Sunday, July 21, 2013

Living by one’s wits

Conventional wisdom often can’t keep up with reality. The U.S. may have lost much of its manufacturing base but still exports a lot of high-tech manufactured goods (aerospace, computers, pharmaceuticals, scientific instruments, electrical machinery, etc.). Right?

Not as much as it used to and, relative to its population, less than practically all other major industrialised countries. Here are such exports per capita (click to enlarge):
Source: World Bank analysis of the United Nations Comtrade database, . Population data compiled in Wikipedia, which see for sources, .

Singapore earns half its GDP from high-tech exports; the U.S.—less than 1%. This would not be so alarming had the U.S. not had a huge balance-of-trade deficit. Singapore, of course, has a large surplus.

Now here’s how the major exporters of high-tech manufactured goods (above $50bln/year) are trending:
  1. China is on a tear, exporting half the total of the other majors combined and growing rapidly. High-tech goods now make up 26% of all its manufactured exports; the U.S. fraction is only 18%.
  2. Almost all the other majors are growing except the U.S., which is now third behind Germany, a country almost four times less populous.
  3. The U.S. topped out in the middle of the last decade and dropped sharply in the first year of the economic crisis, from where it hasn’t recovered.
Furthermore, the majors are not very major, having accounted for only 23% of high-tech manufactured exports (not consumption) by value in 2010 (the latest year for which complete data are available). Manufacturing dependent on high tech is already widely spread around the industrialised countries — and many others.

Like most statistics, these numbers lie, and in a very specific way. When one country (e.g. China) exports manufactured goods (e.g. computers) made possible by R&D conducted in other countries (e.g., the U.S. and Europe), it is the exporting country that books the value of the finished goods (computers). The foreign R&D contributors book little: a much smaller value for microchips exported to China for inclusion in the computer, and no value at all for the motherboard and graphics card made there under license or, probably, any of the software. The same principle applies to exports of pharmaceuticals (from, e.g., India) developed elsewhere (e.g., the U.S. or Europe). This is how China can rack up these enormous numbers while not really being competitive (yet) with the U.S. in producing high-end high-tech manufactured goods (aerospace, medical devices etc.).

However, recognising this lie results in another lie. Money, in the balance of trade, is money. Unlike China, the U.S. has a huge deficit in its trade with the rest of the world (specifically, with China). It doesn’t matter that the U.S. developed a product of interest to other countries if it cannot use most of its value to cover that gap. Of course, it could develop more products and try to live by its R&D capacity alone, but that is clearly not happening.

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