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Should governments have some sort of enforcement mechanism to prevent offshoring? Specifically first world governments, where offshoring is mostly profitable in the first place.
Thinking of this after reading this post on X which details how a CEO basically took the U.S.'s major manufacturing of rare earth elements or refiner or whatever, and sold it off to China. This seems like a huge issue for all sorts of reasons, but especially national security.
However, obviously this offshoring has happened in many industries over the last few decades and seems to present a bad equilibrium. If all your competitors slash their labor prices by offshoring, how can domestic manufacturing compete at all? Tariffs seem like a way to do this, but apparently everyone and their mother who has any economic understanding says they're evil and bad. I really don't know.
That being said I mean... are there ways to legislate outside of tariffs to prevent this sort of major sell off of strategic business to adversarial nations?
Remember when we were all so concerned about suicides at Foxconn in china 15 years ago? Apple helped china become even more proficient at manufacturing because they gave them the best regulatory deals possible.
It’s curious to me that we lost our edge with goods but became way better with services. Maybe that’s the ideal state if your citizens are mostly knowledge workers, but China is a huge adversary and we willingly let them usurp our chemical and commodities manufacturing strengths.
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Couple of tools. Golden shares is one way. Second is tax code. If you only allow some parts of the money spent outside the US to be tax deductible - suddenly US labor doesn't look so bad. The government has lots of tools. What is usually lacking is the will.
Presumably the money spent offshore is spent by a foreign subsidiary.
This is in no way a barrier to a competently written tax code. How, exactly, does the money get to said foreign subsidiary? There is always going to be a point at which the financial resources leave the country and that's where enforcement can happen.
No, these firms have net foreign revenue that they want to repatriate to the US. In fact, that's the bigger thing they are taxed on.
Microsoft (just to pick an example, could be any of them) can fully fund their entire Indian and Vietnamese operations with a fraction of their overseas revenue. The money would have never entered the US in the first place.
If the money never leaves that other company, never returns to the US and then never gets paid to those executives then I don't think there's any issues with letting those other countries tax it. I don't think there are any issues with saying that money your company never actually lays hands on (a foreign subsidiary does instead) isn't subject to taxation. Of course, if you can't actually bring any money back from a foreign subsidiary there's not much point to having them....
But you can use it to hire some Koreans that can check code into a global repository instead of Americans.
The value of the code written by that subsidiary goes into the conglomerate at large.
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I think something that we should at least try is getting the SEC to require major companies to price in a 10% chance of a strategic China shutdown into their projections for the next year.
They have risk management teams anyways. It'd be much less invasive than trying to do strategic tariffs.
It might not work, but I think it's worth a try.
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Smart leadership solves this.
China doesn't explicitly have a policy against offshoring (though they have been trying to keep India from getting the tools and capital to compete), they have a strategy of fostering industry in their own country. They have smart leadership.
It's not just offshoring that matters, what about foreign countries paying large sums for key workers to come over and share skills? China did this to South Korean shipbuilding when they were in a slump, paid the best people to come over for a few years. And now they have the biggest shipbuilding sector in the world.
And why is offshoring a thing? Energy costs are lower, environmental regulations less severe. Smart leaders would lower the cost of energy and industrial inputs by relaxing the most onerous renewable/environmental/planning restrictions. Smart leaders would make the labour market more flexible (US hasn't done too badly here compared to other rich countries), would prevent ridiculous anomalies like caps on doctor training, would invest more in R&D, would modernize infrastructure, would shamelessly steal other people's IP as they see fit.
Individual policies are ineffective if the leadership is stupid. Subsidies just encourage inefficiency and corruption without discipline. Tariffs can be very harmful for imported components and cause uncertainty if they're raised and lowered willy-nilly.
Subsidizing R&D can also just result in people relabelling things as R&D, reducing energy costs can encourage inefficiency... Everything has a 'perverse incentives' evil twin. Sanctions on exporting sensitive technologies can just be busted or third-party routed around, as the US has discovered with AI chips. Any smart person could tell you that it's dumb to sell rare earth mines off to China, whether it's 1995 or 2025. But smart people do not run the US government.
Individual policies must be well-implemented and precisely targeted by a responsive, dynamic bureaucracy in accordance with a coherent long-term vision. It's a crisis of intelligence, not policy.
China intensively polices any kind of capital or resource outflow. Chinese businessmen have sometimes gotten in trouble for just moving 40 million dollars out of the country to buy an overseas business.
They do police outflows but that's part of their managed float of the currency, it's not freely floating. You have to maintain control on money if you want a tethered currency. It's all part of the plan, they want a cheap currency to have more competitive industries in world markets and to aid their industrial goals.
They want Chinese investors investing in Chinese industry to develop the country more. But Chinese industry is struggling with a very competitive market with razor thin margins (see the Chinese share market's poor returns), investors would much rather buy Sydney real estate which constantly goes up in value. There's this tension between government/national interest and private interests.
