Leading up to the ManufacturED Summit on October 21, 2020, Jeff and Carman talk to Rob Atkinson, Founder and President of the Information Technology and Innovation Foundation (ITIF), on how U.S.-China relations are affecting manufacturers, particularly North American firms with supply chains in China. Rob shares insights on how manufacturers are economically decoupling from China while participating in a global supply chain that supports U.S. interests.
What is the Future of the U.S.-China Supply Chain? Transcript:
Announcer: You’re listening to The Kula Ring, a podcast made for manufacturing marketers. Here are Carman Pirie and Jeff White.
Jeff White: Welcome to The Kula Ring, a podcast for manufacturing marketers brought to you by Kula Partners. My name is Jeff White. Joining me today is Carman Pirie. Carman, how you doing, mate?
Carman Pirie: I am doing well and as always, excited for today’s conversation.
Jeff White: Yeah.
Carman Pirie: Maybe even more so today.
Jeff White: Well, I think it’s interesting. We have the MAPI ManufacturED Summit coming up, and we’ve got one of the premier speakers on the show with us today, and I’m really stoked to talk about this kind of future-looking perspective.
Carman Pirie: Yes, and it helps our show have a bit of Canadian content, as well, oddly, so that’s kind of cool.
Jeff White: Yeah. Exactly. I believe our guest is a native of Canada, but not residing their anymore.
Carman Pirie: Indeed.
Rob Atkinson: Beauty, eh?
Jeff White: Thank you. See, you’ll fit right in. Joining us today is Rob Atkinson. Rob is the Founder and President of the Information Technology and Innovation Foundation, or ITIF. Welcome to The Kula Ring, Rob.
Rob Atkinson: Hey. Thanks a lot for having me.
Carman Pirie: Rob, it’s a real pleasure to have you on the show, and just an honor to have you on the show, frankly, and I think if I try to give an introduction to your CV, we may end up using up the entire 30-minute show, so I wonder if you could give our listeners a brief introduction for those who are not familiar with you?
Rob Atkinson: Sure. So, I’ve been in D.C. since ’89, various places, but all focused on technology policy. And since 2006, I was the Founder and I’m the President of a think tank called the Information Technology and Innovation Foundation, and we’ve been doing a lot of work on advanced manufacturing, and smart manufacturing, a lot of work on China, what the future of U.S. or North American manufacturing is going to look like.
Carman Pirie: Look, and of course it’s the U.S.-China relations that is the focus of your upcoming talk at the ManufacturED Summit, and so let’s kind of just unpack that a bit. You don’t have to look at the news for any more than three seconds to understand that the China-U.S. relationship is evolving rapidly, and some might say deteriorating rapidly. I think sometimes we naively think that’s all associated with one particular political dynamic, and it’s bigger than that. Introduce our listeners to what’s broadly at play in your view and how this is shaping up.
Rob Atkinson: I think what’s broadly at play is when we encouraged and allowed China to join the WTO, the World Trade Organization, in the year 2000, we were thinking that they were gonna be like us. Essentially pretty much of a free-trading nation, rule of law, we trade for some things and we export some things, we import other things. We’re good at some things and other countries are good at other things. And because China’s so big, and was growing, this would have been great for us. It was really a fundamental mistake. I’m not blaming anybody. It was hard to know what really was going on there, but China is not a free trader. They’re what I would call a powder trader.
There’s a very important book written in 1941 by an economist, Alfred Hirschman. I’m talking about a book called National Power and the Structure of Forgein Trade, basically talking about Germany in the first 40 years of the 20th century. They didn’t do trade the way America did trade. They did trade to get power and they did it to get relative power. They wanted to hurt their competitors through their trade policy and help them, and that’s a lot of how we should be thinking about China right now. China is focused in some ways, and not every industry, obviously, but in some ways in a predatory manner to go after advanced industries in North America, and we need to be aware of that.
That’s not to say we should decouple completely from China. That would be a huge mistake. But we’ve gotta think about it more strategically and more carefully than we used to. We were pretty naïve before.
Carman Pirie: I mean, there’s a lot to go with there, but I guess it seems to me that if that’s the reality of the situation and we just can’t simply decouple immediately if you will, what are we entering into? Is this a long, protracted, Cold War-esque relationship with China that you’re envisioning?
Rob Atkinson: You know, the problem with using historical terms is that it’s not a perfect analogy, but yeah, I think that’s pretty much what’s gonna happen or what’s already happening. Now, the Cold War with the Soviet Union, we were really not integrated with them very well economically. We sold them Pepsi and we sold them some wheat, a few other things, but there was no real integration. We didn’t produce telephones in Russia, you know? There’s been much, much deeper integration with the Chinese economy. Many North American firms have supply chains coming out of China. They have production in China. Or frankly, the Chinese are their customers.
