THE ECONOMIC CONSEQUENCES OF TRUMP’S TRADE WAR

ERKELEY – US President Donald Trump's phony, blowhard's trade war just got real.

THE ECONOMIC CONSEQUENCES OF TRUMP'S TRADE WAR

Jul 12, 2018 BARRY EICHENGREEN asks why the effect of escalating protectionism on investment and financial markets has been so limited.

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The steel and aluminum tariffs that the Trump administration imposed at the beginning of June were important mainly for their symbolic value, not for their real economic impact. While the tariffs signified that the United States was no longer playing by the rules of the world trading system, they targeted just $45 billion of imports, less than 0.25% of GDP in an $18.5 trillion US economy.

On July 6, however, an additional 25% tariff on $34 billion of Chinese exports went into effect, and China retaliated against an equivalent volume of US exports. An angry Trump has ordered the US trade representative to draw up a list of additional Chinese goods, worth more than $400 billion, that could be taxed, and China again vowed to retaliate. Trump has also threatened to impose tariffs on $350 billion worth of imported motor vehicles and parts. If he does, the European Union and others could retaliate against an equal amount of US exports.

We are now talking about real money: nearly $1 trillion of US imports and an equivalent amount of US export sales and foreign investments.

The mystery is why the economic and financial fallout from this escalation has been so limited. The US economy is humming along. The Purchasing Managers' Index was up again in June. Wall Street has wobbled, but there has been nothing resembling its sharp negative reaction to the Smoot-Hawley Tariff of 1930. Emerging markets have suffered capital outflows and currency weakness, but this is more a consequence of Federal Reserve interest-rate hikes than of any announcements emanating from the White House.

There are three possible explanations. First, purchasing managers and stock market investors may be betting that sanity will yet prevail. They may be hoping that Trump's threats are just bluster, or that the objections of the US Chamber of Commerce and other business groups will ultimately register.1

Second, the markets may be betting that Trump is right when he says that trade wars are easy to win. Other countries that depend on exports to the US may conclude that it is in their interest to back down. In early July, the European Commission was reportedly contemplating a tariff-cutting deal to address Trump's complaint that the EU taxes American cars at four times the rate the US taxes European sedans.But this ignores the fact that Trump's tariff talk is wildly popular with his base. One recent poll found that 66% of Republican voters backed Trump's threatened tariffs against China. Trump ran in 2016 on a protectionist vow that he would no longer allow other countries to "take advantage" of the US. His voters expect him to deliver on that promise, and he knows it.

But China shows no willingness to buckle under US pressure. Canada, that politest of countries, is similarly unwilling to be bullied; it has retaliated with 25% tariffs on $12 billion of US goods. And the EU would contemplate concessions only if the US offers some in return – such as eliminating its prohibitive tariffs on imported light pickup trucks and vans – and only if other exporters like Japan and South Korea go along.

Third, it could be that the macroeconomic effects of even the full panoply of US tariffs, together with foreign retaliation, are relatively small. Leading models of the US economy, in particular, imply that a 10% increase in the cost of imported goods will lead to a one-time increase in inflation of at most 0.7%.

This is simply the law of iterated fractions at work. Imports are 15% of US GDP. Multiply 0.15 by 0.10 (the hypothesized tariff rate), and you get 1.5%. Allow for some substitution away from more expensive imported goods, and the number drops below 1%. And if growth slows because of the higher cost of imported intermediate inputs, the Fed can offset this by raising interest rates more slowly. Foreign central banks can do likewise.

Still, one worries, because the standard economic models are notoriously bad at capturing the macroeconomic effects of uncertainty, which trade wars create with a vengeance. Investment plans are made in advance, so it may take, say, a year for the impact of that uncertainty to materialize – as was the case in the United Kingdom following the 2016 Brexit referendum. Taxing intermediate inputs will hurt efficiency, while shifting resources away from dynamic high-tech sectors in favor of old-line manufacturing will depress productivity growth, with further negative implications for investment. And these are outcomes that the Fed cannot easily offset.

