It Takes More than Economics 101 to Compete With China
Yet these discussions, as well as the reports and studies they often cite, are almost always purely economic cost analyses. They estimate future wages here and abroad, worker productivity and transportation costs, and they conclude that the manufacturing differences between the United States and Asia are diminishing. They then extrapolate these trends far enough into the future that going to Asia seems no longer worth the trip.
Non-market factors are given at most a minimal mention in many arguments that favor reshoring, as it is called, of Chinese manufactured goods. But China’s exchange rates, as we know, are set by its government, not by markets. The massive government subsidies of land, energy and technology, in addition to low- or no-cost loans, are barely mentioned. These are, however, the levers that have catapulted Chinese industries into global prominence in a very short span of years. And these government actions are not going away; if anything, they are increasing.
Americans are assured, based on flawed analysis, that when U.S. companies find it cheaper to make certain goods domestically, they will do so. What is overlooked in reaching that much-wished-for conclusion is that the Chinese, following the example of other Asian nations, simply do not allow important outcomes to be determined in that way.
China did not get to where it is today by allowing natural economic forces to decide the outcome. The reality is much closer to the exact opposite. An industry is targeted, and then the economic forces needed to obtain a dominant position — including subsidies, special tax rates, exchange rates and technology agreements — are put in place. This fundamental reality cannot be ignored.
One report I am particularly fond of, from the respected Boston Consulting Group, is powerfully titled “Made in America, Again.” The cover is a pleasure for any patriot to see: It is simply a large red, white and blue American flag with small figures unrolling the red stripes, while others check the stripes’ exact locations before fixing them into place. The cover graphically and dramatically suggests the glorious return of U.S. manufacturing.
However, what is inside the report is much less colorful but far more realistic. It concludes that if the United States maintains a “flexible” labor force and a good investment climate, it will become “increasingly attractive” for those who want to stop manufacturing goods in China that are consumed in the United States — attractive, that is, for those who, for one reason or another, find other countries in Southeast Asia unattractive.
This is the feeble manufacturing renaissance promised in the report. To get to this rather wishy-washy conclusion, all sorts of leaps of faith are required both in this specific report and in many similar analyses. One must accept that there will be double-digit yearly increases in Chinese wages. One must accept that American workers will remain more productive than Chinese workers. One must be willing to equate U.S. subsidies — few and far between and tiny as they are — with those employed by the Chinese government. And one must believe that the relatively few small manufacturing plants planning to move back to the United States show that forces are in place to close a yearly manufacturing trade gap measured today in the hundreds of billions of dollars.
But most of all, despite the evidence of recent history, there is a tacit assumption that the Chinese government would simply stand by and let these happy outcomes happen. This is unlikely; the Chinese government does not share our pure and simple faith in the unguided operation of markets.
That China adheres to its system is not surprising; its system has been working for it. What is more surprising is that our faith in our own system is so ingrained that we continue to believe in its benign results even in the absence of the free markets and free trade conditions on which those conclusions are based.
A real manufacturing renaissance in America — at least one based on reshoring from China — is not something we can expect. Forecasts that reach that much-desired conclusion by simply extrapolating cost analyses into the future are not realistic. There is far too much that China and other countries can do to shape the outcome. We would do better to consider what we can realistically do in today’s mercantilist world rather than continue to act as if we were living in a textbook world, a world shaped only by market forces.
Ralph Gomory
Research Prof. NYU, Pres. Emeritus, Alfred P Sloan Foundation, Former IBM SVP Science-Tech
Ralph Gomory was born May 7, 1929, in Brooklyn Heights, New York. He graduated from Williams College in 1950, studied at Cambridge University, and received his Ph.D. in mathematics from Princeton University in 1954. Gomory then served in the Navy (1954-57) and then was a Higgins Lecturer and Assistant Professor of Mathematics at Princeton before joining IBM’s newly formed Research Division in 1959 as a research mathematician.
