Last December I initiated a series of articles collectively headed “Why Trump Is Winning.” They were published at Forbes.com and, to say the least, my editors there seemed underwhelmed. After all, the almost universally touted conventional wisdom at the time was that Trump’s support had a low ceiling. Once the field started thinning, his negatives would supposedly bulk ever larger. My bet was the opposite: once the field started thinning, attention would move away from his reality-TV persona and other negatives, and would focus instead on his issues. And there he would prove unstoppable. (For some of my Trump-is-winning articles, click here, here, and here.)
Frankly Trump’s issues are the most powerful in any election in modern American history. After his tour de force in Indiana on Tuesday, there is little doubt that many voters have already got the message. But can he win in November? Even today, not everyone is convinced. Certainly if the British betting industry is to be believed, his chances are still no more than half of Hillary Clinton’s.
Not for the first time, Trump is being underestimated. His advantage on the issues will quickly prove even more telling against Clinton than against Cruz or Rubio. Although Clinton has the woman card (and it may be worth as much as seven or eight percentage points), she is more vulnerable than almost anyone realizes on Trump’s most powerful issues. Those issues are manufacturing and trade.
American cognoscenti have, of course, long viewed U.S. manufacturing as an invalid in the painful last stages of a terrible illness. The best apparently we can do is post a discreet “Do not resuscitate” sign at the bedside. Attempts to revive manufacturing are seen as sentimental, misguided, and, most of all, unnecessary. After all the United States is now supposedly triumphantly leading the world into a new postindustrial era.
In reality, as Trump understands better than almost anyone, the cognoscenti are fundamentally wrong. Their errors are traceable ultimately to misconceptions in outdated Anglophone economics textbooks.
Before considering the textbooks, let’s first note some key empirical evidence. Long ignored by American cognoscenti, the fact is that almost without exception the world’s richest societies boast thriving manufacturing industries, albeit capital-intensive ones that are a world away from the labor-intensive manufacturing that is used in all straw-man discussions among American establishment types. Wealthy manufacturing nations include not only Germany but Switzerland, Austria, the Low Countries, and Scandinavia (on many measures Denmark ranks as the world’s richest society and certainly has for more than a generation now been rapidly lengthening its lead over the United States).
There is also the evidence of East Asia. Not only have South Korea and Taiwan leveraged manufacturing to bootstrap themselves into the upper echelons of the world income table, but Japan is clearly (to anyone who knows the country, as Trump evidently does) one of the world’s richest economies. The impression otherwise is based on a few misleading quarter-truths. There is, for instance, the matter of Japanese asset values. Yes, after a tremendous and utterly unsustainable bubble in the 1980s (I declared it unsustainable at the time), Japanese stocks and real estate duly fell to earth in the early 1990s. And, yes too, Japan’s overall economic output has long been growing more slowly than in the decades immediately after World War II. What the mainstream press has missed, however, is that on a per-capita basis, real Japanese incomes have been doing fine in recent years, and so have living standards. The most obvious testimony to this is life expectancy, which has increased nearly eight years since the 1980s (and this despite the fact that the Japanese now eat a much more Western diet).
The overall economy’s slowdown is attributable not to lagging productivity growth but rather to a consistently declining workforce (in earlier decades, particularly in the miracle years of the 1960s, Japan enjoyed a fast-growing workforce). The latter-day decline reflects no terrible societal death-wish but rather the enactment of the Eugenic Protection Act of 1948. Concerned about food security, the Tokyo authorities legalized abortion on demand in a successful effort to cut the birthrate by more than half. (The concern about food security was not misplaced, incidentally. On a per-capita basis, Japan boasts little more than one-third of China’s arable land. And China, of course, was sufficiently concerned about food security in the 1970s to go one step further than Japan with an explicit one-child policy.)
A glance at Japan’s recent underlying numbers reveals many areas of remarkable – but strangely unpublicized – strength. Take autos, which are by far the most important consumer product traded internationally. In their electronics alone, autos feature as much advanced technology as smartphones. Despite a declining national workforce, the Japanese auto industry has more than doubled its global output in the last 25 years. The Toyota story alone is remarkable. Whereas as recently as the late 1980s, GM enjoyed more than double Toyota’s global sales, now Toyota’s sales are nearly one-third again higher than GM’s.
Japan’s progress in electronics has been even more impressive. Remember that under Moore’s law, the number of transistors in integrated circuits has long been doubling about every two years. What ultimately drives such progress? The pace is set by super-precise production machines known as steppers. These consist of arrays of huge lenses that use optics to imprint ever more miniaturized patterns on optically sensitized chips. The most advanced stepper lenses are available only from Japan and the only other supplier is Zeiss of Germany.
If Japan’s leadership in manufacturing equipment is impressive, the story is even more so in materials. In accordance with Moore’s law, each new generation of chip requires a higher level of purity in materials. Japan dominates the global supply of virtually all advanced semiconductor materials, not least silicon. In the ultra-purified, not-an-atom-out-of-place, form needed for the latest generation of computer chips, silicon is available only from two Tokyo-based companies, Shin-Etsu Chemical and SUMCO. Monsanto of the United States once was a dominant supplier but it long ago fell by the wayside and so more recently did the only remaining European supplier, Wacker Chemie of Germany.
