Lunch Talk: Potential implications of a Decoupling for US High-Tech Industry

October 2, 2019

Yasheng Huang, PhD, Associate Dean and Professor, MIT Sloan School of Management

 

In light of the current tensions embedded in the U.S.-China relationship, the 2019 9th Annual U.S.-China Health Summit warmly welcomed Professor Yasheng Huang to share his insight on the potential implications of a decoupling for U.S. high-tech industry. Dr. Huang holds the positions of MIT Sloan School of Management Epoch Foundation Professor of International Management and Faculty Director of Action Learning, as well as International Program Professor in Chinese Economy and Business and Professor of Global Economics and Management. He is an expert in international business, political economy, and international management, and additionally shares his knowledge internationally, as consultant to the World Bank and founder of China and India Labs, which aim to help entrepreneurs develop their management skills.

Dr. Huang first introduced the current setting of a potential decoupling between China and the U.S. as truly a lose-lose situation, and while the implications of such an event could prove to be just as detrimental to China as it would be in the U.S., his narrative at the Summit addressed the less frequently discussed impacts on the U.S. He proposed four key points that collectively suggest that a U.S.-China decoupling will precipitate in negative consequences, including the U.S. high-tech business model, scale and structure of the government, applications market, and lastly, human capital.

 

His first point on the U.S. high-tech business model addresses the field of research and development. R&D is largely funded by operating income. As a result, anything that negatively impacts the operating income of U.S. tech companies will be damaging to U.S. science. With this in mind, more serious considerations arise with the potential consequences of a U.S.-China decoupling, contextualized by the fact that “U.S. technology companies generate roughly $100 billion to $150 billion in revenues from China annually,” according to the 2018 U.S. investment Jefferies Bank report. This includes large companies including Apple and Intel on the list of the sixteen top U.S. companies that made a total of $105.5 billion from China just last year.

 

Dr. Huang’s second perspective addresses the size and scale of which the government spending in China and the U.S. A key point to recognize is that U.S. federal spending in R&D has not increased in inflation-adjusted terms. As a result, research institutions increasingly turn to other funding sources, like China, to support and develop the ideas that the U.S. cannot afford to fund. Furthermore, the discussion of government R&D spending raises another issue in that it is largely oriented towards basic life sciences research, rather than evenly distributed to also cover immediate commercial application fields, like engineering and material sciences. Additionally, there should be concern regarding tax cuts on the richest 0.1% of the population, compounded with taxing of research universities like Harvard, MIT, and Stanford, under the Trump administration. Dr. Huang proposes the problem with federal spending on R&D in the U.S. is that it funding is driven not by science, but by politics. 

 

Dr. Huang continued onto his third point on the applications market, for which he described certain differing level of development between China and the U.S. In some areas, such as AI, material science, and renewable energy, China actually represents a much larger application market than the U.S., not just in terms of the end product, but also in terms of the intermediate stage, that involves testing, prototyping, and small-scale manufacturing. This has serious implications for both China and the U.S., though particularly for the U.S. high-tech industry in the case of a U.S.-China decoupling, as its large investment in basic science research results in entrepreneurship that will likely require China’s venture capital funds and an eventual manufacturing and applications market in which to develop. 

 

Finally, Dr. Huang addressed his fourth and final point regarding human capital. While the U.S. has previously taken the lead in terms of research and publishing papers, U.S. universities have now come to depend heavily on human capital from abroad, particularly from China. More and more frequently do we see collaborations between Chinese and Americans in current research. Rather than the notion that the Chinese are taking innovations from the U.S., the U.S. should be more concerned that a decoupling will threaten the benefits derived from collaboration. Particularly with the Trump administration’s plans of cutting the allowable number of H-1B visas from the current 60-65,000 to that of the 1970s at only 25,000, there should be greater alarm at a loss of productivity and development in the scientific and technological world. 

 

Dr. Huang ultimately comes to the conclusion that while U.S.-China relations have largely become inflamed during the Trump administration, he proposes that the effects of a potential decoupling have much longer-term challenges than we may expect. While China may have more diversified government funding in more immediately applicable scientific fields, as well as a better developed applications market and manufacturing foundation, the U.S. remains to be a global powerhouse of science and technology, and as such, any impacts to the U.S. will consequently hurt the production of science and technology on a global scale. Ultimately, there are many reasons for which China and the U.S. should continue working together, to complement, benefit, and learn from each other, to continue developing the scientific and technological world. And for those in China who support Trump for undermining the U.S. as rival, he suggests a reconsideration to prioritize collaboration instead, as a decoupling could have a substantial, long-term damaging impact on both countries.

 

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