Restoring the Sources of Techno-Economic Advantage
SCSP’s Economy Interim Panel Report
Hello, I’m Ylli Bajraktari, CEO of the Special Competitive Studies Project. In this edition of our newsletter, we summarize our third interim panel report, Restoring the Sources of Techno-Economic Advantage.
In this edition of 2-2-2, Senior Director for Economy Liza Tobin and Economy Panel members Brady Helwig, Katie Stolarczyk, Tooba Awan, David Lin, and Warren Wilson call for a techno-industrial strategy (TIS) to fill economic security gaps and generate prosperity for all Americans.
SCSP Economy Panel Releases Interim Panel Report
Last week, the Economy team released its Interim Panel Report (IPR), “Restoring the Sources of Techno-Economic Advantage.” This IPR expands on Chapter 2 in Mid-Decade Challenges to National Competitiveness and is the third of six interim reports from the overall work that SCSP has conducted over the past year.
You can view the reports by clicking the report titles above or by visiting our website.
Reach out to info@scsp.ai with any questions!
AN AMERICAN TECHNO-INDUSTRIAL STRATEGY:
Highlights from the Economy Panel IPR
A few days apart, leaders in Washington and Beijing laid out competing visions for achieving techno-economic leadership. On October 12, the Biden Administration released its inaugural National Security Strategy (NSS), calling on the government to “complement the innovative power of the private sector with a modern industrial strategy that makes strategic public investments.” A day later, Director of the White House’s National Economic Council Brian Deese pointed to recent legislation, including the CHIPS and Science Act and the Inflation Reduction Act, as evidence of progress. A “modern American industrial strategy,” he noted, would be characterized by “strategic engagement, not isolationism.” To emphasize his point, Deese called collaboration with allies and partners “a matter of economic and geographic necessity.”
On October 16, at the 20th Communist Party Congress in Beijing, General Secretary Xi Jinping set forth a vision for China that – like the NSS and Deese’s speech – emphasized strong economic foundations as a prerequisite for technology leadership. Unlike the U.S. approach, however, Xi called on China to double down on a strategy of “self-reliance” in order to “win the battle of key and core technologies.”
The United States enters the techno-economic competition with a number of fundamental advantages: a world-class innovation ecosystem, a productive and still growing workforce, an unrivaled network of allies and partners, and the global reserve currency. America continues to be the top destination for global talent, another key component of the competition.
Despite these advantages, America has no room for complacency. Even with slowing growth, the People’s Republic of China (PRC), as an autocracy with the world’s second largest economy, can continue to direct funding to its military and technology priorities. Concerning long-term trends in the United States, such as the decline of manufacturing over decades, slowing productivity growth, and increasing talent shortages in certain sectors, indicate that technology leadership cannot be left to chance.
Toward an American Techno-Industrial Strategy
To address these challenges and ensure its economy is resilient, competitive, and innovative, the United States needs a techno-industrial strategy (TIS) – a public-private initiative that boosts technology diffusion and fills economic and national security gaps in strategic sectors. America has a long history of leveraging industrial strategy for national advantage, from World War II mobilization to the Apollo Program. A TIS would connect emerging policy efforts in Washington with new ideas and partnerships with the private sector to provide a game-changing boost to the U.S. technology and innovation ecosystem, while providing good jobs and building manufacturing hubs across the nation.
If a targeted techno-industrial strategy were implemented, what could the American economy look like?
Let’s fast forward to the year 2032. As you leave for work, your local Smart City hub monitors and redirects traffic flow, cutting your morning commute in half. An AI-enabled energy grid reduces carbon emissions and your energy bill by monitoring energy usage via billions of cloud-connected sensors and automatically redirecting power from a diversified array of energy sources including fusion energy. Smart factories around the country employ well-paid workers, aided by robots, to produce American-made goods on demand. Amidst all these devices, you are protected by commonsense data privacy laws, security practices, and privacy-protecting technology.
This future vision sounds bright and is within reach. A baseline techno-industrial strategy should have five pillars: 1) ensure America can produce or reliably access critical technology inputs; 2) train and welcome the world’s best technical talent; 3) build the backbone of the future digital economy; 4) extend U.S. global financial leadership into the digital age; and 5) push back against distortionary PRC economic policies. In contrast to Beijing’s pursuit of self-sufficiency, America should leverage its global network of allies and partners – one of its greatest asymmetric advantages vis-a-vis China – to strengthen democratic advantage in the technology competition.
