The magnificent Viktor Schvets of Macquarie with the note:
No decoupling but supply chains will focus on competing blocks
•In Oct ’57, Soviets surprised the world by launching the first satellite (‘Sputnik’). While the US defence secretary dismissed it as a ‘useless hunk of iron’, Edward Teller (father of the hydrogen bomb)was more prescient, describing it as the technological Pearl Harbour. It did not help when early attempts to launch US satellites had all failed, and one of the more popular Soviet comic acts at the time involved an actor walking onto the stage with a small balloon and then exploding it and declaring it to be a Sputnik. When the Soviet audience gasped, he clarified-an ‘American Sputnik’.
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•Alas, it was a mistake to underestimate the US, and after Sputnik, it dedicated massive (unheard of in peacetime) funds to overtaketheSovietsbyboostingstate controlled funding for technology and basic research. In the late’60s, more than 10% of Federal spending was devoted to these areas or 2% plus of GDP (today, state underwritten R&Dis less than 0.6%). Most products that we take for granted (from internet to computers, mobile phones to software) trace their origins to this surge of state funding that lasted well intothelate’70s.
•Recently released White House paper (100-Day review of competitive challenges) reads like a modern day Sputnik moment. The paper focuses in four areas: (1) semiconductor manufacturing and advanced packaging; (2) large capacity batteries; (3) critical minerals and materials; (4) pharma. While it is not clear why these areas have been chosen, there is no doubt that unlike Trump’s reviews of autos, steel or aluminium, this report focuses on the future.
•The review starts by rolling-out statistics of erosion of the US share of global production but then it goes far deeper into linking this loss with deterioration of skills and know-how as well as dismantling of supply chains. For example, it is not just that US share of semis is down from~40% in’90 to ~11% but how this change impacted adjacent areas, as production has circular layers that now by-pass the US. Similarly, reduction in mining eroded mining skills and refining (e.g., China controls 55% of rare earths mining but 85% of refining). In the eyes of the White House, and even after adding Canada, UK & Australia (de-facto domestic), there is ample evidence of strategic and economic weakness.
•It makes for sobering reading and while China is not the only actor reviewed, it dominates discussion. The report touched on the impact of financialization and corporate short-termism but most of the blame was laid on industrial policies of other nations, with China coming for a particularly harsh indictment–everyone employs some degree of state supports but China is doing it brazenly and on an industrial scale while distinctions between state and private sectors are far less pronounced and in many cases non-existent. What is the answer? If you can’t beat them, join them. While the paper is realistic about impossibility of decoupling, it argues that targeted industry incentives (not clear how different these are from subsidies) and revitalized state spending could start moving the needle in favour of the US or at least focusing supply chains within competing blocks. Leviathan is rising and the US has unmatched intellectual strengths, corporate assets, and a massive gravitational pull. It will take time but the train has left the station. Watch US spending and supported return to the’60s levels.
Yep. Competing liberal and illiberal blocs.