Let’s move on to a consideration of economic theory and its role in American industrial decline. Anglophone textbooks have traditionally identified just three key factors of production – capital, labor, and land. Now a further factor has emerged that plays a decisive role in the relative competitiveness of modern nations: production knowhow. Although production knowhow is of vital importance right across the board in advanced industries, its role is perhaps most clearly visible in the semiconductor industry. When a new microchip is introduced, top engineers may have to work for months honing production processes. At the outset they may achieve a yield of flawless chips of perhaps no more than 5 percent but as they debug the production system they may raise the yield above 90 percent. Once acquired, the resulting knowhow can be readily transferred to a plant on the other side of the world – and can be harnessed almost instantly to help boost foreign workers’ productivity.
Because textbooks generally do not recognize the significance of production knowhow, they overlook the fact that different nations employ very different production knowhow strategies. Nations like Japan, South Korea, Taiwan, and Germany, where regulators enjoy considerable direct and indirect control of manufacturing, are careful to discourage the flow of their nations’ most valuable production knowhow abroad, while at home they often use cartels to share knowhow rapidly among domestic manufacturers. That way, their own workers at home are provided with a major relative advantage in the world productivity tables. By contrast the United States and to a lesser extent other Anglophone nations are much more casual and these days rarely impose significant restrictions on technology outflows. This increasingly applies even in the case of knowhow considered to have important military applications (whose transfer abroad was in former times generally jealously restricted).
A further vital concern is that many nations have devised ingenious policies to wheedle technology out of other nations. This is most obvious in the case of China, which routinely specifies that as the price of admission to the Chinese market foreign corporations must not only manufacture on Chinese soil but bring their best technology. Such technology then often quickly migrates to indigenous competitors. American corporations are not the only victims but because they are not backstopped by a strong and knowledgeable home country government they are generally more exposed.
The effect on the U.S. economy has been inexorably enfeebling. The worst part of it is that top U.S. corporate executives rarely have much interest in raising the alarm. This is because they often strike profitable side deals with foreign governments that boost short-term profits and by extension the value of their stock options. In the long run, however, American workers – and by extension the American nation as a whole – carry the can. This applies in spades in the many cases where a foreign factory that was recently in receipt of advanced American technology starts exporting back to the United States.
Perhaps the most shocking exemplar of the technology transfer story is aerospace. The process fleetingly became a hot-button issue in the late 1980s when the so-called FSX affair erupted during the administration of Bill Clinton’s White House predecessor George H. W. Bush. The acronym stands for “Fighter Support Experimental” and refers to a Japanese program to acquire much of America’s most advanced airplane technology. As recounted by Kevin Kearns, who as a key foreign service officer in Tokyo tried to fight the deal, Japanese leaders essentially invented a phony need for a fighter jet and by rigging the mission requirements eliminated all existing off-the-peg U.S. fighter jets. A new plane had to be built and it would be built – at vast cost – in Japan. In the name of friendly alliance relations, the United States would supply American production technology to a consortium of the Mitsubishi, Kawasaki, and Fuji industrial groups.
Kearns explains: “The Japanese FSX fighter program was designed to advance the state of Japanese aerospace technology and manufacturing know-how under the guise of countering the Soviets. Japan in fact did not have the capability necessary to produce even a then current-generation fighter aircraft, but was willing to expend scarce defense resources to advance its industrial interests instead of contributing to the common defense. FSX is a clear case of Japanese defense free-riding while devoting its national resources to building better consumer and producer goods, thus increasing its trade surpluses with the United States.”
Despite the transparent nature of Japan’s agenda, the Bush administration acceded, and General Dynamics transferred to rising Japanese rivals much of its most valuable technology. Richard Armitage, who headed the State Department negotiating team, was later awarded the Grand Cordon of the Order of the Rising Sun for contributions to U.S.-Japan “mutual understanding.”
Later, it was Boeing’s turn to transfer technology – and again the recipients were mainly the Mitsubishi/Kawasaki/Fuji consortium. This happened largely on Bill Clinton’s watch and there is no evidence that he ever raised any objections.
The result has been that with each succeeding Boeing passenger plane, Japan’s work share has increased. Whereas Japan contributed a mere 16 percent to the Boeing 767, which was launched in 1982, it contributed 21 percent to the 777, launched in 1995, and a whopping 35 percent to the 787, launched in 2011. It is worth noting that the 787 is the world’s most advanced passenger plane. Its signature feature is superstrong, superlight carbon-fiber wings, which make possible stunning savings in per-passenger fuel consumption. Where are those wings made? In Japan by the Mitsubishi group. Much of the production technology Mitsubishi needed was served to it on a plate by Boeing.
The essense of Boeing’s deal with Japan is that in return for transfers of American technology and manufacturing know-how, the Japanese low-ball their prices for an ever more advanced array of components, materials, and sub-assemblies. In many cases, Japan’s state-controlled airlines further sweeten the pot by paying top dollar for U.S. airframes and jet engines.
Back to Donald Trump and his forthcoming encounter with Hillary Clinton. Trump’s decision to major on American decline was always right on its merits but it will prove tactically devastating against Hillary Clinton. While the entire American establishment – the academic world, the think-tanks, the press as well as big business and Washington – shares responsibility for American decline, one thing is undeniable: Hillary Clinton has ranked as one of the most consequential members of that establishment for a quarter of a century. Fate could not have provided Trump’s “Make America Great Again!” campaign with a more suitable opponent.