Production: Securing Access to Critical Technology Inputs
Twenty-first century technology platforms depend on critical inputs, such as advanced lithium-ion batteries, microelectronics, and rare earth elements and permanent magnets. But a combination of U.S. outsourcing and PRC industrial policies have left the United States dependent on China and its neighbors. Meanwhile, all of the world’s leading-edge semiconductors - powering smartphones, drones, and AI algorithms – are produced in East Asia, even though many are designed in the United States.
These dependencies have left U.S. national security and its economy at risk. Semiconductor shortages caused by the COVID-19 pandemic drove up inflation and cut U.S. GDP by an estimated one percent. But a military contingency or natural disaster in East Asia could be orders of magnitude worse. A PRC blockade or invasion of Taiwan that disrupted chip supplies would cripple the global economy. To build resilience, the United States should act swiftly across at-risk sectors.
Key Actions:
Advanced Batteries: Build on recent momentum, including the Inflation Reduction Act, to construct a resilient North American supply chain for advanced batteries crucial for storing renewable energy, powering electric vehicles, and supplying energy to the U.S. military. To reduce dependence on China, launch a moonshot for alternative battery chemistries and block PRC battery firms from the U.S. market, creating sufficient demand free from Beijing’s distortions.
Microelectronics: Swiftly implement the CHIPS Act to drive innovation and rebuild U.S. leadership in microelectronics, and create a semiconductor fund of funds that blends public and private capital to stretch investments in America’s microelectronics ecosystem even further.
Rare Earths & Permanent Magnets: Build production capacity in the United States and allied and partner countries, accelerate stockpiling efforts, and set a target date to curb purchases of rare earths and magnets processed and produced in China for military use. Accelerated stockpiling coupled with curbing imports could generate a significant demand signal.
Sources: Kelsi Van Veen & Alex Melton, Rare Earth Elements Supply Chains, Part 1: An Update on Global Production and Trade, U.S. International Trade Commission (2020); Does China Pose a Threat to Global Rare Earth Supply Chains?, China Power, Center for Strategic and International Studies (2021).
Pipes: Investing in America’s Digital Infrastructure
As part of a techno-industrial strategy, the United States must invest in next-generation digital infrastructure, including fiber optic cables, 5G and 6G wireless networks, satellite arrays, and data centers. The United States can still win the race to develop game-changing applications for advanced networks and diffuse their economic and social benefits. Just as the Interstate Highway System launched in 1956 generated hundreds of billions in economic value, today, America must upgrade its digital highways nationwide to lay the foundations for the digital economy. Congress has appropriated more than $100 billion to expand broadband access since 2018, but the United States has lagged behind China in rolling out 5G wireless networks. Advanced networks’ true value will be realized in applications like smart cities and smart factories that are only beginning to be developed at scale.
Key Actions:
National Digital Infrastructure Strategy: Roll out a comprehensive strategy to create the backbone for the digital economy and accelerate innovation and diffusion of next-generation applications.
Wireless Networks, 5G and Beyond: To unleash innovation, provide more available spectrum and testbeds for game-changing 5G applications in smart factories and smart cities. Develop open, programmable network technology (including Open RAN), and pair systems with robust security measures.
Data and Computing Access: Facilitate distributed innovation by making large datasets and high-powered computing resources available to researchers and small firms through a National Research Cloud (NRC). Research clouds in Europe and Australia have leveraged crowd-sourcing to drive scientific discovery on crucial topics such as COVID-19. America should do likewise.
People: Building America’s Future Workforce
People are America’s greatest strength, but we have a lot of work to do to train a modern workforce, attract the world’s best talent, and design policies that advance automation and help workers. Occupations that require digital skills are expected to increase by 15 percent in the next decade, but one third of the current American workforce lacks the necessary expertise. America faces a talent gap upwards of 90,000 microelectronics workers in the coming years. The United States trails other modern economies in adopting robotics, and Americans are more skeptical than their counterparts that AI and automation of work will be good for society. For its part, China is projected to train at least double the number of U.S. STEM PhDs per year by 2025 and is investing heavily in industrial robots. Staying competitive will require the United States to revamp talent pipelines from the Associate’s Degree level all the way to the PhD level and make major investments in the American workforce.
Key Actions:
Education: Train the next generation in critical technology fields by expanding industry and higher education partnerships that leverage industry credentials, apprenticeships, and other programs.
Immigration: Increase the pool of high-skilled workers and students in the United States by better targeting work visas, developing new visa programs for innovative entrepreneurs, and loosening green card limitations for high-skilled talent. The United States must take steps to remain a global magnet for talent.
Automation: Create upskilling and reskilling policies and programs that empower workers and boost productivity. In Germany, for example, firms that adopt robotics also tend to make larger investments in workforce training, leading to lower unemployment and incentives to retain workers.
