An industrial strategy we can all live with

I was recently asked on BBC’s Radio Four whether American “protectionism” was bipartisan. I replied that while I understand why Europeans in particular see things like the Biden Administration’s Inflation Reduction Act as isolationist or self-interested (in the sense that the US is giving subsidies for Made in America goods), I don’t see efforts to rebuild the industrial commons in the US as protectionist. In fact, I see it as a crucial part of how the US can help allies by strengthening itself, economically and politically.

Let’s put aside the fact that anything that gets the US to move more quickly towards clean energy (as the IRA does) should be applauded by Europeans. Rather, let’s focus on the fact that the subsidies are being given for greenfield technologies (like electric vehicles and their components) in which there is plenty of room for more production in both the US and Europe. That’s one of the reasons that I’m also in support of any European subsidies in areas like semiconductors, lithium batteries, etc. We need a LOT more of this stuff, in many more places, ASAP.

What’s more, Europeans should understand that both sides of the aisle in the US are increasingly moving away from the neoliberal system and its laissez-faire approach. In fact, they are even finding common ground in doing so, as witnessed by the National Development Strategy and Coordination Act, put out by Florida’s Republican senator Marco Rubio and California’s Democratic congressman Ro Khanna late last year. While the legislation has been overshadowed by holiday travel debacles and now the debt ceiling, I think it’s a strong indicator of where both parties are going on industrial strategy. I’d be surprised if there wasn’t a larger bipartisan coalition supporting it in the next few months.

The bill, which was crafted by Cornell law professor Robert Hockett, would force all cabinet level agencies to identify weaknesses in their supply chains, and also discuss industrial vulnerabilities in the US across agencies. This goes some way towards creating the sort of whole-of-government approach to supply chains that I’ve advocated for in past columns.

That sort of approach gives government more power to decide what the nation actually needs to underwrite, which is something that progressives like myself and Hockett (who has worked for both senators Bernie Sanders and Elizabeth Warren) would like to see. But it’s also a clever way to offer conservatives a chance to get rid of bureaucratic waste. As Rubio’s office pointed out to me, “we have 118 credit facilities across multiple agencies” in the US. It’s possible that just as private sector supply chain analysis is lifting the scrim on corporate misbehaviour (a topic I wrote about here), you could see a top-down government analysis of supply chains and procurement financing be a smart, transparent way of eliminating waste. That’s something any self-respecting Republican can get behind.

But how to convince allies that this effort is in everyone’s self interest? This gets to the heart of the transatlantic challenge. President Biden cares very deeply about two things — Made in America, and the US’s allies. Those things have been in tension. But they needn’t be. Indeed, historically, they haven’t been. Think about Alexander Hamilton, whose industrial policy was at the heart of the success of the early American republic. He was influenced, as Hockett points out, by European thinkers and leaders like Jean-Baptiste Colbert and his ideas about nation building. And Hamilton likewise influenced people like the German economist Georg Friedrich List.

Development is an ongoing process, one that nations shape together. There’s no reason why the US and the EU can’t have a more constructive discussion about how to come together to support industrial policy for a post-neoliberal era in ways that are win-wins for all. I’d love to see continued discussion about a mutual price on carbon, for example, which would go a long way towards combating Chinese mercantilism — a risk for both regions. (Germany is at risk of making the same mistake with its own industrial commons that the US did 20 years ago.) Or a transatlantic tracking of critical supply chains across industries, which could help shape a mutually beneficial discussion about what really is crucial for states to support in terms of the technology sector, and what isn’t.

Gideon, I know you’ve been quite sceptical of industrial policy in the past. But, do you see ways to bring the US and the EU (which certainly has plenty of its own policies) together on this issue?

Recommended Reading

•  This NYT deep dive on Hunter Biden is good, but it buries the lead (and in fact, the only thing you really need to know) on the bottom of the first column of the jump page (yep, I still read long form in print): “Despite their years of efforts — including Mr. Trump’s attempt to muscle Ukraine into helping him sully the Bidens, an escapade that led to his first impeachment — Republicans have yet to demonstrate that the senior Mr Biden was involved in his son’s business deals or took any action to benefit him or his foreign partners.”

