International Economic Law and Policy Blog

Overcapacity and future discussions in the SCM Committee.

Finbarr Bermingham reported on Wednesday, April 23, 2024, that in the recent SCM Committee meeting, there were ‘sharp’ exchanges between the US and China related to Chinese ‘overcapacity’ in key sectors owing to subsidies. China objects to the term ‘overcapacity,’ arguing that there is no clear definition within the WTO treaty architecture. Some of the US’s (and other members’) concerns at the SCM Committee stem from a related problem: WTO members lack information about the extent of Chinese industrial subsidies, making it difficult to know which elements of so-called overcapacity issues require closer inspection and governance. For China, overcapacity is a cloak for concerns with domestic competitiveness and ‘an excuse for protectionism.’

Is the absence of consensus on the legal requirements of ‘overcapacity’ a problem for WTO members seeking to address Chinese policies? I’d argue no. In fact, there’s a long history of trading partners working through government interventions through the GATT’s nullification and impairment clause.

According to the Rhodium Group, '[t]he simplest and most widely accepted definition of overcapacity is when factories’ production capacity is under-utilized.' This has a knock-on effect on global markets. When domestic production capacity far exceeds demand, firms lower their prices and search for foreign markets for their excess capacity. In 2015, the OECD reviewed growing imbalances in steelmaking. The OECD noted that the problem of growing imbalances stemmed from both the extent of and variety of government interventions that distort markets, including government subsidies, foreign investment controls and administrative hurdles that limit entry of new steel facilities.

In addressing China’s continued subsidies, Simon proposes members bring adverse effects cases to the WTO, citing the key parts of Article 5.

    Article 5: Adverse Effects

    No Member should cause, through the use of any subsidy referred to in paragraphs 1 and 2 of Article 1, adverse effects to the interests of other Members, i.e.:

    (a) injury to the domestic industry of another Member11;

    (b) nullification or impairment of benefits accruing directly or indirectly to other Members under GATT 1994 in particular the benefits of concessions bound under Article II of GATT 1994¹²;

    (c) serious prejudice to the interests of another Member.13

    ----------------------------------------------------------------------------------------

    11The term "injury to the domestic industry" is used here in the same sense as it is used in Part V.

    12The term "nullification or impairment" is used in this Agreement in the same sense as it is used in the relevant provisions of GATT 1994, and the existence of such nullification or impairment shall be established in accordance with the practice of application of these provisions.

    13The term "serious prejudice to the interests of another Member" is used in this Agreement in the same sense as it is used in paragraph 1 of Article XVI of GATT 1994, and includes threat of serious prejudice.

Article 5(b) addresses nullification or impairment of benefits, with a note that connects this term to the relevant ‘practice of application’ of the GATT provisions.

As many of you know, the non-violation nullification and impairment clause enables members to deal with contract incompleteness - government measures not covered by any WTO agreement (see also Horn, Maggi, and Staiger (2010) and Hudec 1990 and 1993). As Alan Sykes and Robert Staiger (2013) observe, the clause played a critical role in facilitating the ‘shallow integration’ approach that the GATT adopted – a non-violation claim creates a legal right for a complainant to receive compensation, in response to which the responding member can either pay or remove the measure in question, eliminating the nullification or impairment of the complainant’s benefits. The origins of the nullification and impairment clause stemmed from interwar trade negotiations concerning a formula of equitable treatment for trade agreements. In the League of Nations’ economic work, an American negotiator proposed ‘nullification or impairment’ language for future trade agreements that recognised that when it came to uncertain or indirect forms of administrative protectionism, governments needed a formal right to address frustrations with anticipated commercial benefits of negotiations. Robert Hudec reflected on the GATT concept of ‘nullification or impairment’ from this history, noting that it provides ‘equitable remedies for trade injuries not involving a breach of legal obligations.’