Sources: Shai Bernstein, et al., The Contribution of High-Skilled Immigrants to Innovation in the United States, Stanford University at 1 (2019); Losing Talent 2020, NAFSA: Association of International Educators at 4 (2020); Entrepreneurship, New American Economy (last accessed 2022); Ashley Brown & Greg Brown, Why America Needs High-Skilled Immigrants, Kenan Institute (2020); William Kerry, Global Talent and U.S. Immigration Policy, Harvard Business School at 2-4 (2020).
Project: Extending U.S. Financial Leadership Into the Digital Age
America’s status as global financial leader is a massive source of advantage. The United States boasts the world’s largest and most liquid capital markets, with equity markets alone valued at $52.2 trillion – nearly four times the size of China’s. This capital seeks out productive investments, creating jobs and prosperity around the world. The U.S. dollar is the global reserve currency, often insulating Americans from price shocks and providing economic benefits in the form of lower interest rates relative to global peers.
Questions are arising about the durability and attractiveness of certain aspects of American financial leadership as emerging technologies reshape the financial landscape. Financial technology (fintech) and mobile applications are driving a massive increase in access to financial accounts in the developing world. Beijing is attempting to reduce its reliance on the dollar by mainstreaming its Central Bank Digital Currency (CBDC) and alternative international payments platforms, and by extending its platforms around the world. To extend its leadership and promote innovation, the United States should modernize its payments infrastructure and digital asset regulations. U.S. authorities should also pursue digital finance policies that increase financial inclusion while generating tech-enabled solutions to privacy and security risks posed by fintech.
Key Actions:
Fintech: Develop innovation-friendly regulations for digital assets, like cryptocurrencies and stablecoins, to protect consumers and offer clarity to innovators. The United States should work with its allies and partners to set international standards for dollar-pegged stablecoins and CBDCs that align with democratic values.
Payment Platforms: Establish a strategy to upgrade U.S. payment systems and promote their use to reduce costs and increase financial inclusion in the developed and developing world.
Trade & Investment Promotion: Expand the U.S. government policy toolkit to support U.S. tech firms’ reach into strategic markets abroad – boosting opportunities for American businesses while advancing U.S. statecraft and diversifying supply chains. This includes scaling up programs that blend public and private capital, such as USAID’s Digital Invest.
Source: Fathom Financial Consulting Limited (2022).
Pushback: Countering Beijing’s Predatory Industrial Policies
Running faster is not enough on its own to maintain America’s techno-economic advantages. As National Security Advisor Jake Sullivan noted at the Global Emerging Technology Summit in September, the United States must “maintain as large of a lead as possible” in strategic sectors. For decades, Beijing has capitalized on U.S. and other advanced economies’ technology, investment, and know-how to power its techno-economic rise, advancing its military capabilities and undercutting American jobs, industries, and innovation. A full-scale and abrupt economic decoupling is unrealistic and undesirable, but America and other democracies should reduce overexposure to the PRC in areas like critical infrastructure and sensitive technologies where interdependence undermines security.
In early October, the Biden Administration announced new export controls to restrict the flow of leading-edge semiconductors (and the critical tools and components used to make them) that power the PRC’s military modernization, AI ambitions, and tech-enabled surveillance in Xinjiang – the Administration’s most significant actions to date to address PRC technology threats. Those actions aligned with the approach SCSP recommended in its report the previous month and set the stage for additional policy actions.
Key Actions:
Export Controls: Apply sector-wide export controls to protect America’s lead in industries beyond semiconductors, such as quantum computing, and deploy cutting-edge AI and open source tools to bolster monitoring and enforcement of existing controls. The United States should also lead allies in the creation of new export control regimes designed for an age of emerging technologies and the challenges posed by Beijing’s military-civil fusion strategy.
Inbound and Outbound Investment Screening: Strengthen existing commonsense guardrails, and develop new ones, to ensure that the United States does not transfer its technological crown jewels to adversaries or provide capital and expertise to Beijing that advances its military capabilities and undermines U.S. technology advantage.
Market Access: Ensure that U.S. and allied firms can compete in markets that are fair, governed by the rule of law, and free from PRC distortions and economic espionage. Unless Beijing reins in its policies that distort market competition and seek to monopolize strategic sectors globally, the United States and its allies and partners should selectively restrict PRC access to their markets. Meanwhile, America should seek to deepen trade and investment with allies and partners.
Conclusion
The techno-economic rivalry is, at its heart, a contest about whether the PRC or the United States and fellow democracies can better deliver for their citizens. With the right techno-industrial strategy, the United States can harness the wave of new technologies to strengthen its strategic position in the world, create a healthier, innovative society with expanding equality of opportunity, and present a democratic model worthy of emulation.