William Krist's Blog, page 37

Federal Statistical Needs for a National Advanced Industry and Technology Strategy

With the rise of China and other robust economic competitors, the United States needs a more coherent national advanced technology strategy. Effectively crafting and implementing such a strategy requires the right kind of economic data. In part because of years of budget cuts to federal economic data agencies, coupled with a long-standing disregard of the need for sectoral and firm-level economic data to inform an industrial strategy, the federal government is severely lacking in the kinds of data needed.

Notwithstanding the hundreds of millions of dollars spent every year and the thousands of economists working for the federal government, the exact nature of the challenges to U.S. capabilities with regard to the competitiveness of America’s traded sectors is only weakly understood. At least since after the Great Depression, the federal government has never felt the need to develop strategic economic intelligence in order to fully understand the competitive position of its traded sectors or to help support overall economic productivity. Rather, most of the focus goes to understanding the ups and downs of the business cycle.

If the U.S. government is going to develop more effective policies to spur competitiveness, growth, and opportunity it will need to support better data collection. It should be able to understand the U.S. competitive position vis-à-vis other nations on key technologies and industries, as well as key strengths and weaknesses and where specific policies are needed.

As such, one of the most cost-effective investments Congress could make would be to significantly expand funding for federal economic and technology data collection. As part of a national infrastructure package, Congress should make a one-time appropriation to fully modernize and expand federal statistical agency IT systems. It should then increase annual funding on an ongoing basis.

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To read the full report by the Information Technology and Innovation Foundation, please click here.

Robert D. Atkinson is the President of the Information Technology and Innovation Foundation

The EU’s Carbon Border Tax is Likely to do More Harm than Good

The EU’s proposed carbon border tax is well intentioned. It is motivated by climate concerns, not by protectionism. However, the tax is based on the false premise of carbon leakage, and its implementation is rife with practical difficulties. Moreover, the tax, as proposed, departs from the Paris agreement principle of differentiated responsibilities, and will be challenged by developing countries. The United States is not ready to adopt carbon taxes, either. The WTO, already in a fragile state, may be dealt another body blow by the proposed tax. Better alternatives are available.

The European Union is a global leader in climate policy. It has made considerable progress in reducing emissions of greenhouse gases, whether measured per capita, per unit of GDP, or by its use of renewable energy. It is raising its decarbonization targets under its Green Deal and in the run up to the Conference of the Parties to the United Nations Framework Convention on Climate Change (COP26) in Glasgow in November. The EU’s climate plans include a carbon border adjustment mechanism (CBAM), outlined in a leaked preliminary draft and due to be formally proposed in July. This would be essentially a tax on imports designed to offset the (notional) difference in carbon price between the EU and its trading partners high emission traded sectors such as steel and aluminum. The EU is under pressure to provide compensation to high emitters who pay higher prices for carbon permits under its emission trading system (ETS). Meanwhile, the CBAM is supported by many in civil society as an effort likely to encourage countries to adopt more ambitious emission reduction measures.

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To read the full report from the Policy Center for the New South, please click here.

Uri Dadush is a Senior Fellow at the Policy Center for the New South, previously known as OCP Policy Center in Rabat, Morocco and a non-resident scholar at Bruegel. 

The Economic Costs of Restricting the Cross-Border Flow of Data

Data is the lifeblood of the global economy—supporting everything from global supply chains and international production processes to e-commerce and the delivery of digital services.

The transatlantic economy depends on data, and proof of this is far and wide. Over the past 15 years, data has enabled trade in digital services between the United States and Europe to double. Data flows help consumers and companies take advantage of US-based digital services providers, including cloud services. More than half of EU companies rely on US-based social media platforms, such as Twitter, LinkedIn, or Facebook, to reach their customers or research consumer trends. More than half of European citizens use these platforms to connect with others. 

Ninety-eight percent of global multinational corporations (MNCs) and 83 percent of EU small and medium-size enterprises (SMEs) we surveyed say they have at least one business use for data.

