The Asian Century 23.

            Who knows best, government or the markets? 

            Governments have a larger range of concerns than do markets; among them is the need to promote the national welfare.  National “welfare” includes national security as well as material prosperity. 

            For many years, people believed in the great benefits of comparative advantage and global trade.  For example, Americans could devote themselves to producing high-value goods (like computer software) while farming out the low-value goods (like textiles or computer chips) to developing economies.  In a nutshell, the United States became dependent for some key products—both for economic prosperity and national security—on Asian manufacturers.  This didn’t mean only China.  Japan, South Korea, and Taiwan especially became vital suppliers. 

            In some Asian countries, conditions could allow corporations to ignore or subordinate investor concerns about short-term factors like return on investment, quarterly earnings reports, or stock prices.  They may have had a different attitude toward capital than the prevailing view in the United States.  They saw it as abundant, rather than scarce.  Moreover, they were in the control of families, or part of a web of allied companies, or had the backing of their governments.  In the United States on the other hand, capital markets held the whip hand.[1] 

            Chinese assertion in the western Pacific has belatedly cast into doubt the virtues of comparative advantage and global trade.  The supply-chain mess attending the Covid pandemic showed what could happen if anything disrupted trade in vital commodities.  Now the United States has launched a major effort to rebuild its position in the manufacture of semi-conductors.[2] 

            In economic theory (and practice), markets allocate resources best.  Investors (whether the idle rich or public employee pension funds) will be happy with high returns and unhappy with lower returns, whatever the cause.  Capital markets (like Wall Street) allocate capital to the places where it will earn the highest return. 

            Companies can be asset-heavy (like steel-makers) or they can be asset-light (like owners of some form of intellectual property—social media platforms, movie studios, software designers).[3]  In recent decades, the returns on investment in asset-light companies has been tremendous.  So that is where a lot of investment has flowed. 

            In recent decades, economies of scale required the construction of enormous semi-conductor computer-chip factories (fabrication plants or “fabs”).  Only such plants could produce a return on investment that would satisfy investors.  They cost a lot of money, in the area of $10 billion each.  Hard-pressed to obtain capital and unable to scale-up, lesser American producers started off-shoring production to China and Taiwan.[4] 

            At least two questions arise.  First, can government subsidies counter the force of the market?  Second, America has lost ground in many areas of “advanced manufacturing,” not only in semi-conductors.  What about those other industries? 


[1] Greg Ip, “In U.S. Chip-Making Push, Wall Street Shrugs,” WSJ, 15 September 2022. 

[2] The Chips and Science Act, July 2022, allocates better than $50 billion in subsidies to the chip fabricators. 

[3] Examples of the latter include computer chip-designers, chip-design software producers, and chip-making machinery makers.  That last one is a mouthful.    

[4] One manufacturer claims that his company is at a 30-50 percent cost disadvantage against Asian competitors. 

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