So, for those who observe that the economic and financial fallout from Trump's trade war has been surprisingly small, the best response is: just wait

--

John Case
Harpers Ferry, WV

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In Latest ACA Sabotage, Administration Nearly Eliminates Marketplace Enrollment Assistance Funds [feedly]

In Latest ACA Sabotage, Administration Nearly Eliminates Marketplace Enrollment Assistance Funds
https://www.cbpp.org/blog/in-latest-aca-sabotage-administration-nearly-eliminates-marketplace-enrollment-assistance-funds

The Trump Administration this week slashed funding for consumer enrollment assistance and outreach through the Affordable Care Act (ACA) navigator program. The funding cuts, and other changes to the program, will reduce access to crucial assistance that helps consumers make informed decisions about their insurance and sign up for and maintain comprehensive coverage – yet another in the Administration's efforts to weaken the ACA.

The latest cut reduces funding for the navigator program to just $10 million for the 34 states whose ACA marketplaces are facilitated by the federal government. Combined with the large cut last year, navigator funding has now fallen more than 80 percent from its 2016 level.

Navigators raise awareness about the availability of ACA coverage and subsidies, help vulnerable and hard-to-reach communities complete complex eligibility and enrollment processes, assist people with grievances, and connect people to other resources, such as tax experts, as needed.

The Centers for Medicare & Medicaid Services (CMS) makes three flawed arguments to justify slashing navigator funding.

• First, it claims that the need for navigators has "diminished" as the ACA marketplaces have become more visible and familiar. In fact, outreach remains critical in building awareness among people who could benefit from marketplace coverage, research shows. For example, 35 percent of uninsured adults didn't know about the ACA marketplaces in the fall of 2017 and an earlier survey found that nearly half of uninsured adults didn't know about marketplace financial assistance, even though many would likely qualify.

• Second, CMS argues that the navigator program is inefficient, based on a misleading metric. The metric, which finds a relatively high program cost per person enrolled, focuses only on marketplace enrollments completed by navigators. It ignores navigators' other duties, including raising awareness about coverage more broadly. That often results in enrollment in the marketplace by consumers completing the process on their own or enrollment in other programs like Medicaid or the Children's Health Insurance Program (CHIP) that the CMS metric doesn't capture.

  CMS unfairly compared navigator performance to that of agents and brokers using this metric. The metric likely undercounts the enrollments completed by navigators because it links enrollments to navigators using identification numbers that, up to last year, most navigators believed were optional to provide and that they have received little or no training in using. By comparison, insurance agents and brokers have long routinely used identification numbers to ensure they are compensated for work they've completed to enroll consumers.

  In addition, navigators' enrollment counts may be lower than typical insurance brokers' because they work with hard-to-reach and vulnerable populations — including people who live in rural areas, have limited access to the Internet, have limited English proficiency, or have disabilities or other special needs — who often take more time to assist and may have complex eligibility or coverage questions.

• Third, CMS suggests that agents and brokers reimbursed by health insurers can replace navigators. But navigators differ from agents and brokers in that they are required to provide fair and impartial information about health plan options, rather than promoting particular options. They also provide services that agents and brokers generally don't, such as making referrals for individuals to get appropriate assistance if they have a grievance related to their coverage, helping eligible individuals enroll in Medicaid or CHIP, and assisting people in resolving eligibility inconsistencies when their application does not match federal data records.   

Unfortunately, CMS also indicates that it seeks to interfere with navigators' impartial role by pushing them to promote limited-benefit coverage options, "such as association health plans, short-term, limited-duration insurance, and health reimbursement arrangements." As we've explained, such plans can leave consumers exposed to significant financial risk if they become ill or injured, and the proliferation of such plans will result in higher costs for people needing comprehensive coverage.

Finally, the funding announcement, building on an earlier CMS rule, opens the door to other significant changes that may leave consumers in some states without access to in-person, marketplace-funded assistance. The CMS rule changed the parameters for navigator program design, no longer requiring that they have a physical presence in the state they serve or that at least one navigator group in a state be a community-based non-profit focused on vulnerable populations.

Building on these changes, CMS encourages a single group to apply as the navigator organization serving multiple states. It claims that there's less need for face-to-face assistance, and it encourages navigator groups to present "less resource-intensive" outreach and enrollment strategies, like relying on virtual or mobile assistance to consumers. But some consumers — often including the vulnerable populations that navigators have designed their programs to serve — continue to need and seek in-person help.