With the surge in data comes a great responsibility to govern it. Rising concerns about data breaches and consumer privacy have led many countries to adopt data protection rules. The number and restrictiveness of these regulations have grown in tandem with the terabytes of data flowing through the global economy. And the rise of digital adoption as a result of the COVID-19 pandemic will boost emerging efforts to tighten regulations beyond national borders.

The impact of data regulations on the global flow of data cannot be underestimated. Our calculations show that a full ban on cross-border flows of personal data could result in a 31 percent decline in digital services imports from the United States to the European Union. As a result, the EU GDP could contract between 1.9 and 3.0 percent—€264 billion to €420 billion. This effect would persist due to lost trade, limited substitutability of select digital services, and lower company productivity.

Digging a little deeper, our research shows that all companies are affected by tighter data regulations, but SMEs are bearing the brunt of them. Many of these smaller businesses lack the legal and technical capabilities to manage data effectively. Because of costly data requirements, 30 percent of SMEs that use personal data when they trade abroad say they have reduced the amount of personal data that they transfer, process, and store outside the EU. Existing data rules have also forced some SMEs to discontinue selected operations or switch to less cost-effective services providers.

Enabling data to flow freely and support economic activity while also protecting and ensuring privacy is a tall order. Achieving this will require having a thorough understanding of the economic importance of data and the implications of restricting its flow. This is the gap that this study attempts to fill.

The economic costs of restricting the cross-border flow of data

To read the full report from the European Centre for International Political Economy and the Kearney Global Business Policy Council, please click here. 

What is Chinese “Innovation Mercantilism” and how should the UK and allies respond?

Beijing has deployed a combination of protective market policies and economic intimidation to achieve its domestic goals and ward off foreign competition. The alignment between the CCP and enterprise in China’s state-capitalist system enables the Chinese government to subsidise its commercial champions to enter foreign markets having forced foreign firms to engage in technology transfer in exchange for market access. Simultaneously, the CCP works to influence global standards bodies in an attempt to entrench the dominance of Chinese technical standards.

In the current international landscape, Beijing can cripple foreign industries by cutting off access to its domestic market. Atkinson argues that this tactic has already proven effective in recent times, with EU telecoms companies recently threatened with being shut out of the Chinese market should the bloc bring a trade case to the WTO against China for unfairly subsidising its own telecoms giants, Huawei and ZTE.

This matters to the world as China is pursuing global dominance in key industries and technologies through its Made in China 2025 scheme. It is therefore time for a new approach under which like-minded democratic nations agree to come to each other’s aid. Success would depend on members of this ‘NATO for trade’ cooperating to deter Chinese economic aggression that would harm all nations.

China’s state capitalist model and economic playbook have proven to be powerful, and it’s imperative that like-minded democracies have their own strategy, building on each nation’s technological strengths, to ensure that they can compete and prosper economically and technologically.

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To read the full report from the China Research Group, please click here.

Robert D. Atkinson is the President of the Information Technology and Innovation Foundation

The Challenge of Decarbonizing Heavy Industry

Heavy industry makes products that are central to our modern way of life but is also responsible for nearly 40% of global carbon dioxide (CO₂) emissions. Steel, cement, and chemicals are the top three emitting industries and are among the most difficult to decarbonize, owing to technical factors like the need for very high heat and process emissions of carbon dioxide, and economic factors including low profit margins, capital intensity, long asset life, and trade exposure.

Steelmaking uses coal both as a source of heat and as part of the chemical process of converting iron ore to elemental iron. Both of these uses produce carbon dioxide. Eliminating CO₂ emissions from steelmaking requires a change in process. Using hydrogen as the heat source and the chemical reducing agent can eliminate CO₂ emissions, or carbon capture can remove them. Steel can also be recycled without CO₂ emissions, but demand for steel is too large to be met with recycled steel alone.

Cement production also releases CO₂ as part of the chemical process, in this case when limestone is heated to very high temperature to produce calcium oxide “clinker,” the cement’s primary component. Other substances can be mixed with clinker while still maintaining cement quality, but the primary method of decarbonizing the sector is to capture the CO₂ and store or find a use for it.