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The classic way to do this is just subsidies. If you want strategic resources or production capabilities to stay domestic, you can always just pay for it. This has - across many different nations and decades - worked mostly OK, especially for strategic essentials like food and energy production. Most western nations spend around 2% of GDP on that.
You could double that spending and easily get everything from domestic batteries to chips, from steel to rare earth metals for it. It's an absolutely enormous amount of money, after all.
And while it's probably not the most efficient way to do it since you distort/steer the market (that's the whole point), and if you overdo it you might need some export tariffs (you probably do not want to use tax dollars to subsidize foreign consumers - unless you're China and want to bankrupt your competitors production capability), it will get results.
While I do not doubt that for 2% of the US GDP, you could get some batteries, a decent range of chips and possibly REE refining, I think that for full independence from foreign markets at near-equal performance, even 100% of the GDP would not be enough.
Modern production chains are incredibly complex. A lot of products which are viable if your target market is a few billion people are not viable when your target market is just 300M. Remember when the 2011 floods in Thailand drove up hard disk prices for a year or two, because HDD manufacturing had naturally clustered in the Pacific rim?
Gains from scale are real and significant, they are what is powering the global economy. If someone in the US decides to build a game console which is made out of ore mined in America and manufactured and assembled in the US, that would require investments of many billions and result in a product which would be 10x as expensive as its international competitors.
If you want full autarky, join the Amish.
A better question would be which parts of the production chains you see as strategic important and especially vulnerable, and then think whether it is feasible to onshore these (or subsidize a friendly country building them). At the end of the day, the American people will survive if China will refuse to sell them the latest iPhone, after all.
But full autarky is (and never was) the goal of subsidies. Most countries spend billions on agriculture, and still end up importing a very large percentage of the food consumed during peace time. And that's ok, what matters is having the people, the knowledge and the supply chains set up just in case. Because scaling up and retooling is so much easier than building from scratch, and having the civilian consumer market collapse is a far smaller problem than having your military supply constrained.
So, you don't actually want to mimic the world economy on chips, batteries and REE. Any single type of small brushless motor is enough. Any single type of microcontroller - several generations behind state of the art FAB - is enough. Any type of niche battery format is enough. The rest can be scaled and retooled when necessary.
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Modern military equipment also uses high-performance computer chips. We need some way to get that even if China doesn't want us to expand our military.
I hear this a lot, and I can appreciate that it's probably true to an extent, but "milspec electronics" and "next gen process nodes" don't really overlap as much as you'd expect, as best as I can tell. I can imagine some things it matters for (radars and such), but I don't think process node differences within the last decade are really driving, say, artillery battles or even drones in Ukraine. Maybe in a few years we'll be talking about mostly-autonomous targeting systems with ML, but half of the impact of drones seems to have come from how they became commercially ubiquitous in ways that drove the price down into the "expendable" regime.
Generally I don't see this claim with listed categories of weapons systems, but maybe there is something I haven't thought of. What can you do at 3nm that you can't at, say, 65nm?
Yeah, state of the art FAB is really only necessary for advanced autonomous functionality.
And it's not even any of the more recent AI shit, classic computer vision algorithms, millimeter wave phased array 4D radar or synthetic aperture radar just need to solve a shitload of Fourier transforms, in real time.
But it's worth noting that you can do a lot - and a lot more than we've seen in Ukraine so far - even with just 65nm.
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Even granting that, don't you need rare earths to produce lower-grade chips for ubiquitous drones and all sorts of other things too?
In a commodity drone, the rare earths are in the motors, not the chips.
The main (but not the only) industrial use of rare earths is for strong permanent magnets, and the main industrial use of permanent magnets is electric motors and generators.
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Companies producing weapons and military vehicles already have tons of laws on them that would prevent them from being purchased or suborned by a foreign power.
Literally all that needed to happen was for the government to identify that REE was critical to defense and apply the same rules to them that they do to other defense critical industries.
Unfortunately, the time to do that was around 30 years ago. But in 1995, with the Soviet Union having fallen, and the Tiananmen Square demonstrations in recent memory, and HK still under British control, the government just wasn't thinking about China as a strategic level threat. Thinking ahead 30 years? Eh, they'd probably collapse like the Soviet Union by then anyway, right? Mid/late 90s US was on top of the world, why worry about some rinky dink mining company or two getting bought out by the Chinese?
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You can require the military to purchase only e.g. equipment made of rare earths that are mined and processed in the USA or its allies, with a rigorous supply chain verification. Expect to pay out of the nose for it. (And if you don't get any takers with your initial offer, you're not paying enough.)
Paying out the nose for it would in theory be fine. Since you're paying to your own citizens. Funding infrastructure and human capital and more.
But in reality, implementing anything of the sort would is hazardous at best. As the global marketplace would slowly siphon these gains out of the economy. Resulting in a very similar process to the direct selling of natural resources, just by a thousand cuts.
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