The dramatic cut in navigator funding and other changes to the program will weaken navigators' effectiveness and ultimately reduce the viability of community-based enrollment and outreach programs tailored to each state's diverse populations. As a result, fewer people will get the impartial assistance they need to enroll in and maintain coverage.

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Chart of the Week: An Answer to the U.S. Wage Puzzle [feedly]

Chart of the Week: An Answer to the U.S. Wage Puzzle
https://blogs.imf.org/2018/07/10/chart-of-the-week-an-answer-to-the-u-s-wage-puzzle/

By Yasser Abdih

July 10, 2018

Hiring is strong, but workers still aren't seeing big raises (photo: Kutay Tanir/Getty Images by iStock).

Wages in the US have grown slowly in recent years, even as the unemployment rate has fallen to the lowest levels in decades. This is puzzling. Economic theory and common sense suggest that companies competing for a shrinking pool of available workers would have to raise wages as the labor market tightens.

What explains stagnant wage growth, then? The Chart of the Week, based on our new study, offers a plausible answer: slower growth in labor productivity—the amount of goods or services produced in an hour of work—and a decline in the share of income that goes to workers. Both have held wages down, overcoming the positive impact of a declining unemployment rate.

The chart shows that worker compensation (the red line) has increased just 2 percent or so each year, on average, since the Great Recession, down from 3½ percent in the eight years before. That's barely keeping up with expected inflation—the blue bars—even though unemployment, or "slack," has diminished, as indicated by the black bars.

How productive workers are is a key factor for employers when making compensation decisions.

A key explanation lies in slower labor productivity growth, as depicted by the orange bars. How productive workers are is a key factor for employers when making compensation decisions. If workers aren't producing as much, employers need to restrain pay growth to sustain profitability.

Another factor that has held down wage growth is a falling share of income that is paid to workers (the green bars). In an earlier study, we examined the reasons behind this decline and found that the bulk of the effect came from changes in technology that are linked to the automation of routine tasks, followed by import penetration. 

The role of slowing productivity growth underscores the importance of policies to encourage investment and innovation while facilitating the movement of capital and labor toward their most productive uses.

Policies also need to foster systems for continuous retooling and upgrading of worker skills. Although education and training programs would not immediately address the short-term adjustment costs for affected workers, over time they could enhance the resilience of employment and productivity of labor. Investing in education and training programs outside traditional channels could prepare future workers to keep up with technological progress and global competition.

Related links:
Understanding U.S. Wage Dynamics
What Explains the Decline of the U.S. Labor Share of Income? An Analysis of State and Industry Level Data 
Technology and the Future of Work

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Krugman: Brexit Meets Gravity [feedly]

Brexit Meets Gravity

Paul Krugman

https://www.nytimes.com/2018/07/10/opinion/brexit-meets-gravity.html

These days I'm writing a lot about trade policy. I know there are more crucial topics, like Alan Dershowitz. Maybe a few other things? But getting and spending go on; and to be honest, in a way I'm doing trade issues as a form of therapy and/or escapism, focusing on stuff I know as a break from the grim political news.

Anyway, as Britain's self-inflicted Brexit crisis (self-inflicted with some help from Putin, it seems) comes to a head, it seems to me worth trying to explain some aspects of the economics involved that should be obvious – surely are obvious to many British economists – but aren't, apparently, as obvious either to Brexiteers or to the general public.

These aspects explain why Theresa May is trying to do a soft Brexit or even, as some say, BINO – Brexit In Name Only; and why the favored alternative of Brexiteers, trade agreements with the United States and perhaps others to replace the EU, won't fly.

Now, many of the arguments for Brexit were lies pure and simple. But their claims about trade, both before and after the vote, may arguably be seen as misunderstandings rather than sheer dishonesty.

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In the world according to Brexiteers, Britain needn't lose much by leaving the EU, because it can still negotiate a free trade agreement with the rest of Europe, or, at worst, face the low tariffs the EU imposes on other non-EU economies. Meanwhile, Britain can negotiate better trade deals elsewhere, especially the US, that will make up for any losses on the EU side.

