Can the US “Out China” China?

The passage of the US Innovation and Competition Act by the US Senate last week generated a lot of media attention. It’s a unique piece of news in that it’s newsworthy both as a “process story” and a “substance story.”

By process, I mean the 68-32 vote tally -- a true bipartisan effort that’s as rare as snowstorms in Texas. Only a united adversarial attitude towards China can bring about this level of bipartisan cooperation. This isn’t the first time Congress presented an united front regarding China. Last year, I wrote about the bipartisan passage of the Holding Foreign Companies Accountable Act, which aims to delist Chinese companies from Wall Street in “Why Huawei Should IPO in America”.

By substance, I mean the $250 billion investment where the list of technology sectors to “innovate” or “compete” in looks eerily similar to the items outlined in the Made in China 2025 plan. Semiconductors, AI, quantum computing, electric vehicles, 5G -- you name it, both countries got it. Even the deadline is similar; the bill’s funding is for the next five years.

Of course, being the Senate, there are still some random things that get squeezed into a proposal destined to pass -- your typical “riders.” Sandwiched between sections to limit nuclear cooperation with China and supporting an open 5G network with OpenRAN is a provision to limit shark fin sales.

One thing is clear though, what the Senate has clearly signaled is the US’s willingness to take a page out of China’s industrial planning playbook and attempt to “out China” China.

Will it work?

Lacking Industrial Planning Muscle

Implementing industrial planning well requires “muscles” that America either never had or hasn’t exercised in a while. Industrial planning is really an entrepreneurial company building exercise on steroids. Both the magnitude of funding and support, as well as attention and scrutiny, are amplified many fold. America has built most of the world’s best tech companies to date, but those examples all exist in a free-market environment, where market-driven capital allocation drives the direction and choices of both resources and talent.

That approach has largely produced America’s vibrant economy. The same approach also means the best and brightest won’t just go work on things the government wants them to -- there are many options competing for their energy and talent. Sustained ability to attract and keep talent is, in fact, the biggest challenge in executing the kind of industrial planning outlined in the Senate’s bill, where the focus is building the technologies of today and tomorrow, not patching up the highways and bridges of yesterday.

The same reason why America’s economy is the largest and most diverse in the world may also become the reason why we lack the “muscles” to make large-scale industrial planning work. Let’s take semiconductor as an example, since it did get the biggest piece of the pie -- $52 billion out of the $250 billion.

Morris Chang, the founder and two-time CEO of the world’s largest semiconductor foundry, TSMC, made his critique of America in this regard in a speech in May. I wrote about the speech extensively but the TL;DR on America is: it lacks the hardworking, dedicated, and talented engineers and managers, as well as some basic transportation infrastructure to ever replicate TSMC’s success, which took more than three decades to materialize. What he didn’t say, but is just as important, is that Taiwan’s smallness gives it a structural advantage to focus, educate, attract, and retain talent in a single, strategically important sector. America, with its vast size and wealth, will ironically have a harder time sustaining the needed focus to develop the necessary talent and infrastructure -- five years is simply not long enough. That’s why Chang sees South Korea as Taiwan’s biggest competition in semiconductor, not America.

Peering into history, America has rarely exercised any industrial planning muscles, because it’s just not in its nature to do so. And when it did, the situation was forced, not proactive, so even calling it “planning” is a bit of a stretch. Byrne Hobart’s The Diff newsletter has an excellent post (paywalled) that describes some of these episodes. NASA’s space program during the Cold War is the example most people recall -- that was in response to the USSR’s space program which was world-leading at the time. The US government’s various protectionist and coordinated investment policies to support America’s semiconductor sector in the 1980s was also a response to the rising competition from Japan. This US Innovation and Competition Act is yet another response to China, which in the Biden administration's own words is “long past time”.

Looking ahead, Byrne made a very astute point:

“...the big opportunity in industrial policy, for a country that's historically bad at it, is to free-ride on other countries' better planning, while still using domestic resources to their fullest extent.”

The US has already decided to “free-ride” China’s “better planning” to some extent. That’s not a bad thing. It’s important to be pragmatic and do what works, no matter where the learning comes from. Heck, Chinese government officials have been soaking up best practices from their American and European counterparts for years. The latest fruit of that “free-riding” is China’s new antitrust regulations and penalty on Alibaba, which is not-coincidentally inline with how the EU has penalized Google for years.

But what unique “domestic resources” does America have to make this work? In other words, what’s truly exceptional about “American Exceptionalism.”

What’s Exceptional About “American Exceptionalism”

If you are an economist, investor, or finance person, you might point to the dollar as the world’s reserve currency as “exceptional.” If you are a political animal, you may point to the American democratic system as “exceptional.” If you are a scientist or technologist, you may point to Silicon Valley or our top universities as “exceptional.”

As someone who is a little bit of all three, I would agree with all those elements. But I also believe what fuels “American Exceptionalism” are two more fundamentally exceptional components: immigration and rule of law (maybe because I am an immigrant who went to law school). These two components are what set America apart, if it knows how to use them.

Demographically, both the US and China are in decline. According to the US 2020 census, America’s population only grew by 7.4% from 2010 to 2020 -- the lowest growth rate since the Great Depression decade of 1930-1940. According to China’s 2020 census, it is also experiencing the lowest population growth rate, since the country started keeping a census in 1953. An open immigration system is the one “muscle” that the US has and China does not.

Unlike the US, China has never and likely will never have an open immigration system; you’d have to be Elon Musk or Stephon Marbury to be an immigrant there. Yet, simply telling its citizens that they can now have three children won’t magically produce three-times the people. Unlike China, the US can make up for the lack of specific talent in the areas of innovation outlined in the Senate bill and reverse the general demographic decline, if it knows how to “flex” its immigration muscle again. And that gets into the rule of law.

Anyone with a cursory understanding of US immigration history can tell you that while America has constructed an image of openness and inclusion, its immigration laws have legalized just as much openness as xenophobia. The Chinese Exclusion Act of 1882 is a particularly egregious example. Yet, the rule of law and all the institutions built to practice it have held up surprisingly well during the four years of the Trump administration, when all aspects of it, including immigration, were under assault. That’s quite “exceptional.”

But immigration only works if the rule of law can equally protect the immigrants’ hard work and creations (intellectual property) and their safety from nativist hate crimes (criminal justice), so the best people are willing to come to America to do their best work.

Thus far, that has not been the case. Anti-Asian hate crimes are at an all-time high. Deterioration and despair continue on the southern borders. Public discourse and public policy are just starting to scratch the surface of systemic racism. And more recently, the “Wuhan lab leak theory”, while a perfectly valid line of inquiry to unearth the true origin of COVID-19, may be causing more hate against immigrants working in the American scientific community. None of this is “exceptional.”

The US Innovation and Competition Act still needs to clear the House of Representatives to become law, and there’s indication that the House may break it up into pieces and complicate the bill’s future. But I think some version of this Act will pass (and soon), because the bipartisan support and urgency to counter China is too strong.

The money will be there. So will the political will. And we all know the famous line from the Hamilton musical: “Immigrants, we get the job done.” But in this new age of extreme US-China rivalry, will America let them and protect them?

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