Last week, the federal government reported that the U.S. trade deficit grew by 33 percent in 2010 to nearly half a trillion dollars. Most of the gap resulted from an imbalance in trade with China, which shipped $365 billion in goods to America but only bought $92 billion in U.S. goods. The resulting U.S. deficit of $273 billion in bilateral trade with Beijing reflects a persistent feature of the Sino-American relationship since China joined the World Trade Organization in 2001. Over the last ten years, China has mounted the biggest challenge to the U.S. manufacturing sector ever seen, threatening producers of steel, chemicals, glass, paper, drugs and any number of other items with prices they cannot match. Not coincidentally, the United States has lost an average of 50,000 manufacturing jobs every month during the same period.
There are usually other things happening in the economy that obscure what China is doing to the U.S. industrial base. For instance, some of the job losses were traceable to steady increases in industrial productivity since 2001, eliminating the need for many workers. Last year’s increase in the trade deficit resulted in large measure from higher prices on imported oil (the average cost per barrel rose from $57 to $75) and a greater propensity of consumers to spend as economic recovery strengthened. Exports of services, consumer products and industrial supplies rose to record levels, even though imports rose faster. But when the impact of transient factors is removed it becomes clear that the underlying narrative of U.S. manufacturing in the new millennium is mostly a story of decline. Competition from China is rapidly eroding the industrial foundations of American economic power.
That trend has now progressed to a point where the U.S. intelligence community has become concerned. Richard McCormack reported in Manufacturing & Technology News on February 3 that the Director of National Intelligence has initiated preparation of a National Intelligence Estimate to assess the security implications of waning manufacturing activity in America. National Intelligence Estimates are the most authoritative analyses prepared by the intelligence community, definitive interagency products typically reserved for the most serious threats. So the fact that the nation’s top intelligence official thinks a National Intelligence Estimate is needed for manufacturing isn’t a good sign. It suggests that America’s industrial decline is approaching the status of a crisis.
Federal policymakers have been getting hints that all was not well in the industrial base for some time. For example, when Defense Secretary Robert Gates decided to surge production of armored trucks for the Iraq counter-insurgency campaign in 2007, it was discovered there was only one steel plant in the nation producing steel of sufficient strength to meet military needs. That plant — the old Lukens Steel Company facility in Coatesville, Pennsylvania — had been bought by European steel giant Arcelor Mittal, and already had weapons makers waiting in line for the output its limited capacity could support. Other items needed for the Iraq-bound trucks also were in short supply, such as oversized tires. The Pentagon had to cobble together an ad hoc network of domestic and foreign suppliers in order to ramp up production of the needed trucks, suggesting that the industrial complex FDR once called “the arsenal of democracy” had become a rather fragile affair.
The National Intelligence Estimate being managed by senior intelligence official Lawrence Gershwin will be looking at much more than the military industrial base, because it is supposed to capture all of the adverse security consequences arising from declining manufacturing activity. Take the case of steel. The year before China joined the WTO, the United States and China each produced about 100 million tons of crude steel. But once China was in the WTO, its steel output rose rapidly while U.S. production drifted downward. Last year, China produced eleven times as much steel as America (880 million tons versus 81 million). The huge size of the Chinese industry now makes it a dominant force in both the global steel market and the market for production inputs such as iron ore and metallurgical coal. Few U.S. producers can compete with China’s state-supported producers, and as a result some key products like the “rebar” used to reinforce concrete are no longer produced at all in America.
It’s hard to fault China for the scale of its industrial investment when its needs are so great. China may now have 45 percent of global capacity for smelting aluminum, but it also consumes 40 percent of global output. The problem comes when the Chinese government intervenes to help indigenous producers in what is supposed to be a free trade system. For instance, shortly after joining the WTO Beijing decided to target antibiotics as a growth sector and invested vast sums in building penicillin fermenters. According to a story in the January 20, 2009 New York Times, government subsidies so thoroughly disrupted pricing in the global market for antibiotics that many western producers had to either move facilities to Asia or exit the business entirely. The reason this might matter to intelligence analysts is that the last U.S. source of key ingredients for antibiotics — a Bristol-Myers Squibb plant in East Syracuse, New York — has now closed, leaving the U.S. dependent on foreign sources in a future conflict.