We’re not gonna, in my view, it’s certainly possible if the Chinese made some kind of very aggressive military actions that things could deteriorate pretty quickly, but absent that I don’t see us decoupling in a complete way. What I think is gonna happen is much more strategic decoupling, so depending upon the sector you’re in as a manufacturer, you might find yourself in a position where you can’t get your supplies from China anymore or vice versa, or you can’t produce in China anymore, or you can’t sell to China anymore. But I don’t think that’s gonna happen across the board and most sectors are not all that sensitive, but certain sectors that are sensitive if you will, like for example you saw the decision today when we’re recording this, or over the weekend, with regard to the Trump Administration with regard to the Chinese semiconductor firm, where they were going to potentially block sales to this firm.
If you’re in a sector like that, then there’s a lot more sensitivity. The other component of that is also just the tariffs that the Trump Administration put on on a fair amount of imports coming in from China. If you’re a producer over there, or you’re using Chinese suppliers, that’s a risk to the business, and I don’t see that potentially going away overnight. It’s possible. Certainly, if Trump gets elected, I don’t see those going away, and if Biden gets elected, it’s certainly possible he would keep some of those.
Carman Pirie: Some relationships will persist. Not a full decoupling, clearly, and it’s happening whether it’s Biden or Trump post-election in a political environment that is likely to encourage more tensions, not fewer. Does all of this add up to a scenario where manufacturers, you mentioned this before about they could take the approach of being basically a free trading organization operating within a free trading nation within free trade agreements, or free trade posture, I guess. Are you envisioning that manufacturers and governments will be a little bit more closely connected in the future than what we’ve experienced in the last decade?
Rob Atkinson: I do believe that for two reasons. One is 20, 10 years ago, at one point in the Bush Administration, in the second Bush Administration, the U.S. Commerce Department was actually going around the United States at conferences, holding conferences to encourage and educate U.S. manufacturers on how to offshore work to China. Nobody knows this, but it was amazing at the time. It wasn’t amazing at the time. It was sort of normal. Of course, you’re going to move your production to China. Boston Consulting Group was making all this money and all the other consulting firms. Move to China!
You do that today and the risk of scrutiny is much higher. Having a lot of production in China raises the risk of scrutiny. You saw that play out with Trump with regard to a number of U.S. companies, where they say, “Well, we want to move something to Mexico.” And Trump pulls out the bully pulpit and says, “No, you shouldn’t! And I’m gonna shame you publicly.” U.S. manufacturers are going to be under more scrutiny in terms of where they source from, where they produce. I think that’s inevitable, particularly vis-à-vis China and places like Mexico. I think Europe, Canada, it’s not as big a deal. It’s not seen as a problem to be doing that, because they’re allies and they’re high wage nations.
But the second point is also the U.S. is in the process of developing and putting in place a much more sophisticated national industrial strategy. We’ve seen that in the Senate in the last few months, where a big piece of legislation for the semiconductor industry was put in place, a big legislation called the Endless Frontier Act, basically to focus on key technologies. Vice President Biden has proposed expanding these, what we call Manufacturing USA institutes. I think regardless of who gets elected, but particularly if Vice President Biden gets elected, he’s gonna be more assertive in terms of a domestic manufacturing strategy.
I think manufacturers who want to be in the good graces of the public image, as well as the administration, they’re gonna need to be thinking about playing along. They’re gonna need to be thinking about how can we be a responsible partner. I’ll give you an example. If the administration says, “We think it’s really important for the U.S. to be involved in the machine tool industry,” and we set up an institute, companies in the U.S. who are machine tool builders, or even potentially users, will probably need to be engaged somehow. Otherwise, they’ll look like they don’t care, like they’re not patriotic, and what’s the matter, are they just out for money? I’m not saying that’s the case, but that’s the perception.
Announcer: Manufacturing is undergoing a rapid transformation and MAPI’s annual leadership summit, ManufacturED Online, will be exploring the many issues faced by the industrial sector. Join us on October 21st from 1:00 to 4:00 PM Eastern for this virtual summit. The Kula Ring is proud to be a media partner again this year. Register now using the promo code KULARING20 and save 20%. Just go to ManufacturEDSummit.com or follow the link on our podcast page. Hope to see you there.
Jeff White: It’s certainly the case that in this highly visible and social world that we all live in now, perception is reality.
Rob Atkinson: Absolutely.
Jeff White: Yeah. And truth is negotiable I believe is how that goes.