What's wrong with this story? The first thing to understand is that the EU is not a free trade agreement like NAFTA; it's a customs union, which is substantially stronger and more favorable to trade.

What's the difference? In NAFTA, most Mexican products can enter the U.S. tariff-free. But Mexico and the U.S. don't charge the same tariffs on imports from third parties. This means that Mexican goods entering the U.S. still have to face a customs inspection, to make sure that they're actually Mexican, not, say, Chinese goods unloaded in Mexico and trucked across the border to bypass U.S. tariffs.

And actually it's worse than that, because what is a Mexican good, anyway? NAFTA has elaborate rules about how much Mexican content is required to qualify for zero tariffs, and this adds a lot of paperwork and frictions to intra-NAFTA trade.

By contrast, the EU sets common external tariffs, which means that once you're in, you're in: once goods are unloaded at Rotterdam they can be shipped on to France or Germany without further customs checks. So there's much less friction.

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And frictions, not tariffs, are what businesses are complaining about as Brexit draws near. For example, the British auto industry relies on "just-in-time" production, maintaining low inventories of parts, because it has been able to count on prompt arrival of parts from Europe. If Britain leaves the customs union, the risk of customs delays would make this infeasible, substantially raising costs.

These frictions are also why estimates of the cost of Brexit are comparable to estimates of the cost of a global tariff war, even though the predicted reduction in trade volumes is much smaller.

Still, even if leaving the customs union would be costly, couldn't Britain make up for that by getting a really good deal with Donald Trump's America? No.

Certainly the U.S. couldn't offer hugely valuable tariff reductions, for the simple reason that our tariffs on EU products – like EU tariffs on our products – are already quite low. You can find examples of high tariffs, like our 25 percent tariff on light trucks, but overall there just isn't much to give.

What about a Britain-U.S. customs union? That would be hugely problematic, among other things because given the asymmetry in size Britain would effectively be giving Washington complete control over its policy. Beyond that, no deal with the U.S. could be worth as much as Britain's customs union with its neighbors, because of gravity.

What? One of the best-established relationships in economics is the so-called gravity equation for trade between any two countries, which says that the amount of trade depends positively on the size of the two countries' economies but negatively on the distance between them. You can see this very clearly in British exports. Here's British exports to selected countries as a percentage of the importing country's GDP, plotted against the distance to that country:

Image

The point is that while America offers a market comparable in size to that of the EU, it's much further away, so that even if the UK could make an incredible deal with us, it wouldn't be worth nearly as much as the customs union they have.

All of this explains why May is trying to negotiate a deal that keeps the customs union intact. But that, of course, ain't much of an exit: Brussels will still set UK trade policy, except that Britain will no longer have a vote. So what was the point of Brexit in the first place?

Good question. Too bad more people didn't ask it before the referendum.

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China’s trade numbers look certain to trigger Trump backlash [feedly]

China's trade numbers look certain to trigger Trump backlash
http://www.atimes.com/article/chinas-trade-numbers-look-certain-to-trigger-trump-backlash/

These are strange and dark days. In a barrage of rhetoric and a slew of economic data, China's exports to the United States hit a record high last month, which is certain to fan the flames of the trade war between Washington and Beijing.

As tensions continue to rise between the world's leading economic powers, the US was branded a "bully" by Vice-Minister of Commerce Wang Shouwen at the World Trade Organization in Geneva, while US Ambassador Dennis Shea insisted there was a "reckoning" coming over China's membership of the WTO

Claim and counterclaim swirled around the closed-door, three-day policy review in the picturesque Swiss city as both nations took a tough line.

"China's failure to fully embrace the open, market-oriented policies on which this institution is founded must be addressed, either within the WTO or outside the WTO," Shea said in prepared comments released by the US mission on Thursday.

"This reckoning can no longer be put off," he added.

Less than 24 hours later, official statistics released by China's General Administration of Customs showed the country's trade surplus with the US in June swelled to a record high of US$28.97 billion for a single month.

May's figures

It was also an increase of more than $4 billion on May's figure of $24.58 billion, with the January through to June number coming in at $133.76 billion compared to $117.51 billion for the first six months of 2017.

