America is Losing the Shoe Race With China

China not only has more shoes, it is the world largest producer of shoes. How did The United States let this crucial industry, on which modern economies must stand, escape from its grasp?

A better question might be who cares.  The number of shoes is not a good indicator of national power.  In fact, no single technology is a good indicator of national power.  The U.S. economy is vast, decentralized, continental in size, and is guided by actively competitive markets. It has been exceptionally innovative for decades.  Leading in a single technology (like railroads in the 19th century or semiconductors today) reflects a common analytical error that misjudges how economies and technology actually create national power.  The concept of a “race” itself is a questionable legacy of Cold War thinking – the Cold War had a finish line (identified by Eisenhower and Dulles at the onset), while the current situation does not.

Stories about the United States falling behind are so predictable that they form a literary genre.  In 1957, the President’s Science Advisor predicted that Soviet performance in math and science education would give it global leadership in a decade.  In 1969, the Departments of Treasury, Commerce and Agriculture warned President Nixon that a powerful new economic entity, the European Union, would displace the United States.  Starting the 1980s, assorted pundits announced that Japan would dominate the global economy. And until recently, there were routine predictions that China would displace the United States, predictions that still make regular appearances. 

These predictions have two things in common. First, they were wrong.  Second, they were wrong because they counted the wrong things.  They did not place their analyses in the context of larger national economies. Instead, they relied on picking illustrative metrics, usually proxy indicators that provide an indirect measurement of technological success.  One recurring problem is the tendency to measure inputs rather than outcomes.  A politician may have great staff and spend more on an election, but the ultimate metric is how many votes are received.  Claims that the Unites States is falling behind China in 5G because China has deployed more base stations or has more 5G enabled phones reflects a similar confusion over metrics.  It is not the number of base stations that is important, it is the ability to use 5G to create new goods and services (or be more efficient in the use of existing goods and services) that is important, and this is best measured by the monetization of new 5G enabled services and products and their revenue. 

A report that announces that China leads in 37 technologies out of 44 technologies does not explain why the United States is the center for development of artificial intelligence, quantum technology, and biotechnology.  China did not develop successful COVID vaccines, lags in quantum, and there are anecdotes that China’s leaders asked the author of a best-selling 2018 book on China’s coming dominance of artificial intelligence why, if that was the case, were GPT technologies developed first in the United States?  Of the 37 technologies listed, China’s alleged lead is open to question in 23.  Does China really lead in cybersecurity, as the Report asserts?  The digital economy depends on cloud computing, next generation networks (like 5G and 6G), and software (like AI products) and these are technologies where the United States has a strong if not dominant position.  

China is good at manufacturing what others have invented but no longer so good at innovation itself.  This is the result of political change. China was becoming a leading innovator when it was politically open, before 2012.  It still has advantages, but now that it is becoming politically closed, idea creation has slowed, entrepreneurs, investors and researchers are leaving, foreign investment is in decline (because of a perception of increased political risk), and geopolitics frays connections to global research and tech.  Under different political leadership, China would be a much more formidable competitor, but China made a political decision that values continued party control over innovation and its ability to innovate is at risk. 

Similarly, the EU spends significantly on R&D and has excellent research facilities, but its regulations are a powerful disincentive to entrepreneurship and commercialization.  Europe’s major economies have shown flat income growth for more than a decade.  It is not positioning itself to compete in a digital economy, since this requires a willingness to accept risk and allow entrepreneurship. Europe values privacy over innovation.

There is no easy way to directly measure innovation, so there can be a tendency to use proxies like number patent issued, amount spent on R&D, number of PhDs and publications. It seems reasonable to assume that more R&D spending, more publications, and more patents correlate with more innovation and one of their attractions is that they are easier to count, but by themselves they do not explain strength in technological innovation.  Until the last few years, the United States lagged in investment in basic research (the foundation of innovation) and in the infrastructure to support innovation.  Yet it has over eighty years outperformed other economies when the measures are the creation of valuable new technologies and national income. The strength of the U.S. “innovation machine” lies somewhere else. 

The discussion of technology and innovation relies on indirect proxy measurements, like the number of patents. Patents are a metric that must be used carefully.  The assertion that “when a measure becomes a target, it ceases to be a good measure” is particularly true for China’s centrally directed economy, where people perform to meet measures set by Beijing, leading to situation where researchers are rewarded for the number of patents issued (or number of publications) even if no one uses those patents. 

Many quantitative measures may not actually measure technological leadership as it relates to national power.  Specific metrics such as the percentage of national income spent on R&D or the number of patents issued, are inadequate by themselves to predict technological leadership. It is the ability to use technology for commercial and military purposes that is essential.  Looking at the U.S. economy, it is investment in R&D, access to skilled labor, supportive business and intellectual property laws, a dynamic financial system, and an entrepreneurial business culture that explains its overall strength compared to other economies. 

Nor does technological “leadership” guarantee military advantage.  Other factors determine military success, the most important being political will, leadership, and strategy.  An opponent that has an advantage in these areas will be able to resist and thwart a more technologically advanced opponent (the Taliban, for example).  Advanced technology in the service of flawed strategy will not change outcomes.  There is an assumption that technology provides an advantage and, in a contest, where other factors are equal, technological leadership can be critical, but in most situations this technological advantage is only one factor among many in determining effectiveness. Specific quantitative measures may not actually measure what we want to assess.  It may be better to ask what nations want (wealth, international influence, military power) to determine the contribution of a basket of technologies.

These issues are not binary – an outcome where China makes all the shoes, and the United States makes none. We would need to consider both the number of shoes produced and their quality and type, and then ask how shoes contribute to wealth, power, and military strength and whether there are alternative technologies that can substitute for them (since under duress, nations are inventive). Answering these questions requires a broader view than that taken in many reports that looks at the overall economy and its technological base. The best predictors remain overall national revenue and tech market share.

The keys to technological leadership are at the most fundamental level, access to capital and to ideas (both the ability to create new ideas and to use them). Better measures of success include market share (meaning someone actually buys what you are making), the number of startups (particularly ‘unicorns’), revenue, and the long-term trend in national income. These revolve around the central importance of the ability to commercialize research and innovation. This is an area – entrepreneurship - where the United States has had an advantage over Europe and China, both of which score well on proxy innovation metrics but less well for outcomes.  The biggest risks to the U.S. innovation system are political dysfunction and regulatory ideologues. These are domestic problems, not the result of international competition, but is easier to fault China than in the mirror.  

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James Andrew Lewis
Senior Vice President; Pritzker Chair; and Director, Strategic Technologies Program