The U.S. Tech Sector Is Looking Weak. That’s a Geopolitical Risk.

In a world at peace, making potato chips is just as good for a nation as making computer chips, and making movies about fighter jets is just as good as making actual fighter jets. All that matters in free trade is how much money a country earns from its efforts.

But with Russia grinding up Ukraine and China threatening to seize Taiwan, “at peace” is a poor description of the world today. This has prompted some new thinking about U.S. economic strategy.

This week, the Information Technology & Innovation Foundation, a research group sponsored by tech companies such as Amazon and Microsoft, announced that it had started an initiative, the Hamilton Center on Industrial Strategy. Its goal is to help fortify the ability of the United States to produce advanced technologies that are “strategically important for economic and national security,” according to its website.

The Hamilton Center is named after Alexander Hamilton, the first Treasury secretary of the United States, whose Report on the Subject of Manufactures in 1791 aimed to make the young nation stronger economically and militarily by building up manufacturing. He once wrote that government-led development “would baffle all the combinations of European jealousy to restrain our growth.”

Hamilton’s interventionist views are out of step with pure laissez-faire economics. “If you listen to the Washington trade establishment, trade is win-win,” Robert Atkinson, the founder and president of the Information Technology & Innovation Foundation, told me in an interview before the opening of the center. “That may be true for some sectors. When you talk about advanced sectors, though, it’s not win-win. It’s win-lose.”

The country that sells advanced products, in other words, wins against the one that has to buy them because the producer retains all of the vital technical knowledge.

Atkinson makes a good point, although it’s also important to keep in mind the downsides of sourcing important technologies domestically or from just a handful of trusted partners. Costs go up. Sheltered domestic industries can become inefficient. Neutral trading partners that aren’t admitted to the inner circle are harmed. And international tensions can worsen: Reducing interdependence with China, which is racing to develop technologies such as artificial intelligence and semiconductors, might backfire by giving the Chinese government even less reason to be on good terms with the United States.

With those caveats in mind, I explored a spreadsheet of data about global tech production that the Hamilton Center shared with me before its opening. I made three charts to highlight some interesting findings, which I share below.

The first chart shows that for the past decade, China has more or less matched the United States in terms of the two nations’ shares of world output in seven high-tech sectors: pharmaceuticals; medicinal, chemical and botanical products; electrical equipment; machinery and equipment (from engines to office gear); motor vehicle equipment; other transport equipment (mostly aerospace); computer, electronic and optical products; and information technology and information services. The data comes primarily from the Organization for Economic Cooperation and Development and is available only through 2018.

The second chart makes the United States’ situation look worse. It shows that the U.S. economy has increased its share in one sector, information technology and information services, but has lost share in the other six categories combined. “We’ve gotten so enamored with big tech, that masks very significant weaknesses elsewhere,” Atkinson said.

Next, the following table ranks the tech intensivity of 26 important economies, with Taiwan coming out on top. The table compares how important tech is to a national economy with how important tech is to the world as a whole. This is known as the location quotient. (Readers may recall that I used location quotients from the Bureau of Labor Statistics recently to look at the popularity of jobs in different states and metro areas — shampooers in New Jersey, tire builders in South Carolina and so on.)

There’s hardly a one-to-one correlation between tech intensivity and prosperity. India’s location quotient is above average, for example, while Hong Kong’s is well below average. The way the index is constructed, a movie studio that made a blockbuster movie would lower its nation’s location quotient by increasing the nation’s gross domestic product and thus watering down the tech sector’s relative contribution.

I asked Atkinson by email why he believes the location quotient is nonetheless a worrisome data point for the United States, which scores below average. He wrote, in part, “Weaknesses make the United States vulnerable to economic aggression, especially from China.” India scores high because “it punches way above its weight in I.T. and pharma, something the United States needs to be concerned about because their gain has come at the expense of the United States,” he added. And Hong Kong scores low because its main strength is finance, he wrote. “So, sure, Hong Kong has been prosperous, but would anyone call it secure at this point?”

Elsewhere

The second spike in lumber prices appears to be over. Lumber prices soared in 2021 because sawmills couldn’t keep up with the demand for housing construction coming out of the worst of the Covid-19 pandemic. Prices cooled when the mills caught up but then rose again because of continued strong home-building demand coupled with higher tariffs, bad weather, pine beetle infestations and labor shortages at the mills.

Higher mortgage rates that depress housing demand are the latest depressant for lumber. Prices in the futures market shown in this chart tend to appear with a lag in prices for producers and consumers.

Quote of the day

“To try effectively to wipe out hard core inflation by squeezing the economy is possible but disproportionately costly. It is burning down the house to roast the pig.”

— Robert Solow, quoted in “The Threatening Economy” by David Mermelstein, The New York Times Magazine, Dec. 30, 1979

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