Naturally, the data will make unpleasant reading in the White House. President Donald Trump has mounted a personal crusade to bring the US deficit down with the world's second-largest economy, which was a record $375.2 billion last year.

He has also targeted the "Made in China 2025" policy involving advanced technology.

But as Beijing hardens its approach toward Washington, the Ministry of Commerce blamed the US for the deficit, insisting the "imbalance was overestimated" and caused by US "domestic structural problems."

"This trade dispute will definitely have an impact on China-US trade and will have a very negative impact on global trade," Huang Songping, a spokesman for the General Administration of Customs, said.

The data comes just a week after Trump rolled out 25% tariffs on the country's imports worth $34 billion before threatening another round of duties worth $200 billion. This, in turn, prompted a tit-for-tat response from Beijing after accusing Trump of starting the "largest trade war" in economic history.

Since then, the Ministry of Commerce has gone into overdrive. Spokesman Gao Feng urged major US companies to start applying pressure on Washington in "defense of their own interests," without going into further details.

"We don't want to have a trade war," Gao said at a press briefing which was reported by the Chinese media group Caixin. "[But] we are not afraid of one, and we will fight one if forced to."

Earlier on Friday, the annual China Business Climate Survey of the American Chamber of Commerce released its annual survey in Shanghai with almost 69% of the 434 companies polled opposing tariffs, despite concerns about doing business in the country and intellectual property rights issues.

Still, US firms plan to increase investment there this year. "Resolving these [trade] challenges in an equitable manner is essential for the United States and China to have a healthy commercial relationship that brings benefits to both our peoples," AmCham said in a statement.

Toning down the verbal barbs appears unlikely in the near future. At the WTO, Vice-Minister Wang talked about Beijing "taking the moral high ground," and made it clear that the world's second-largest economy would "mobilize global forces against the US."

But his comments failed to impress Ambassador Shea, who responded by pointing out that China was simply paying lip-service to WTO rules when it came to state support for major private companies. "China provides massive, market-distorting subsidies and other forms of state support to its domestic industries," he said.

Trade dispute

His remarks resonated with representatives from the European Union, Japan and Canada. They have all aired concerns about President Xi Jinping's administration and its role in all aspects of the economy, as well as excess capacity and cyber-security.

Despite its ongoing trade dispute with the US, the EU is just as concerned with intellectual property rights and China's constant pledges to further open its markets with few tangible results.

The EU Chamber of Commerce in Beijing has called  this "promise fatigue." "[We] urge China to follow through on its promises of reform and opening-up that have been repeatedly stated since President Xi's speech to the World Economic Forum in January 2017," the business group, which represents more than 1,600 foreign firms, stated in a report.

"While some of these pledges have been written into legislation, European companies have yet to see much real concrete implementation," it added.

Significantly, a glance at last month's China trade data showed a 7.9% surge globally for the first half of the year to 14.12 trillion yuan ($2.12 trillion). General Administration of Customs Spokesman Huang said "growth" had been fueled "by the recovery in the global economy," and "new measures" to open up "trade and investment."

Yet those observations are unlikely to placate Washington as the trade war starts to reach a crucial second stage. Expect sparks to fly.

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Europe, migrants and trade [feedly]

Europe, migrants and trade
http://piketty.blog.lemonde.fr/2018/07/10/europe-migrants-and-trade/#xtor=RSS-32280322

Europe, migrants and trade

While European leaders are preparing to tighten the conditions of entry into the European Union it is worth trying to get a clearer picture of the current patterns of migration and more broadly of Europe's positioning in the globalisation process.

The data available are incomplete but are sufficient to establish the main orders of magnitude. The most comprehensive data are those gathered by the United Nations Population Division on the basis of demographic statistics provided by each country and a patient labour of homogenisation. They serve to indicate the trend of the migratory flows entering and leaving the different countries in the world; they also include the sensitive issue of the World Population Prospects established for the decades to come. If we consider the most recent data available, two facts clearly stand out.