The chemical industry is different from the other two, encompassing many thousands of processes and products. However, more than 90% of “organic,” or carbon-containing, chemicals are derived from just a few building blocks, which are produced in large quantities and traded internationally. The chemical industry is also unique in that it uses coal, oil, and natural gas as feedstocks that are transformed into final products, not just sources of energy. Fossil fuels will likely still be feedstocks in a zero-carbon world, with process electrification and zero-carbon hydrogen as methods of removing CO₂ emissions. Ammonia is crucial for fertilizer and although it does not contain carbon, hydrogen needed for its production is today made from natural gas, with carbon dioxide as a by-product.

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To read the full report from the Brookings Institute, please click here.

 

Measured Response: How to Design a European Instrument Against Economic Coercion

It used to be the case that the European Union had no options available to it when confronted with other global players’ use of economic coercion against it. This coercion would gravely violate either European or national sovereignty. But, now, Europe has an option available to it strengthen itself against economic coercion. The European Commission is currently in the process of designing an anti-coercion instrument (ACI), which would allow Europe to take countermeasures against third-country coercion and act as a deterrent against coercive practices (similar to the option of a collective defence instrument that the European Council on Foreign Relations analysed last year). The Commission is set to propose the ACI this autumn as part of its Open Strategic Autonomy trade strategy. Member states will then decide whether they would like to establish the deterrent.

But what should the ACI look like? What is the specific gap in the EU’s defences that it would fill? What forms of economic coercion could trigger EU countermeasures? And what sort of countermeasures should it use? How would the EU decide whether to impose them? Critically, could the EU really ensure that the ACI would strengthen its position, given the significant risks involved?

There appears to be an avenue for designing an ACI that would answer these questions, and would ensure the EU became less vulnerable to economic coercion. But it is a daunting task. This report proposes several ideas for how the EU can approach this challenge. It indicates which ideas might be most feasible and effective. It is based on the work of ECFR’s Task Force for Strengthening Europe against Economic Coercion, which brings together high-level representatives from six EU member state governments and the private sector.

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To read the full policy brief from the European Council on Foreign Relations, please click here.

Can China Blunt the Impact of New US Economic Sanctions?

Successive US administrations have embraced economic sanctions, especially financial sanctions, to punish bad actors in Iran, North Korea, Russia, and other hostile countries. Often, US officials leverage the economic pressure on their targets by forcing individuals and companies outside the United States to stop transacting with those on the US sanctions list or face severe penalties. European governments have instituted blocking regulations to prohibit compliance with such extraterritorial US sanctions against their nationals, but with limited success. Most companies forsake business in countries targeted by US sanctions rather than risk losing access to the US market. China is now adopting new blocking rules to nullify the effect of foreign sanctions or other measures “unjustifiably applied” against Chinese nationals. The new rules allow Chinese government officials to issue orders prohibiting Chinese companies from complying with foreign sanctions, essentially forcing them to choose between access to the Chinese market and access to the US market, with penalties possible in either direction. For decades weak foreign pushback allowed unilateral sanctions to remain a relatively powerful tool of US economic statecraft, but the Chinese blocking rules signal a major change to the status quo. The authors argue that multinational firms operating abroad are increasingly at risk of being caught firmly between US sanctions, including export controls, and Chinese countermeasures. These pressures add to growing US-China trade frictions already pushing the restructuring of global supply chains.

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To read the full report from the Peterson Institute for International Economics (PIIE), please click here.

China’s Microchip Ambitions: Semiconductors Advance the Next Phase of Techno-Nationalism

Comprising the ‘brains’ for everything, from AI to machine learning and the internet of things (IoT), semiconductors represent the world’s most essential and coveted technology. China’s tensions with the US and its allies is accelerating strategic decoupling, reshoring, and ringfencing throughout the critical technology landscape.

