Yes, Virginia, there is a trade surplus

U.S. companies sell lots of chip-making machines. That's the good news.

Published July 6, 2006 7:12PM (EDT)

First the good news. Despite the widely publicized, and steadily growing, trade deficit that the U.S. suffers from with respect to the rest of the world, there is one industry in the U.S. that enjoys a big trade surplus: the semiconductor manufacturing equipment biz. The U.S., with some competition from Japan and a little from Europe, is at the top of the heap in the business of making the machines that make chips.

Now the bad news. Despite U.S. success in this hugely important market, employment in the industry has plummeted over the last five years, from 50,430 employees in 2000 to 27,212 employees in 2004. The culprit: automation of manufacturing processes, offshoring of subsidiary businesses, and layoffs in response to the semiconductor market crash of 2001.

So even at the commanding heights of high tech, where the U.S. still reigns nearly supreme, the outlook for high-skilled engineers and other employees is not so great. Looking for a job? Maybe you should move to China or Taiwan or South Korea, the countries that are buying the machines that the U.S. makes.

The employment data comes courtesy of a fact-filled report on the semiconductor manufacturing equipment (SME) industry completed by the United States International Trade Commission. This is a great report if you are interested in learning more about the incredibly complex process of chip manufacturing. But it has some holes. For example, it is mystifying how there could be a section discussing China as a market for semiconductor manufacturing equipment without devoting any consideration to the impact of United States government export controls. In the near future, China will probably become the biggest potential market for these machines, but their sale is a highly controversial political football, given the importance of state-of-the-art semiconductor equipment for advanced military technology.

But that's not our topic du jour. The Trade Commission report also contains an interesting analysis of how government support in Japan and the European Union has helped nurture the domestic semiconductor manufacturing equipment industry in those regions. The U.S., says the report, currently offers no federal support or subsidies to the SME industry.

State support of strategic high-tech industries, especially in Asia, is old news, but as I read the report, I heard the recently spoken words of George Scalise, president of the Semiconductor Industry Association, ringing in the back of my head. In an interview with CNET published earlier this week, Scalise made a strong plea for more state and federal support of the chip industry. But heaven forfend that such support be labeled, gasp, as "industrial policy."

"This is all about choosing to compete," said Scalise. " If you ever get to the point where you are viewing this thing as corporate welfare or industrial policy or things of that nature then you have missed the whole argument. It is only about what it will take to compete in this new global economy..."

This is called protesting too much. What the heck does Scalise think "industrial policy" is, if not "choosing to compete"? AMD, the second-largest chip maker in the United States, recently decided to locate a new $5 billion plant in New York. Why did they choose New York? Because the state offered financing help that adds up to about $1.2 billion of the total cost, along with a bucketload of other goodies.

"The preparation of the site," reads a New York government press release, "which began in September 2002, and necessary infrastructure and utility upgrades for this and future projects at the Luther Forest Technology Park is being supported with the assistance of funding from Congressman Sweeney, New York State, Saratoga County, the towns of Malta and Stillwater and National Grid. These improvements include new access and internal roads, water and water treatment lines, improved and expanded electrical service and natural gas to the site and surrounding communities. Road infrastructure and utility upgrades will total $80 million and $200 million respectively."

That's called industrial policy, and in the United States, states do it all the time.

But the federal government stands on the sidelines. While China steadily raises the percentage of gross domestic product that it spends on research and development, that same percentage is falling in the U.S. Indeed, according to testimony before a congressional subcommittee on Technology, Innovation and Competitiveness last year, "U.S. government funding of microelectronics R&D has been declining for a number of years and is projected to decline further in the coming decade."

One strategy for helping U.S. companies compete is to try to prevent nations like China and Taiwan and South Korea from subsidizing their own industrial development. But many of the tactics currently used -- tax holidays, tax treatment of individuals, and infrastructural support -- are not currently against World Trade Organization rules. And strengthening such rules, which is what hardcore free traders want, is likely to be fought tooth and nail, as it will be clearly seen for exactly what it is -- a way to lock in U.S. dominance of crucial industries and prevent other nations from catching up.

Why is George Scalise so afraid of the taboo words "industrial policy"? Perhaps it's because of its long association with the much derided idea that governmental officials can "pick winners." And yet, it doesn't take much brilliance to figure out that as an industrial sector, semiconductors are critical to economic growth. Taiwan picked a winner when it focused on chips. China is likely doing the same. It's a no-brainer!

You just have to shake your head when you ponder the implications of the Trade Commission report. Right now, yes, the U.S. is dominant in a critical industry. But that dominance isn't leading to greater employment in the U.S. and may not continue indefinitely, in the face of determined efforts by other nations to overcome their second, and third, and fourth-place status. Come on, George, don't be shy. Maybe you could start by just whispering the words: "Industrial policy might be smart." There, that wasn't so scary, was it?

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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