• Nicholas Lemann’s piece in the Washington Monthly is spot on about the shifts in the American political economy.

•  This Big Read by the FT’s Patrick McGee, on whether Apple can disentangle itself from China, is a wonderful analysis of the pickle that the US tech giant is in. For years, it has depended on China for both production and profit. Now, decoupling is totally upending its business model.

• My wise colleague Tim Harford, aka the Undercover Economist, tells us what economic models get wrong about personal finance. I’ll be thinking about this a lot as I try to plan out my next few years’ personal finance trajectory.

• And finally, read my wonderful colleague Martin Wolf’s Weekend FT essay, which is based on his new book coming out in February about the challenge facing democratic capitalism. We don’t agree on everything (like trade dynamics, which I think are quite different for small European countries versus big free markets like the US or state-run systems like China) but his concerns about the tensions between the market system and democracy are worthy and well-stated. I’ll be ordering and reading this book with great interest.

To coincide with Martin Wolf’s new book, The Crisis of Democratic Capitalism, publication, join Martin and other thought leaders online for a subscriber-exclusive event on January 31. Register for free here.

Gideon Rachman responds

Rana, I certainly take your point about the growing bipartisan consensus around industrial policy in the US. In fact, I recently heard Jared Kushner make very similar arguments to the ones you’ve just made. Guess where that happened? Yes, Davos! But let’s not revisit that argument.

You are right that I am sceptical about industrial policy. I think I may be an example of that old saying (but who said it, Swampians?) that if you want to understand somebody’s worldview, you have to know what was happening in the world when they were 20.

I was 20 in 1983 — just as the Thatcherism was taking wing in Britain. The liberal policies that she was pushing (I think you would call them neoliberal?) were a reaction to decades of failed industrial policy. Britain had subsidised all manner of “strategic” industries — cars, shipbuilding, the railways, coal. The results had been almost universally dreadful. Far from being worldbeaters, British industries were decrepit and plagued by strikes.

Thatcher decided to get the state out of the business of “picking winners”. She decided that market forces should decide which businesses flourished and who should receive investment. “Privatisation”, pioneered by Thatcher, became a global trend.

Forty years later, I still think that the reasons that Thatcher ditched industrial policy are broadly correct. Government bureaucrats should not be picking winners. Not only do they waste taxpayers’ money, they also distort the economy. The key to success (at least initially) becomes your ability to attract government money, rather than to design a product that the market genuinely wants. Concentrating investment power in the hands of the government is also an invitation to corruption.

And those are just the domestic effects. Internationally, the spread of industrial policy spells disaster for companies based in small countries that cannot match the financial and subsidy power of the US — or China for that matter. That is a major reason why the EU has cracked down on state-aid and subsidies within its 27-member Union. If they were allowed, it would mean that Germany and France could always crush competitors in smaller EU countries. And an EU-wide subsidy regime would immediately degenerate into a fight over which countries’ companies got the cash.

So, to summarise, you ask is there a way for Europe and the US to co-operate on industrial policy? I don’t know. But I sincerely hope not.

Your feedback

 And now a word from our Swampians . . .

In response to “Celebrity speed dating in Davos”:
“I wonder if anyone has calculated the total cost of this huge gathering of who’s who in this world . . . In the case of firms/private individuals they would have to figure out whether this venture was worth the time and the cost. As far as country representatives are concerned this kind of scrutiny would be evaluated in less numerical terms and it would be difficult to find what these costs actually are. I doubt if anything concrete or binding is ever achieved. At most it is simply a tête-à-tête. So I get this feeling that it is nothing more than a huge party which you attend to boost your ego and most probably, at someone else’s expense.” — Ajay Doshi, Nairobi, Kenya

Edward Luce is on book leave and will return in mid-February.