The main purpose of the GATT is to facilitate a balanced exchange of tariff reductions, along with requiring all contracting parties (now WTO members) to act in a manner consistent with the principle of non-discrimination. However, if a government must act in a way that distorts markets, the GATT includes commitments that a government consider concepts of fairness and equitableness when participating in global markets. For example, Article XVI:3 of the GATT 1994 evolved into prohibiting export subsidies within the SCM Agreement. However, at its root, the contracting parties ‘seek to avoid’ export subsidies (on primary products). When a government does ‘directly or indirectly’ subsidise exports, the subsidising government cannot receive ‘more than an equitable share of world export trade.’  (Aside: as per Ad Article XVI:B.2, a “primary product” was vital to development and understood to be any product of farm, forest, fishery, or any mineral). Another reference is found in Article XX(j) of the GATT, whereby if members purchase products that are globally in short supply, that member must remain consistent with the principle that all members ‘are entitled to an equitable share of the international supply of such products.’

I do not want to mask the causality problems involved with the ‘equitable’ language. In 1982, Colin Phegan wrote about the political sensitivity captured by GATT XVI:3, raising questions about the disciplining of ‘equitable sharing’, such as the threshold by which a country’s share in global markets becomes ‘inequitable’ or demonstrating causality between a subsidy and the increase in the share of global export trade.

But I do want to suggest that, where there are concerns about overcapacity, it seems entirely possible for the US and other members to bring an adverse effects case and seek non-violation nullification and impairment remedies, resting on the idea that when a government’s subsidies create global imbalances, there is a legal foothold to question whether the situation is equitable, even drawing parallels to the early consideration of export subsidies for taking ‘more than an equitable share of world export trade.’ Could this apply to domestic surplus across many industrial sectors? Perhaps not. Yet it seems that the multilateral trading system did embed these principles into the GATT knowing that state trading economies existed and would trade in global markets, explaining why we have non-violation cases and references to commitments that such state trading economies accord to the trade of other members’ fair and equitable treatment. At the very least, raising the concept in a non-violation nullification and impairment case seems a starting point for WTO engagement.

Whether this could work in the current state of WTO dispute settlement remains crucial. At the bare minimum, it may be time to examine the origins of these subsidy commitments and consider whether the EU, US, and other members have legal footing to open a discussion in the SCM Committee.

The Meaning of Economic (In)Security.

I posted a new working paper drawn from years of archival research that disrupts contentions that Cold War-era trade institutions fail to offer stability or predictability in the global economy due to advanced economies’ economic security strategies. The history is rich and exciting, and a future post may offer a summation of my redescription of the making of the postwar global economic order and its early tests with the elevated tensions between the Soviet bloc and Western free-market countries. Such historical analyses show a delicate sensitivity to state insecurities with trade multilateralism and reveal how such interferences were core to this system, not acts of violation or evidence of its impotence.

But I want to stick to the present. The WTO need not face its death just because governments are reimagining global economic integration. Instead, policymakers should move away from questions about the reviewability of the security exceptions and break down questions of self-sufficiency, conservation, and defeating foreign economic competitors within the multilateral trading system.

Economic security may be the paper that covers rock. It is far broader, abandoning any notion that economics and security are antinomies. Nor does it demand governments dwell on legal assessments between what is a rule and what is an exception in WTO terms. In the face of rising unilateral trade actions, the WTO defined ‘economic security’ as ‘resilience’ and ‘the ability of a system, including households, firms, and governments, to prevent and prepare for, cope with, and recover from shocks.’ The emphasis on prevention and preparation collapses notions of wartime, peacetime, or the transition period in between. No longer compartmentalised by ‘exceptional’ times, economic security stretches how security interacts with trade policy. States that refer to economic security emphasise ongoing evaluation and management of economic action in the highly integrated global economy, whether it is firms’ market power, technology transfers through foreign investments, or even classic efficiency gains from trade. The legal consequences of sustained economic security trade actions for the multilateral trading system remain unknown. However, any member may challenge the legality of ongoing strategies based on benefits being ‘nullified or impaired.’

I have developed a conceptual framework for economic security based on my historical assessment. I divide economic security into four buckets: two short-term and two long-term categories.