At IBM Research in the early 1960’s, Gomory published papers with Paul Gilmore on the knapsack, traveling salesman and cutting-stock problems, and with T. C. Hu on flows in multi-terminal networks and continua. In the late 1960’s, he developed the asymptotic theory of integer programming and introduced the concept of corner polyhedra. In the early 1970’s, he collaborated with Ellis Johnson in investigating subadditive functions related to corner polyhedra that could also play a role in producing cutting-planes.
Gomory served as Chairman of IBM Research’s Mathematical Sciences Department from 1965-67 and 1968-70 during an important period of its growth and evolution. This period saw the beginning of Samuel Winograd’s work on limits of algorithms and of Benoit Mandelbrot’s work on fractals.
Gomory became Director of Research for IBM in 1970, with line responsibility for IBM’s Research Division. During his 18 years as Director of Research the Research Division made a wide range of contributions to IBM’s products, to the computer industry, and to science. The Zurich Research Laboratory did the work that resulted in two successive Nobel Prizes in physics, Yorktown Heights Research was the birthplace of what is now known as RISC architecture, and San Jose was the birthplace of the concept, theory and first prototype of relational databases.
Gomory, who had become the IBM Senior Vice President for Science and Technology retire
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rom IBM in 1989 and became President of the Alfred P. Sloan Foundation. During his tenure as President he led the foundation into a long list of fields relevant to major national issues. The foundation pioneered in the field of on-line learning supporting this work before there was even a public Internet, and then supported its growth to more than three million people taking courses for credit. They started the now widespread program of industry studies, and engaged a major program advocating a more flexible workplace. The foundation developed a novel and successful approach to the problem of producing minority PhD’s in scientific and technical fields. The foundation was early in perceiving the threat of bioterrorism and was active in that area for years before the events of 9/11. On the scientific side the foundation supported the widely recognized Sloan Sky Survey, which has made major contributions to the problem of dark energy and initiated a major worldwide effort to survey life in the oceans known as the Census of Marine Life. In December 2007, after 18 years as President, Gomory retired from the foundation and became a Research Professor at New York University’s Stern School of Business.
Gomory has served in many capacities in academic, industrial and governmental organizations. He was a Trustee of Hampshire College from 1977-1986 and of Princeton University from 1985-1989. He served on the President’s Council of Advisors on Science and Technology (PCAST) from 1984 to 1992, and again from 2001 to 2009. He served for a number of terms on the National Academies’ Committee on Science, Engineering and Public Policy (COSEPUP). He has recently joined STEP, the Board on Science Technology and Economic Policy of the National Academies.
Gomory has been a director of a number of companies including the Washington Post Company and the Bank of New York. He is currently a director of Lexmark International, Inc., and a small start-up company. He was named one of America’s ten best directors by Director’s Alert magazine in 2000.
Gomory has been elected to the National Academy of Sciences, the National Academy of Engineering, and the American Philosophical Society. He was subsequently elected to the Councils of all three societies. He has been awarded eight honorary degrees and many prizes including the Lanchester Prize in 1963, the Harry Goode Memorial Award of the American Federation of Information Processing Societies in 1984, the John von Neumann Theory Prize in 1984, the Medal of the Industrial Research Society in 1985, the IEEE Engineering Leadership Recognition Award in 1988, the National Medal of Science awarded by the President in 1988, the Arthur M. Bueche Award of the National Academy of Engineering in 1993, the Heinz Award for Technology, the Economy and Employment in 1998, the Madison Medal Award of Princeton University in 1999, the Sheffield Fellowship Award of the Yale University Faculty of Engineering in 2000, the International Federation of Operational Research Societies’ Hall of Fame in 2005, and the Harold Larnder Prize of the Canadian Operational Research Society in 2006.
While continuing his research on integer programming Gomory has written on the nature of technology development, research in industry, and industrial competitiveness, and on models of international trade involving changing technologies and economies of scale. He is the author, with Professor William Baumol, of the book Global Trade and Conflicting National Interests (MIT Press 2001).
