American Techno-Mercantilism
The case for digital industrial policy
Suppose I sell you something for $8 that cost me $1 to produce and make a tidy $7 profit. You sell me something for $10 that cost you $8 to produce and book a modest $2 profit. Who’s winning here? Oh, also, I print the currency we trade in.
The Trump administration claims that the rules of trade are unfair. That America is the victim of unfair subsidies, IP theft, and discriminatory practices. That America has been forcibly de-industrialized and hollowed out - ostensibly by China.
Thus, as a non-sequitur, the Trump administration has levied tariffs on its closest allies and neighbors. First, it was the 25% tariffs against Canada and Mexico. Then on “Liberation Day”, this courtesy was extended to all other allies - the UK, EU, Japan, South Korea, Australia, etc. Perhaps the worst hit will be Taiwan, where the Administration seems intent on forcing the transfer of its semiconductor manufacturing capabilities to America.
If America cannot stand being out-competed by her once-stalwart allies in their specialties - Canadian resource extraction, German auto manufacturing, Taiwanese chip fabrication, etc. - perhaps those allies should be applying Trump’s trade analysis to America’s dominant export industry: tech1.
Have you ever wondered: why does China - a country as poor as Africa when you and I were born - have frontier foundational AI models when none of America’s allies do? Why do they have cloud hyperscalers when American allies don’t? Why haven’t America’s allies ever been able to make something like TikTok?
Simple. America has de-technologized the free world.
When Donald Trump says trade is unfair, he means that it’s unfair that BYD sells cars that are both cheaper and higher quality than Ford (and probably soon, Tesla). When I say America has de-technologized the free world, I mean that even if you could make something better at a lower price, American tech has rigged the game so you’ll still lose.
You can read my long, and frankly, dry, argument of why it’s impossible to compete in tech but I think the basics are generally accepted:
it’s easy to create monopolies in tech - network effects, API restrictions, bundling, vendor lock-in, etc.
software monopolies in one sector proliferate into monopolies in emerging sectors because the distribution advantage is enormous
tech monopolies train human capital and produce abundant excess capital to be invested in new technologies
Consider this: you will never be allowed to make something better than AirPods.
Apple restricts others from using the APIs that AirPods uses, so no matter how good your hardware is, you’ll never be allowed to write software that makes your wireless headphones as ergonomic. That’s a 20b+/year industry that your countries’ companies are locked out of. Multiply that by Apple’s entire suite of products and then again by the other tech mega-monopolies. The mantra of Silicon Valley is quite literally “competition is for losers”.
The Great Firewall, put in place to protect Chinese citizens from the oppression of ideas like freedom of expression, actually inadvertently protected their companies from American tech. I argue it has accidentally been the single most effective industrial policy ever. They essentially put on the training wheels for their own tech ecosystem, made sure that the inevitable monopolies were domestic, and put them in pole position to expand into emerging technologies.
For all the talk about EU regulations and culture, Chinese entrepreneurs deal with worse. If you were in edtech, you woke up one day to Xi Jinping nuking your entire sector. As your business failed, you might find that VCs were entitled to go after your personal assets to recoup your money, something unthinkable elsewhere but fairly common in China. Dealing with GDPR seems a bit better than all that.
Yet today, the Chinese tech industry is roughly competitive in every sector you can think of, except semiconductors, and completely blows the rest of the free world combined out of the water. Again, this is a country that had a GDP per capita of less than $1000 when their tech giants started up.
Let’s use the same mercantilism trade lens the Trump administration does. The mercantilism of the old empires made the vast majority of the world poorer, by forcibly de-industrializing nations and formalizing extractive institutions. The American monopolies today have made the rest of us not only poorer, but threaten the foundations of our governments and societies.
Democracy under attack: social media
The illusory truth effect is the tendency to believe false information to be correct after repeated exposure.
The illusory truth effect means that when the average person now spends 2h33m per day on social media, the truth is no longer the result of vigorous debate in some marketplace of ideas, but is the result of the content presented by an opaque feed algorithm hosted in America or China.
An algorithm your society has no power over, and no insight into.
Is that the basis for a functioning democracy?
America itself clearly doesn’t think so. A rare bipartisan consensus passed a bill to force the sale of TikTok, due to national security concerns and for some officials, a supposed pro-Palestinian bias.
A single social media platform they didn’t own, and the American establishment freaked out. Does your country even own a single social media platform at all? Meta’s products are as opaque to your government as TikTok is to the US. Maybe once upon a time, that mattered less since you presumably shared the same liberal democratic values.
