Editor’s Note: Prabhudev Konana is a Distinguished Teaching Professor and the Thomas O. Hicks Endowed Chair, William H. Seay Centennial Professor of Business in the McCombs School of Business at The University of Texas at Austin. The opinions expressed in this commentary are his own.
The Covid-19 pandemic has revealed a terrible truth: Our mindless over-reliance on China has led us to no longer have the capacity, the expertise or the manufacturing infrastructure to meet our own nation’s needs.
When unbridled capitalism helped shift millions of production jobs to low-wage countries like China decades ago, we unintentionally but systematically ceded control of our supply chains to them. Our chaotic response to the coronavirus situation shows how thoroughly unaware we were of how the systems we have created truly work.
Take, for example, that 90% of antibiotics and 80% of active ingredients for other medicines come from India and China. That means we no longer have the ability to easily ramp up production of such items here.
The United States should force some fraction of essential items – food, medical equipment, drugs and other items essential for survival – to always be sourced from within the United States, even if it costs more. This can be done through some combination of subsidies, tax incentives and tariffs on imports. If we don’t, future global emergencies could have even worse outcomes than what we are experiencing now.
There is no doubt that global trade has spread wealth around the world, offering better living standards, life-saving drugs and previously unimagined opportunities to millions. A billion people from countries such as India, China and the Philippines moved out of poverty during the past 25 years.
Since bilateral trade was established in 1979, China’s advantages have increased significantly. Now, China produces not only low-cost products, but also sophisticated high-margin growth products such as Huawei’s 5G technology. China’s total research and development spending is nearing that of the United States, and it now files far more patents.
These developments imply that China is now a formidable competitor for a large number of hi-tech US firms that traditionally dominate with innovations. Huawei, for instance, is aggressively capturing worldwide market share in 5G not only with its technological superiority, but also low prices. China is now making giant strides in artificial intelligence and quantum computing, potentially challenging US giants such as IBM, Microsoft and Google in the future.
The age-old trade argument that high knowledge-intensive and high-paying jobs will remain in the United States while low-paying jobs will go to low-wage countries like China is not relevant anymore. While Chinese firms can effectively compete in advanced technologies, US firms cannot easily compete with labor-intensive industries due to costs.
Wall Street fat cats and Silicon Valley entrepreneurs unleashed tremendous opportunities for US companies to seek higher profits from offshoring millions of jobs to low-wage countries like China. This practice has left a trail of destruction: US towns and cities that once thrived because of manufacturing are now impoverished. And that was before the pandemic.
Tax policies that promote US companies moving headquarters, intellectual property and operations overseas need to be reduced. Instead, tax policies should encourage investments in the United States.
At the same time, there must be greater control on intellectual property and how advanced technology is shared with countries such as China. Asymmetrical trade policies that allow foreign countries easy access to US markets but limit US companies access to their markets are untenable.
For instance, the United States has an extraordinary advantage in new-age platform-based technology firms such as Facebook, Google, Twitter, Snapchat and Dropbox. But they are blocked from operating in China, where local equivalents are enabled to grow into massive businesses. There are many sectors within China and other developing countries where American companies must have a local partner, which often leads to transfer of technology or IP theft.
President Trump’s unconventional presidency and the outbreak of Covid-19 have made this entire issue much easier to see. The moment is right for us to reevaluate the boundaries of capitalism if we want our country to thrive in the new world economic order.