Carman Pirie: That is always the second half of that statement. Yeah. I do think it’s interesting, too, how it means that government relations part of the marketing function in these manufacturing organizations may need to take a different angle. There’s also, seems to me that there’s a different texture to the reputational management challenge for folks that find themselves in corporate communications, in marketing roles in manufacturers. In some way, maybe they could almost get away with ignoring that context before, but Rob, as you so rightly said, the scrutiny is just gonna be so much higher now.
Rob Atkinson: Yeah, absolutely. The old days, meaning a couple of years ago, most companies, even midsize manufacturers, had to have something around corporate social responsibility. They have to have some program, they have to have some images, something. But a lot of that was around things like education, or helping the local community, or making sure that you’re taking adequate steps to be environmentally sustainable. Those aren’t gonna go away. They may need to step up. But I would add a new one that has to be part of that, and that’s are you a patriotic manufacturer? Are you doing what you can to help make sure that the U.S. has a strong and sustainable manufacturing base?
Carman Pirie: I find that one… just going into that a little bit more, it seems to me… On this show, we’ve interviewed an awful lot of very smart manufacturing marketers from some America’s leading companies, and when you do that, you realize just how big of a disconnect there is between the political conversation around manufacturing and the reality around manufacturing. This positioning in the political narrative of manufacturing being blue-collar Joe Lunch Pails, all in a line going into a factory, when people recognize that the workforce of tomorrow in a factory setting is going to be vastly different. When we think about appealing in some ways to that same demographic or political constituency, sometimes that patriotic nature just kind of comes down into the buy American, rah-rahness. Do you feel this, Rob, that we’re gonna be kind of moving past that kind of superficial characterization of it? Or am I just being hopeful?
Rob Atkinson: Yeah, I think we’re probably gonna move more in that direction. I think, look, I live in Washington, I’ve been here a long time. Most Washington policymakers, including members of Congress, I think they have a somewhat up-to-date understanding of manufacturing. They understand that just some guy or gal coming out of high school that doesn’t know any math and has low levels of literacy is gonna have a hard time in modern manufacturing. They know that. And that’s why there’s a big push in Washington and will continue to be a big push to think about things like apprenticeship programs, and better community college programs, and maybe more kind of engineering and skills programs even in high school.
I think that is moving along well. I think the real challenge, though, is helping policymakers understand that there are things called global supply chains, and what you find is that a lot of policymakers think, “Well, we should just make everything here. Why have any risks with our PPE equipment or whatever we’re worried about not having? We’ll just say you have to have your supply chains here.” The reality is sure, at some marginal level more of that is useful and possible, but there are a lot of these companies that are sourcing from 40 different countries, and they can’t source from the U.S., because we don’t make it, so I think that’s one of the biggest challenges to explain to policymakers, that these supply chains are global.
Now, I think the notion that we can and will be saying and probably should be saying you probably should be sourcing less from China, particularly sensitive kinds of things that we need to be able to make. We can’t be dependent upon China. I think that’s really one of the core messages going forward over the next decade. Areas where we’re super dependent on China, where we don’t have a lot of other options, those are gonna be completely under a lot of scrutiny. But I think, sure, if we’re sourcing from Europe, or Brazil, or Taiwan, people need, policymakers need to understand that oftentimes that’s good for us and we shouldn’t be trying to completely radically change it.
Jeff White: Rob, are you seeing anyone who’s doing this particularly well and kind of getting out of ahead of the game and really showing others how to do this and decoupling some of their supply chain from China and presenting you that image that way?
Rob Atkinson: My impression is a lot of companies are doing this more on the QT. Like for example, my understanding is that Apple has moved half of its AirPod production to Vietnam. And that’s the part that’ll source for the U.S., so if you buy an AirPod, it’ll be made in Vietnam. If you’re in Brazil and you buy an AirPod, it might still be made in China. You see some companies doing that, a few companies saying that they’re doing those kinds of things. There’s a group in the U.S. called the Reshoring Institute. It’s an interesting institute that really looks at and documents American companies that have reshored production and puts out press releases and the like, and that tends to get pretty good press if you can tell that story.
Even if you can tell the story of, “Hey, we’ve moved stuff from China, but it doesn’t really make sense to bring it to the U.S., so we put it in Mexico,” that’s a positive story. It’s not as positive as you put it in Toledo, but it’s still a positive story because it’s close to the U.S. For a producer to have something produced in Mexico and exported to the U.S., we get 50 cents back on that because of reciprocal trade. In China, we get 20 cents back, so just having more of the supply chains in Mexico is a bigger direct benefit to the U.S. It doesn’t all have to come back to the U.S.
