Did the presidential election change the Pacific Rim as we know it?
During these days of transition speculation, there is plenty of talk about what president-elect Donald Trump’s victory means for health care, for immigrants, for the economy, for minorities, for NATO, and so on. In terms of long-term national interests, it’s important to add the endangered concept of a U.S.-centric Pacific Rim to this list. This is because the Trump victory may well spell the end of America’s previous Pacific aspirations.
We will quite possibly see a significant shift of innovation and entrepreneurship westward in the Pacific Rim—indeed, so far West that the center of economic gravity ends up firmly in the Far East.
There are two big reasons for these shifts. First, changes in immigration policy under a new administration will make the U.S. less friendly to talented foreigners seeking to work here. Second, new trade policy is likely to diminish the competitive environment for domestic manufacturers.
The new administration’s anticipated changes to immigration and trade policy are, whatever you think of them and their potential impact on the U.S. economy, a response to real issues. For one thing, globalization has depressed incomes of the middle class—average wages for production and non-supervisory workers is about the same after inflation as in 1974, at $20.67 per hour, according to the Pew Research Center. For another, immigration exacerbated competition for an ever-shrinking pool of low-skilled jobs. Economists have documented, for example, a 6 percent decline in employment and a 2.5 percent decline in wages for low-skilled African-American men attributable to this increased competition.
On top of that, manufacturing employment has been steadily declining for decades and is now at one-third the number of jobs in 1970.
Hillary Clinton promised a continuation of current policy (i.e. these trends) and Donald Trump promised less of them. The voters have now asked for a different engagement with the world that will seek to blunt these three trends.
Immigration policy, in particular, may shift the geography. During the campaign, Trump, with talk of walls and border security, was all over the place. His policy position on H1B work visas and J1 work and study visas has been unclear, through the views of his confidant and nominee for attorney general clearly lean toward more restrictive visa policy.
Overseas news media and businesses—according to reports in the India Express, The Jakarta Post and elsewhere in the Pacific Region—see current visa programs as being in jeopardy. Suffice it to say that whatever new immigration policy emerges will be less inviting to foreigners.
In particular, innovators and tech entrepreneurs from China (vilified in the campaign), Indonesia (the world’s largest Islamic country), Malaysia (another Islamic country), and India (with a Muslim population of 175 million) will feel less welcome. This will be true even if there is an expansion in visa issuance to highly qualified tech people in general.
Instead those ambitious, smart, entrepreneurial innovators will be more inclined to migrate to another hub of technological innovation, perhaps Singapore, Bangalore, Toronto, Tokyo or Shanghai. The more attractive these hubs are to innovators, the faster their local economies will grow, potentially at the expense of U.S. growth. Singapore, with centrality, two large universities, and several small technical colleges and the new Singapore Technology Development Center, is especially ready to take advantage. But others are as well.
Shanghai eased restrictions for foreign science and technology professionals willing to participate in the Chinese Communist Party’s innovation initiatives at its new technology hub in 2015. When I was in Shanghai with a UCLA class last March, we learned that even though China ranked low on IP protection, innovation in the new hub was starting to explode. Silicon Valley Bank, whose original mission was funding new ventures in California, is in a joint venture that provides funding to exciting new Shanghai start-ups.
The U.S. election will push not only people but also the products they produce in a “westward to the East” direction. New innovative products coming out of expanding Asian tech centers will be traded among Asian countries and not as much with the U.S. This is because American trade policy will be less friendly towards imports that compete with U.S. manufacturing.
The rejection of the Trans-Pacific Partnership trade deal and the consequent ascendency of the Chinese-led Regional Comprehensive Economic Partnership (RCEP) will reinforce this trend. Meanwhile, as our innovation edge erodes over time, the U.S. will likely lag in producing, and exporting, cutting-edge goods. Instead U.S. firms may come to copy what the foreign firms are doing much in the way that the Chinese now try to copy what quality U.S. firms are doing.
One might argue that the U.S. is a very large economy and therefore restrictive trade measures are not liable to have much impact. Domestic competition and the ability to sell in a very wealthy market should be attraction enough for entrepreneurs.
While that might be true, protectionist policies—what economists call import-substitution policies that include high tariffs on imports, like those suggested by Trump during the campaign—have been pursued by many countries and studied extensively. The consensus is that, by protecting domestic firms from more efficient international competitors, they hurt economic growth and manufacturing efficiency.
Stagnation in Latin America is in part attributable to a reliance on import substitution. Argentina is a classic case. In 1909 it was the seventh-richest country in the world. Many things went wrong in the 20th century, but import substitution was part of the story. Nehru’s India is another case of a country that insulated itself from world competition because it thought itself a big enough market to go it alone, and suffered the consequences. Myanmar, where I will be writing the next piece in this series in December, took protectionism to extremes and has basically been dormant for 50 years.
The point here is not that the U.S. will stagnate nor that it will become Myanmar, Argentina, or India, but rather that all of the examples of protectionist policies, however mildly applied, lead to a diminution of the country’s ability to be a leader in the protected industries.
A desired move towards a more protectionist economy was one of the key takeaways of the Nov. 8 vote, especially in battleground industrial states like Pennsylvania, Wisconsin, and Michigan. The electorate may have deliberately chosen international withdrawal, opting for stable but less efficient domestic industries over dynamic and nimble leading industries.
It is rare—and very valuable—for a place to achieve critical mass in a certain industry. Critical mass in entertainment occurred in Los Angeles because it was possible to film in a variety of nearby locations all year long. Many states and countries have tried to counter it with subsidies, but Atlanta, Toronto, and others have transferred wealth into Hollywood moguls’ bank accounts in Beverly Hills, and not into a self-sustaining critical mass. The same is true with technology and Silicon Valley. The Silicon Corn Field in Iowa and Silicon Bayou in Louisiana are only shells of what the planners dreamed of for them.
We don’t know right now which places are going to be most competitive and achieve critical mass in innovative industries as the Pacific Rim center shifts west. My money would be on Singapore, with its English common law, low taxes, affluent and well trained work force, major universities, and central location. If Singapore (or insert your top candidate here) in fact hits critical mass, it will be very hard to dislodge. So even if the U.S decides to reverse course on immigration and trade policy in the future, we will have to live with the consequences of this shift.
In 2011, Joshua Kerlantzik in an article in Current History argued that the 21st Century was “not quite yet” the Asian Century. A shift to the west of innovation and technology may well change that.
Jerry Nickelsburg, an economist at UCLA Anderson School of Management, writes the Pacific Economist column. He would love to hear from you at Jerry.Nickelsburg@Anderson.UCLA.edu or via Twitter @jnickelsburg.
*Photo b J. Scott Applewhite/Associated Press.