Short-term (ST): urgent, temporary responses to known threats that do not seek to alter existing markets.	Long-term (LT): preparedness and potential of unforeseen contingency; responses suggest governments do not take market structure as given.
ST1: Re-arming Trade restrictions related to ‘hardcore’ military interests, such as arms, ammunition, and implements of war.	LT1: Self-sufficiency Trade restrictions to develop the resiliency of a domestic economy. Lt1A: Domestic productivity (inward) Lt1B: Trade diversification; Multiple supply sources (outward)
ST2: Insecure Supply Trade restrictions related to an urgent event that demands a temporary workaround to address essential short-supply issues.	LT2: Breaking and Re-making Markets. Trade restrictions to weaken/slow economic opponents or to prevent a state (or its firms) from dominating the design, production, distribution, or trade of critical materials. LT2 measures aim to break and structure global markets, requiring future planning that can engage LT1 and ST2 measures to rebuild market structures or supply chains.

Some buckets fit neatly within existing institutional structures and rules. However, one bucket does not. Long-term economic security strategies of members that resolve to break and remake global markets are – at the roots – about members reacting to another member’s success within the globalised economy. Rather than complain to reverse restrictions, amend arbitrary or unjustifiably discriminatory practices, or countervail unfair trade practices, this long-term strategy focuses on powerful members remaking the markets that drastically reduce that member’s capacity. Underlying this bucket is the idea that long-standing economic competitiveness justifies severing supply chains – a deliberate, permanent choice to eliminate MFN treatment to another member. Members further pull these long-term actions outside the conventional ‘legal’ world into ‘non-law’ purgatory to escape an MFN violation. I use the word choice of purgatory deliberately, signalling a gap in WTO institutions. Within the paper, I identify these actions as LT2.

Members need not respond to a present threat when invoking economic security within this LT2 bucket. Governments emphasise the potential for unforeseen contingencies and speak to government anticipation of circumstances giving rise to economic security concerns. It speaks to state intervention for broad preparedness and potential, tethered to states’ dynamic views of economic security. Some explanations are the monopolisation of strategic markets or their contribution to excess global capacity, which impairs other states’ markets. Governments may push this further to assert that another state has a monopoly on production due to the exploitative activities of a dominant firm. As an example, the United States’ sweeping measures to bolster its competitiveness with China follow a political logic that views China as a ‘challenge to the international order’ and a significant threat to international rights and the goal of advancing democracy globally. Beyond the obligation to invoke security according to a member’s good faith obligations, there is nothing within WTO rules and institutions to effectively manage actions that thrust WTO commitments into purgatory. As LT2 strains the MFN principle, its crucial WTO members supplement the gap with other norms and principles to structure their actions and coordinate trade within the global economy. In other words, simply raising security exceptions leaves too much government policy as ‘untouchable.’

Within the paper, I detail an early experiment with international government coordination on the short supply of critical materials. Within the bounds of infant institutions for the multilateral trading system, the ‘free world’ economies used the Korean invasion in 1950 to drive what one official described as a temporary, urgent ‘super-government cartel’ for critical supply chains. Inbuilt into the newly established global economic order was an inherent contradiction regarding the permissiveness of state interferences in producing and trading goods. Rather than break the MFN norm and exist in violation of the GATT, the US-led ‘free world’ controlled the supply of materials informally, collectively, and under the principle of equitable allocation. A shared interest in critical materials for defence facilitated this contradiction, giving states a temporary legal foothold in the loosely held-together rules-based trading system. Equitable allocation would develop a double meaning for “free world” economic policymaking: it promised these countries a voice on distribution and interlocked production to US military preparedness. Although the GATT would reconstitute a global economy rooted in international legal structures, informal structures embedded within US military demands divided the global economy, too.

Where does this leave us? For one, WTO members can reimagine the idea of equitable allocation as the contrary force to equality of treatment (already captured within the existing WTO agreements). One pathway I found convincing was the work of green economy collaboration by Emma Aisbett and her co-authors that emphasise mutuality and conservation to dictate the contours of state intervention – a dramatic reorientation from US militarism.

