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Politicians are Wreaking Havoc on the US Economy

“Very large countries such as India and China, unless they are pried and held open to international influences, have a tendency to close themselves up inside their shells in the belief that other countries do not matter to them, so vast is their own domain and so multifarious are its problems.” —Austin Coates, China, India, and the Ruins of Washington (1972).

Well, congratulations, all you bloated beltway cold warriors. You’ve done it.

For two decades, China has oriented its entire technology sector toward the United States, relying throughout its infrastructure on US chip designs, software architectures, networking protocols and other industry standards.

Under that regime, US companies Apple, Microsoft, Google, and Amazon have ascended in ten years to become the world’s four most valuable enterprises. US chip producers such as Intel, Broadcom, and Texas Instruments have flourished. Applied Materials and other US producers of chip manufacturing gear have expanded their markets. US-China trade has spearheaded the global economy.

That’s apparently now over.

In what will be seen as one of history’s most self-destructive technology regimes, United States policy has now persuaded China to bar all foreign computer equipment and software from its governmental facilities within the next three years. According to estimates in the Financial Times, the first phase will entail swapping out 20-30 million pieces of hardware. With the influence of Chinese government policy on its private firms, the long-term shrinkage of US technology business potential is incalculable.

Although for years, Communist party forces in China have advocated decoupling from the United States. Until recently, they have given way to the floods of influence from United States businesses and culture. American companies, university graduates, technologies, and the English language are widespread throughout the country.

But the new Chinese decision echoes new US policy.

The “Entities List” Grows Larger

In October, the Trump Administration arbitrarily extended its Commerce Department “entities list” of banned suppliers.

Formerly restricted to weapons-of-mass-destruction such as nuclear weapons and anthrax, the bans now apply to imaging chips, telecom routers, and face recognition technology. There are no apparent limits on what might be considered an entity to be barred from US markets and components.

From Congress to the Administration, the US has recently become the world’s leading defender of Chinese Uighur Islamists from the ravages of camera surveillance. Uighur terrorists have killed some 500 Chinese in recent years in railroad stations and other public places. One attack narrowly preceded a visit to Xinjiang province by Xi Jinping. Now around a tenth of Uighurs are being trained in Mandarin and other professional skills in “reeducation camps.” These may not be health resorts, but they are probably better for most of their inmates than US Indian reservations where a large proportion of residents become alcoholics.

We have apparently failed to figure out that the alternative to face recognition technology to identify specific terrorists is to capture entire groups. In the absence of face-recognition tools, this was the alternative followed by the US against Japanese citizens put in concentration camps during World War II.

If the faces of specific terrorists are not identifiable, the Chinese will have to use our current Transport Security Administration (TSA) hands-on techniques of treating everyone as a potential terrorist. US politicians justify such undifferentiated intrusions as “protecting privacy.”

The immediate result of the Chinese edict against American suppliers is an unfathomably drastic reduction in the potential markets for US technology. The apparent goal is a decoupling of the US and Chinese economies. The actuality is a Luddite decoupling of the US economy from the future.

The US government apparently upholds the view that China’s acceptance of US operating systems, internet protocols, wireless architectures, and microprocessor instruction sets signifies some impregnable US technological superiority.

We regard Huawei routers in telecom networks as a potential “Trojan horse.”

As if this equipment cannot be tested by the US Telecom companies that would control it. But we see US chips with trillions of transistors in Huawei equipment as no countervailing US vantage point, perhaps exploitable by the National Security Agency (NSA), which is known for its prowess in hacking foreign equipment.

Intel Takes a Major Hit

In a perverse lose-lose policy, we imagine that we can wield supremacy in chip technology as an instrument to disrupt the Chinese economy. At my COSM conference in Seattle last month, White House Chief Technology Officer Michael Kratsios crowed about US “supremacy” in quantum computing and microchips.

But the only major chip producer still manufacturing in the US is Intel corporation. Intel will lose a likely $18 billion in annual sales through the closure of Chinese markets for its chips. Meanwhile, its Chinese rivals such as Huawei will gain huge new markets and learning curve gains. Since Intel from its origins has been largely an Israeli company, some 80% of its Chinese business comes through Israel. That business is also in jeopardy from the Chinese directive.

Making US companies unreliable and politicized suppliers who renege on contracts, technical collaborations, and business relationships on the whims of politicians wreaks more damage to American technology than any hostile policy by China.

Most US chips are already made in China (Taiwan). Although admittedly weak and vulnerable in transgender and climate studies, China now commands the bulk of world engineering and manufacturing talent. While obsessively restricting political freedoms, it continues to expand economic freedoms.

China now has three times as many technology initial public offerings as the US does. Secretary Xi Jinping has recently promoted blockchain as a “core” Chinese forte. Continuing its fabulously successful policy of “special economic “free” zones, China has recently announced a new “free zone” with “free flows” of people, data, and money on Hainan Island, the 13,000 square mile tropical district in China.

To imagine that the US commands a permanent technology lead is quixotic. It is thus akin to the apparent view, prevalent among US academics and politicians, that a futuristic energy source for America is windmills.

In this environment, I believe that the best policy for US investors and the best way to preserve US capital resources is to find technology companies outside the United States. I will be describing such opportunities in Israel and other countries in The George Gilder Report and Gilder’s Moonshots.

Regards,

 

George Gilder
Editor, Gilder’s Daily Prophecy

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George Gilder

George Gilder is the most knowledgeable man in America when it comes to the future of technology — and its impact on our lives.

He’s an established investor, writer, and economist with an uncanny ability to foresee how new breakthroughs will play out, years in advance.

And he’s certainly no stranger to the financial newsletter...

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