which often leads to developing facilities for manufacturing.25 While China is strengthening its developing aviation and aerospace industries, the U.S. aerospace industry is losing jobs to outsourcing. Over 4,500 Boeing aircraft contain parts and assemblies made in China,26 and Boeing has contracts to purchase billions of dollars in parts and services from China.27
For the past few years, in response to incentives provided by China’s government, foreign companies have brought advanced battery technologies to China via joint ventures and partnerships.28 While critics ballyhooed the $2 billion in stimulus funding allocated for developing advanced battery technology, U.S. dependence on Asia for electric car batteries is a foregone conclusion unless we take steps to develop a domestic capacity to produce the batteries.
China is the world’s second largest producer of lithium, behind Chile. As we attempt to develop a domestic battery industry, we must consider that China’s policy of protectionism over its pillar industries includes restricting exports of raw materials,29 which poses a significant threat to our manufacturers.30 In the case of lithium, we could find ourselves in the same situation we are in now with the petroleum-exporting countries in the Middle East, unless we are either successful in enforcing WTO rules that discourage protectionist export restraints, which seems unlikely, or develop an alternative technology.
While the United States has developed the know-how for new rechargeable battery technology, companies in Asia have been able to make the technology economically viable through investments in manufacturing,31 and 98% of lithium ion batteries are now made in Asia.32 Warren Buffet made headlines by purchasing a nearly 10% share in China’s BYD, the world’s second largest producer of lithium-ion batteries and a manufacturer of automobiles.33 BYD has announced plans to make electric cars as part of China’s quest to dominate the market in new “green” energy vehicles.
American companies have sought short-term cost advantages as they focus on the bottom line, which can negatively impact long-term R&D.34 This has a domino effect, as competitors are forced to emulate each other’s actions. As a result jobs disappear, and those possessing a specific knowledge or skill set migrate to other fields.35 Meanwhile, U.S. dollars flow overseas to fund R&D and manufacturing activities that benefit our competitors. China is the penultimate example of a country poised to capitalize on this behavior, as their central government bolsters China’s manufacturing sector and provides cost incentives to foreign investment that recession-starved U.S. businesses will find hard to resist.
Our most vital resource is our intellectual property. If we refuse to provide sufficient incentives for domestic R&D investment with a long term payoff, and instead demand short term profits that cost jobs and stimulate the development of our competitors’ knowledge base, our future will be one of dependence on the economic policy of competing foreign governments. In the case of China, our viability is an instrument for the growth of their economy, not the continuation of our success.