Biden’s industrial policy is missing a key ingredient
The era of unfettered free trade is over. There’s bipartisan sentiment in Washington to build what national security adviser Jake Sullivan has called a “new consensus” around “a modern industrial and innovation strategy.” It’s echoed in Beijing and other foreign capitals that are aggressively pursuing protectionist policies. What comes next is still in the incubation phase. Yes, the Biden administration has enacted sweeping subsidies to boost production of semiconductors, batteries and green energy at home. There are already signs of a U.S. manufacturing resurgence. Industrial policy is clearly back, but how it gets implemented will set a precedent on the global stage. Is this new era one of decoupling or a growing trade practice known as “friend-shoring”?
Top Biden administration officials insist it’s not decoupling, which would be a broad retreat from trade. We agree that would be a mistake. A better approach is to deepen trade ties with our allies and like-minded nations, a strategy that might be called maximal friend-shoring. To put it another way, Bidenomics will only succeed longterm with a lot of friends abroad. “Our goal is a strong, resilient, and leading-edge techno-industrial base [of] the United States and its like-minded partners,” Mr. Sullivan said.
The key lesson from the past 30 years of free trade is that the United States failed to acknowledge there would be losers – especially many blue-collar communities at home – or to do much to help them. It also took too long to fight back against China’s widespread and unfair use of subsidies and protections for its homegrown companies. And there was little to no strategic thinking about the environmental costs of mass production of goods in Asia and shipping them around the world – or about the national security imperatives to maintain certain production capabilities in North America.
Meanwhile, policymakers cannot ignore the fact that costs of production do matter in the long run. The premise of trade strategy is that there are huge benefits to having nations specialize in different tasks and then trading goods and services. Done right, trade helps create more growth and consumption, while lowering costs. The proof is evident. More than a third of people on the planet lived in poverty in 1990 (defined as living on less than $1.90 a day). By 2015, that number had fallen to 10 percent. The success was driven largely by the economic rise of China and India.
Another reality of Mr. Biden’s industrial policy is that the United States will not be able to produce everything for the green energy future efficiently. The subsidies might lure investment now, but companies won’t stay here unless it makes sense long-term. The ideal is for the United States to think of this green future as one to build handin-hand with our long-standing allies in Europe, the United Kingdom, Canada, Japan and Australia. This nation already shares security secrets with them, and there have been renewed unity and purpose in the ardent opposition to Russia’s invasion of Ukraine. It would benefit the United States economically, politically, militarily and more to think of tighter trade links, too. All the better if other nations can be brought into the fold as well.
The biggest flaw so far in Mr. Biden’s industrial policy is it’s not been accompanied by strong enough trade policies. There is still no trade deal with Europe. In the Indo-Pacific region, the “economic framework” that is meant to counter China is not opening new markets or reducing trade barriers. Instead of embarking on a broad strategy for global trade, Americans are executing modest maneuvers. For example, the United States and European Union are negotiating a carbon accounting of steel and aluminum production. The Biden team has to do more than just talk about partnerships.
When it comes to industrial policy, Mr. Biden cannot ignore history. The U.S. government has a terrible track record of picking winners. It’s not sustainable for the U.S. government to subsidize industries indefinitely. It’s also an inefficient use of taxpayer money. Consider that the Trump administration tariffs to save steel jobs cost more than $250,000 a job.
There are good reasons for the United States to be less reliant on trade with China. But the focus for the future also has to be forging deeper bonds with our friends.