In the first instance, the migratory flows entering the rich countries (net of outflows) have fallen since 2010. From 1990 to 1995 they stood at approximately 2 million persons per year, from 1995 to 2000 at 2.5 million and subsequently from 2000 to 2010 exceeded 3 million; the numbers then fell to around 2 million persons per year between 2010 and 2018, the level on which the United Nations base their forecasts for the years to come. The population of the rich countries is in the region of one billion persons (500 million in the European Union, 350 million in the United States and Canada and 150 million in Japan/Oceania). This means that the migratory flow was below 0.2% per annum in the 1990s, before rising to almost 0.2% per annum since 2010. These flows may seem minuscule and, in a way, they are: the globalisation of the years 1990-2018 is primarily financial and commercial and has never reached the levels of migration observed in the 1870-1914 period.

The difference however is that the new migratory flows lead to greater multicultural exchanges involving people of different cultural origins (whereas in the past the migratory flows were primarily internal to the North Atlantic) and that these migratory flows take place in a context of demographic stagnation: the annual number of births is now less than 1% of the population in a number of rich countries. This means that an annual contribution of 0.2 or 0.3% leads in the long run to an appreciable change in the composition of the population. This is obviously not a problem per se, but recent experience demonstrates that this may unfortunately generate successful bids for the political exploitation of issues of identity, particularly if adequate policies have not been set up to promote the creation of jobs, housing and the requisite infrastructures.

The second striking conclusion which emerges from the United Nations' data is that the fall in the migratory flows is mainly due to the situation in Europe. The number of migrants entering the European Union (net of outflows) has been halved, falling from almost 1.4 million persons per annum between 2000 and 2010 to less than 0.7 million per annum between 2010 and 2018, despite the influx of refugees and the peak in 2015. In the United States, where the recovery from the recession in 2008 was easier than in Europe, the flow remained stable (1 million per annum between 2000 and 2010, and 0.9 million between 2010 and 2018.

There is a third fact that is worth bearing in mind alongside the first two. According to the most recent ECB (European Central Bank) data the trade surplus of the Euro zone stood at 530 billion Euros in 2017, or almost 5% of the GDP of the Euro zone (11,200 billion Euros) and the trend is the same in 2018. In other words, each time the countries in the Euro zone produce 100 units of goods and services, they only consume and invest 95 in their own country. The gap may seem narrow but, repeated year by year, it is in reality considerable. Never in economic history, or at least never since the existence of trade statistics (that is, since the beginning of the 19^th century) have we found evidence of such a huge trade surplus for an economy of this size.

Some oil-producing countries have sometimes had surpluses greater than 5% or 10% of the GNP but these are much smaller economies relative to the world economy and are often countries with very small populations (with the result that the happy owners of these resources do not really know what to do with them, apart from accumulating them abroad).This highly abnormal situation, or in any case totally unprecedented, is driven to a large extent by Germany, but Germany is not alone: Italy for example has had a trade surplus in excess of 3% of its GNP since 2015.

For those advocates of the market as being all-knowing and ever efficient, this situation is the rational consequence of aging; European countries anticipate the future scarcity of labour and production to come – possibly even their total disappearance – and are simply saving for their old age. The truth is that we must above all see there the consequence of exacerbated competition with no political guidance and excessive wage stagnation which has led to compressing growth and boosting trade surpluses.

We should also bear in mind that at the moment the Euro zone has a primary budgetary surplus. Tax payers pay more in taxes than they receive in expenditure, with a gap greater than 1% of GNP. Just as Trump's budgetary deficits only make the American trade deficit worse, the European budgetary surpluses exacerbate our trading surplus.

If there does come a time when Europe wishes to revive the policies for integration, it will have to begin by learning how to invest and how to consume once again.

NB: the data series on migratory flows referred to are taken from the UN « World Population Prospects » ; all details are available in this excel file. Data on euro zone trade balance comes from the june 2018 ECB economic bulletin (table 3.1, p.S8). Latest series on Italian and German balances are available here and there

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Unicorns, Creativity and Artificial Intelligence: East Asia’s Modern – High-Tech Entrepreneurship – Brand of Industrial Policy [feedly]

Unicorns, Creativity and Artificial Intelligence: East Asia's Modern – High-Tech Entrepreneurship – Brand of Industrial Policy
https://www.globalpolicyjournal.com/blog/10/07/2018/unicorns-creativity-and-artificial-intelligence-east-asias-modern-high-tech

On September 19, 2014, Alibaba completed its IPO on the New York Stock Exchange. It was an instant classic, as the IPO produced three records. First, it was the largest IPO of all time, with Alibaba (under the ticker: BABA) raising $21.8 billion (on a total valuation of $168 billion).