Shared.
Liberty under attack: the plutocrats and authoritarians
When I saw Trump and Vance’s attack on Zelensky, I was dumbfounded. Initially, by how brazen and awful it was. Afterwards, by what seemed like an orchestrated response by the Tech Right. Various VCs, founders, and podcasters all immediately came out with the same flagrantly false talking points. Such lies they could only have been malicious.
Well, we now know how they all managed to arrive at the same conclusions.
Yes, America’s billionaires spend most of their free time in group chats with people like Curtis Yarvin, who believes America should be ruled by a dictator, and that “it is very difficult to argue that the [Civil War] made anyone’s life more pleasant, including that of freed slaves.”
When the Trump administration started granting white South Africans refugee status (wtf?), Elon Musk’s X took it upon themselves to change Grok’s prompt to push the White Genocide narrative. Hilariously, it would do this on any post, no matter how unrelated. The only reason this was caught was because they did it incompetently (and LLMs are hard to control). What do they do competently that we don’t even know about?
When the American president proposed, publicly and seriously, annexing Canada, Panama, and Greenland, the first reaction of the Plutocratic elite was “How do I make money off of this?”
When the International Criminal Court indicted Benjamin Netanyahu and Yoav Gallant for Israel’s actions in Gaza, the Trump administration sanctioned the ICC. This forced Microsoft to kick the ICC off their business productivity software suite (never mind staffers being warned of arrest if they entered the US). Your country’s entire digital and white-collar economy runs on software like this. Are you free if your economy is subject to the whims of whoever is in the White House?
America sanctions companies run by people with close ties to the CCP. Those companies represent projections of values that are incompatible with the American worldview. Are these values compatible with your society?
Prosperity under attack: the monopolists
I will simply present the graph again.
If you want to work at a frontier AI lab, world-scale infra company, or internet advertising money printer, it has to be done in America or China. That’s the simple result of giving monopolies market access. Shame for everyone else, because these are the highest-leverage, highest-paying jobs out there.
And the talent + capital flywheel means it’s nearly impossible to found future giants in your country because they’ll be outcompeted by the same company in America. Those founders go to America. The Chinese don’t have to worry about this, so they’ve been able to make do with less capital and less talent. On the other hand, how many generational companies have been founded by French émigrés to America alone? Snowflake, HuggingFace, Datadog, …
Even if you don’t care to work in the tech industry, the Baumol effect essentially says that all wages rise in proportion to the highest paying local wages. That’s why a waiter in a nice NYC or SF restaurant makes more than an executive in Spain. Having jobs like these in your country benefits you, no matter what you do.
Of course, you can’t and shouldn’t recreate the entire Great Firewall. But if America will not allow free trade in goods, you don’t have to allow free trade in services! Here’s an idea for trade negotiation: just pick an American monopoly and ban it as retaliation! I’m serious. Competition is for losers. This would have been unthinkable a year ago, but so was everything the Trump administration already did.
The first experiment should be as economically undisruptive as possible, so probably Meta or Netflix, not business-critical SaaS. Banning Meta would probably be good in and of itself, but I digress. This would also probably only work in large countries/blocs like the EU or Japan.
People would instantly start and fund new companies to fill in the money-printing void. You would probably want to study how East Asian countries developed their manufacturing industries to understand how to nurture this. Namely, the purpose is never to pick a specific winner, but to create conditions that both nurture an eventual winner and cull the weak.
The new winner itself probably wouldn’t stop just at social media/entertainment either. Meta and ByteDance show that if you start with software for people to connect with each other, you somehow end up at the forefront of AI.
Likewise, the lesson from both Amazon and Alibaba seems to be that if you wish to create a really good online bookstore from scratch, you must first create a cloud hyperscaler. Perhaps the inverse is true as well.
If that seems too extreme, then consider a digital services tariff. The zero-marginal cost nature of software means that companies have huge margins to stomach tariffs instead of passing it on to consumers. Cutting into tech’s margins would wipe a lot of wealth off American indices given their astronomical P/E ratios. A useful weapon in a trade war, but maybe less so for moving up the modern value chain. At any rate, almost every country has a services trade deficit with America. Reciprocity indeed.
America really does seem intent on breaking and reordering global trade. But every crisis is an opportunity.
More specifically, software and software-defined hardware (e.g. iPhones)