This study is Part 3 of a Hinrich Foundation series, authored by Research Fellow Alex Capri, that began with the comprehensive primer Semiconductors at the heart of a US-China tech-war in January 2020. This paper will focus on the actions China has taken to catch up to US tech firepower. As with Part 1 and Part 2, this report also revisits the concept of ‘techno-nationalism’ – the neo-mercantilist mindset that links a nation-state’s technology prowess with its national security, economic prosperity, and socio-political stability.

The four themes of previous reports – strategic decoupling, tech alliances, innovation mercantilism, and the In-China-For-China strategy question – are also visited in this report. Export controls and restricted entity lists continue to be weaponized in semiconductor supply chains. Tech alliances continue to affect reshoring and diversification of global value chains.

Download this third instalment to learn what lies ahead for Chinese chipmakers, leading Taiwanese firm TSMC, and the electric vehicle sector that is driving demand for microchips.

Chinas microchip ambitions - Hinrich Foundation - Alex Capri

To read the full report from the Hinrich Foundation, please click here.

China’s microchip ambitions: Semiconductors advance the next phase of techno-nationalism

Comprising the ‘brains’ for everything, from AI to machine learning and the internet of things (IoT), semiconductors represent the world’s most essential and coveted technology. China’s tensions with the US and its allies is accelerating strategic decoupling, reshoring, and ringfencing throughout the critical technology landscape.

This study is Part 3 of a Hinrich Foundation series, authored by Research Fellow Alex Capri, that began with the comprehensive primer Semiconductors at the heart of a US-China tech-war in January 2020. This paper will focus on the actions China has taken to catch up to US tech firepower. As with Part 1 and Part 2, this report also revisits the concept of ‘techno-nationalism’ – the neo-mercantilist mindset that links a nation-state’s technology prowess with its national security, economic prosperity, and socio-political stability.

The four themes of previous reports – strategic decoupling, tech alliances, innovation mercantilism, and the In-China-For-China strategy question – are also visited in this report. Export controls and restricted entity lists continue to be weaponized in semiconductor supply chains. Tech alliances continue to affect reshoring and diversification of global value chains.

Download this third instalment to learn what lies ahead for Chinese chipmakers, leading Taiwanese firm TSMC, and the electric vehicle sector that is driving demand for microchips.

Chinas microchip ambitions - Hinrich Foundation - Alex Capri

To read the full report from the Hinrich Foundation, please click here. 

Why the United States Needs a National Advanced Industry and Technology Agency

With the rise of China and other economic competitors, the United States requires a national advanced technology strategy. While there are many steps Congress and the Biden administration should take—steps the Information Technology and Innovation Foundation (ITIF) has detailed in numerous reports—the most important is the creation of a dedicated national technology agency. Well over 50 nations have already established such bodies. This new agency, ideally at least as large as the National Science Foundation (NSF), would lead a number of core tasks, including analyzing U.S. industry strengths, weaknesses, opportunities, and threats and responding with well-resourced solutions, including support for domestic research and development (R&D) and production partnerships and investment in advanced research facilities.

To be clear, we recognize the political difficulty of creating any new agency, given committee conflicts, a view that such reorganization is difficult, and resistance by some to larger government. But doing so is critical. NSF and the academic science community play a key role in the advancement of basic science, but that is different than supporting technological innovation and value capture in the United States. While the Department of Defense (DOD) plays a key role in technology development, its focus will always be on defense needs. The Department of Energy (DOE) is either focused on basic science or energy technology. What the United States lacks and desperately needs is a free-standing federal entity whose sole mission is supporting advanced technology industry development in order to help America compete.

Such an agency should take the lead in crafting and regularly revising a national advanced industry and technology strategy (AITS). It should coordinate, along with the White House, an interagency process to help align federal, state, and international (allied nation) policies and programs with the goal of U.S. advanced industry competitiveness. And it should be the one place in government that funds activities explicitly focused on commercial competitiveness.

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To read the full report from the Information Technology and Innovation Foundation, please click here.