Just as remarkably, the Alibaba IPO is said to have created the richest men in two countries that day: Jack Ma, the founder of Alibaba, became the wealthiest man in China, and Masayoshi Son, the founder of SoftBank and an early investor in Alibaba, the richest man in Japan.

The tale of Alibaba's record-breaking IPO is notable not only for these headline accomplishments. It is emblematic of the rise of technology entrepreneurship and venture capital in East Asia. Suddenly, the accolades that substantiate the ephemeral success of Silicon Valley as the global beacon of technology entrepreneurship and venture capital investing were endowed on a tenacious and exciting Chinese entrepreneur and a risk-loving businessman turn game-changing Japanese venture capitalist. And, extreme wealth can be created through tech entrepreneurship, rather than maintained amongst corporate dynasties.

September 19, 2014 was not a one-off in East Asia's technology, entrepreneurship and venture capital ascent. In 2017 Masayoshi Son announced the launch of the SoftBank Vision Fund. The Vision Fund was not to be yet another venture capital fund. The Vision Fund would raise a previously unheard of amount for the purposes of venture capital investing: $100 billion. Son quickly assembled large tickets from global investors; $45 billion from Saudi's Public Investment Fund, $9.3 billion from Abu Dhabi's Mubadala, and $5 billion from Apple, FoxConn (and Sharp, though Sharp is now owned by Foxconn, which I will talk about later). In May 2018, news came that the remaining $7 billion would come from a combination of investors, including German car markers (Daimler and Mercedes Benz) and three Japanese banks (MUFG, Mizhou and Sumitomo Mitsui Banking Corp).

It is not only the size of SoftBank's fundraising that grabs headlines. Son is shaking up the Silicon Valley investment arena with his decisiveness and large checks. The Vision Fund was reportedly involved in more than half of the top 10 biggest investments in VC-backed startups. Its largest single investment was in Uber, at the tune of a whopping $9.3 billion in the ride-sharing company.

It's not only SoftBank. Venture capital investing and entrepreneurial activity have been on the rise in East Asia in the 21st century, and especially in the last five years.

In 2013, when Park Geun-hye came to office, she launched the Creative Economy Action Plan from her inauguration address. She spoke of a "2nd miracle on the Han River" – one that would be led by nimble startups, by creativity and innovation. For many, the primacy of creative economy activities has raised the profile of entrepreneurship, which is increasing both the quantity and quality of startups in Korea.

"Made in China 2025" has grabbed headlines globally, since it was issued in 2015. The aim is simple: to advance China's high-technology prowess, with particular emphasis on artificial intelligence, robotics and other frontier technologies. On the 4th of July, a New York Times article asserted that Made in China 2025 will succeed despite Trump and a looming trade war. The confidence in the strategy's ability to deliver in manufacturing advances stems both from the large government support and the buy-in of Chinese companies.

The latest country to grab headlines for its support of high-tech entrepreneurs, and their successes, is Japan. In May this year, Mercari achieved the status of "Japan's first unicorn" – a privately-held company with a valuation in excess of $1 billion – as it filed for a Tokyo IPO worth $1.1 billion. This came two months after The Guardian asked if Osaka was becoming "Japan's Silicon Valley" given the efforts to turn the Grand Front – a stunning complex with a large mall at the bottom – into a tech entrepreneurship cluster through efforts such as "Knowledge Capital" and "The Lab". Consumers, innovators and the broader community would all come together to develop and test new technologies and products.

This all comes as seed funding has been on the rise in Japan since the Global Financial Crisis. Japanese venture capital wasn't just growing, the earliest –stage – and highest risk – form of venture capital was taking off. But venture capital is not a 21st century addition to the Japanese economy; the first venture capital fund was created in 1972, as the Kyoto Enterprise Development, and then in 1982 JAFCO formed the first limited partnership fund in Japan (see Yusuke Asakura's excellent materials).

