Monday, May 12, 2008

The High Tech Trade Deficit

I plan to buy a new laptop computer soon. A Thinkpad. It's the brand my university buys from. This is not an IBM mind you but a Lenovo, made by the Chinese company that made the computers for IBM, and then bought the brand. According to Wikipedia, Lenovo is more than 27 percent owned by the Chinese government. US trading partners rightly seek to produce more high tech products-- products with more value added and comparative value. The US has gradually surrendered its initial advantages in producing such products.

The Center for American Progress recently issued a report entitled Our Nation's Surprising Technology Trade Deficit. Christian E. Weller and Holly Wheeler note that:

Surprisingly, the United States has recorded a deficit in high-technology products over the past five years. By the end of 2007, our nation’s high-tech deficit reached new record highs, measured either in absolute terms or as a share of the overall trade deficit.

Weller and Wheeler attribute the declining US position in high technology products principally to failed innovation policies.

A larger and more deep-seated problem, however, has been the dramatic difference between U.S. innovation policies and those of our global competitors. As other countries have been investing in innovation to create a skilled workforce and encourage more research and development, the United States has, by and large, neglected to make innovation a policy priority. The U.S. high-tech trade deficit finds its roots in the negligence of our innovation policy and requires a strong policy response.

While more government promotion of innovation might help, the effects are likely to be quite minimal if US innovators have few incentives to manufacture new products in the US because of the trade manipulations and financial flows that sustain and perpetuate the trade deficit. But because comparative advantage in technology can be acquired, reversing current trends isn't likely to be easy. A 2006 NYT story notes that

All players, even the "100 percent American-owned" vendors, have a major presence in China. Roger L. Kay, the president of Endpoint Technologies Associates, a consulting firm in Natick, Mass., said China had attracted so many companies based in the United States that the PC ecosystem there had reached a critical mass. Low-cost production is not the draw. "Now the reason you want to be in China," he said, "is because that's where everyone else is."

My experience with earlier IBM Thinkpads suggests that these are and have been well built machines, machines able to command premium prices because of their quality. If I bought a Dell or HP laptop, it would probably have been made in China too. That's where almost everyone in the PC business is.

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