Jeff White: What about for manufacturers who are located in the U.S., or Canada, or vice versa, that are looking to sell into China? Do you think that they’re going to continue to go down that path? Surely if you’re exporting to China, that’s less of a risk from a PR perspective than ordering and purchasing from China.
Rob Atkinson: Very much so. Again, it depends on what you’re selling. If you’re selling that gets ended up putting into a Chinese fighter jet, then there’s a risk, but sure, if you’re just selling widgets, generic widgets, or consumer products to China, absolutely. In some ways, that’s a plus, because they’re saying, “Hey, we’re selling to them and it’s a lot better than them producing for themselves.” It sort of takes something away from them, if you will. It adds something to us. I think the selling to China generally should be a good story. And I really don’t think that’s gonna come under a lot of risk unless it’s something that’s much more of a sensitive product. If you’re selling some kind of semiconductor to China, which even if it’s used for commercial purposes, it might get swept up in this dual-use restrictions that are there. But overall, I think selling to China is a good thing and companies can use that to their advantage.
Carman Pirie: Are you seeing a trend beyond the U.S. to other countries that have a significant trade relationship with China adopting a more focused industrial policy to govern their relationship with that country? Is this something that you feel is particularly acute for the U.S., or is it something that a number of other European countries are also struggling with, or are they further ahead?
Rob Atkinson: No, no. They’re definitely not further ahead. We are at the head of the phalanx, if you will. We’re leading this. But what’s really important is four or five years ago, we would have been alone, and now we have certainly a number of other countries, and I would put Japan right at the top of that list. Before Prime Minister Abe resigned, he was able to get through a very aggressive program for subsidies for companies, Japanese manufacturers, to either move production, to basically move production out of China. If they moved it to Malaysia, or Vietnam, or Indonesia, they got some incentive. So, actually, they were paying companies to move stuff out of China, even if it didn’t come back to Japan, and if they moved it back to Japan they got a much bigger incentive.
A lot of companies actually took advantage of that. Japan is very concerned about Chinese economic and technology power, and they’re very much willing to work with us. You know, places like Canada, I think Canada is willing to work with us, but Canada I think feels small and powerless. I say that as a Canadian.
Jeff White: A certain amount of understanding that goes into that. Yeah. No, we’re big, but we’re tiny really.
Rob Atkinson: Yeah, we’re tiny. But I just had a call with some members of Parliament in the U.K. today, and you had an initiative from their Prime Minister to create what’s called a D10, a Democracy 10. I think it’s a little bit stalled now, but the idea is could we get 10 democratic countries, Australia would be an example, Canada, U.S., Japan, really to work together and push back against some of these practices. So, absolutely I think that’s happening. You’ll see more of that in continental Europe. The German manufacturing association, BDI I think it is, I’m gonna get that wrong, came out with a big report last year for the first time saying, “Wait a minute. China really is playing unfairly and it’s hurting German manufacturers.” Including what they call the Mittelstand, the really powerful middle-size companies that are doing quite well.
So, even the Germans are waking up to this and saying maybe we need to change course a little bit.
Carman Pirie: Well, it’s a fascinating kind of topic area, and I just, I really thank you for sharing your experience and expertise with our listeners to just help understand it a bit more and see it in a bigger context. It’s certainly a big challenge ahead for American manufacturers and I think you’ve helped at least illuminate some of that road.
Rob Atkinson: Great. My pleasure.
Jeff White: Yeah, and I think if anybody wants to check out your talk, where you’ll be talking even more about the U.S.-China relations and where this is going, they can check you out at the ManufacturEDSummit.com and register there to see it.
Carman Pirie: Thanks again, Rob.
Rob Atkinson: All right. My pleasure. Thanks, guys.
Carman Pirie: Take care, now.
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Rob AtkinsonPresident, ITIF
Dr. Robert D. Atkinson is one of the country’s foremost thinkers on innovation economics. With an extensive background in technology policy, he has conducted ground-breaking research projects on technology and innovation, is a valued adviser to state and national policymakers, and a popular speaker on innovation policy nationally and internationally. A sought-after speaker and valued adviser to policymakers around the world, Atkinson’s most recent book, Big is Beautiful: Debunking the Mythology of Small Business, was released March 2018. Before founding ITIF, Atkinson was Vice President of the Progressive Policy Institute and Director of PPI’s Technology & New Economy Project. He received his Masters in Urban and Regional Planning from the University of Oregon and was named a distinguished alumnus in 2014. He received his Ph.D. in City and Regional Planning from the University of North Carolina at Chapel Hill in 1989.