In fact, the popular "Dragon's Den" and "Shark Tank" format did not originate in Silicon Valley, Route 128, or Silicon Roundabout. The global phenomenon was first created in Japan, as "マネーの虎" ("Money Tigers") and ran from 2001 to 2004.

I wanted to learn more about "Japan's Silicon Valley" and this stunning advance of technology entrepreneurship and venture capital. Last month I visited Kyoto, Osaka and Kobe to see: do you see the buzz? What is the government doing to promote local technopreneurship and equity investing?

I met with city government officials to get a sense of how much the "SoftBank effect" resonates with activity in Japan. I found that innovation, entrepreneurship and venture capital are at the fore of policymakers' minds. There are remarkable efforts around bringing globally-renown accelerators – such as 500 KOBE, the Kobe City instalment of 500 Start-ups – tax subsidies for commercialisation and entrepreneurship, changes to regulations, etc. Notably, in late June the Economy Ministry launched the J-Startup initiative with the aim of producing 20 unicorns by 2023, an aim that certainly feels Silicon Valley-like. 

Why the push – or embrace – of global, high-tech entrepreneurship? And why now? Based upon my recent interviews and research on Japan's ecosystem, I argue that there are three main reasons, and implications:

 

1. Fear of the "Galapagos syndrome": In an earlier period of tech boom, in the 1990s and early 2000s, Japan's cell phone industry is said to be world-leading. But, the great advances did not diffuse, and since the rest of the world did not take up the technologies, Japan's cell phone innovations became an island rather than a leader, or a beacon. It was like the Galapagos: remarkable, but distinct from everywhere else. In explaining the global orientation of Japanese technology today, policymakers speak of wanting to make a concerted effort to be globally relevant – and leading. For this, getting users in China and the US is just as important as the technology itself. So Japan's current startup boom has a distinctly international, and globally interested character.

 

2. Flailing giants and open innovation: Much of Japan's phenomenal economic success stemmed from the tremendous growth of its conglomerates, either the horizontally integrated keiretsu or its vertically-linked zaibatsu (think Mitsubishi and Sumitomo). But in recent years, holes have been spotted in these giants' armour. In July 2017 creditors plead with Toshiba to file bankruptcy following a massive accounting scandal in 2015. In August 2016, Taiwanese firm Foxconn acquired Sharp at a discount. Back in 2012, Sony had reported its largest losses ever, while Nintendo, Toyoto and Kobe Steel all flirted with disaster. The takeaway – for many – is that large firms can't do it on their own. They need the ideas, the innovativeness, and the nimbleness of startups. So they have embraced the idea and practice of open innovation.

 

3. Less Permanent Employment: Along with the challenges faced by leading firms, the notion of "permanent employment" has taken a lashing. The corporate environment in which employees stay as "company men" for life, as the company takes care of the individual just as the worker gives their loyalty, has changed. The troubled performance of what were previously considered steady leaders has shaken the psyche associated with permanent employment. As a result, there is now more mid-career movement. It is not considered (as) uncouth to leave a job mid-career, and to either try to build a startup, or to be recruited elsewhere. In a system where university recruitment was a crucial entry point into high-profile firms, graduates of elite universities sought out a top job and then intended to stay with the company. But increasingly, recent university graduates start businesses, join startups. And, there are now markets (and even apps) for job searches throughout the career.

 

The Japan Times said in a May 2018 headline "Japan shouldn't try and replicate Silicon Valley to spur innovation". I agree. There are certainly Japanese characteristics that are – and should be – distinct, just as elsewhere.

What is undeniable is the fervour in favour of supporting technology entrepreneurship across the region. The aims are familiar across Japan and Korea: to aid the innovation capacity of former giants, to diversify the provision of high-quality (if not permanent) employment, and to foment competitive positioning in the global technology sector. In the case of China, as epitomised by Made in China 2025, the aim is to upgrade capabilities as a crucial driver of development.

It may also be about creating more East Asian role models, along the lines of Jack Ma and Masayoshi Son. The availability of such high-profile, influential business leaders such as Steve Jobs is, of course, part of the Silicon Valley recipe in the 20th century.

 

 

Robyn Klingler-Vidra, a Lecturer in Political Economy at King's College London and author of The Venture Capital State: The Silicon Valley Model in East Asia

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