At first glance, it might seem the notion of equitable allocation is alarmingly unhelpful (and if one looks over the bridge to the investment law world, there are many precedents to support issues with equitable treatment). However, I argue that international norms ground institutions and there is an apparent absence of norms settling relations when one speaks of LT2. Consider it this way: current dispute settlement reports where one member has invoked GATT Article XXI reveal only one key finding – the relations between the members must be near or at complete breakdown. There is, thus, nothing to help members come back from deterioration. Ungoverned, LT2 actions may only encourage governments to act alone and deny economic globalisation.  If WTO members reimagine globalisation, as perhaps towards global public goods and mitigating climate change, they must have the legal infrastructure to do so.

I’ll be brief here, but another potential pathway is to evolve the economic underpinnings of the multilateral trading system and establish dynamic, collective governance on materials that speak to the global challenges many members need to prioritise (in addition to their domestic interests!). To shift LT2 actions away from unilateral actions focusing on abuse and coercive practices, members may coordinate on select materials or goods they conclude no single member may dominate global capacities. An involved new form of governance entails negotiating new schedules and submitting to warning mechanisms that effectively let WTO members prepare for and manage supply chain dominance (as they define it). This entails significant reimagining of transparency and notification requirements and greater demands for providing reasons for, among other things, domestic capacity targets and purchasing powers on a rolling basis.

Many developing countries understand economic integration as vital to their economic security because of the role of trade in reducing extreme poverty and inequality. Even if the economic security strategies do not threaten the foundations of the system, efforts to shift multilateral trade governance to a new agenda set by industrialised economy members’ economic security strategies fail to address what Sylvia Ostry described as developing countries' ‘unfinished business of past negotiations.’ Just as there is a concern among advanced economies that existing legal structures are blind to the risks of economic integration, unilateral actions in response to these risks threaten developing countries’ growth capabilities, with risks of fractured global value chains and increased trade costs, particularly in agriculture and services. In this sense, the normative power of economic security strategies chokes the deliberative functions of the WTO.

The WTO remains an important forum for all governments to connect and deliberate on the supply of goods and services. Yet, WTO members must take great care in recommending ‘better’ management as the solution without a robust and clear articulation of the problem. Focusing on a solution to chase a problem fails to match the institutional form to the problem institutions are meant to address. Members must first articulate what domestic economic security policies aim to do, what (and whom) they protect, and what international coordination should achieve.

Katherine Tai on Industrial Policy, the Global Steel and Aluminum Arrangement, and EU Digital Regulation

Last week, U.S. Trade Rep. Katherine Tai spoke at the Center for American Progress. You can watch the whole event here. As I try to do whenever I have time and she says something in the Q & A that intrigues me, I'm going to quote a few things she said and comment on them. The three topics from this event that I'm commenting on are: industrial policy, the global steel and aluminum arrangement, and EU digital regulation

First up is industrial policy. Here's what she said:

Question:

I want to start if I can with the 30,000 foot elevation of what this new industrial policy means. We know that this administration across the board, from the president, all the cabinet agencies, have worked furiously to actualize this historic commitment to renew ... industrial policy in the country, that has reinvigorated industries across the board, and has made a significant contribution to the states that you mentioned before that have been hollowed out. Can you kind of ground us in what that means for ensuing 21st century trade policy through your vision? ...

Tai:

That's a great question and a really important foundation and foundational place to start from. You know, I think one of the really important aspects of what we're doing now is that nothing ... in what we're doing is really a traditional approach. And I think that it's really important to recognize this, because I think that it gets lost in the conversation sometimes, that if it's not the thing that you've been doing over and over again, then ... what could you possibly be doing? But if you just look at the world around us, from the economy, to geopolitics, to supply chains, and sort of the clockwork of ... how we are interconnected to each other across all areas, you just see significant amount of change that's happening. And so from our perspective, in order to be responsible, and responsive, the trade policies that we pursue have to reflect the changes. And, moreover, it's not just change for change sake, but that we're pursuing a really positive affirmative vision for the kind of economy that we want to have, for the kind of economy that we want to lead in partnering with the rest of the world, to push towards a version of America, America in the world, and the rest of the world that is bright, where you can see a long future ahead of you, and that you see a sustainable path. And one where we feel like opportunities are rife, and that they're not shallow.

So bringing that back to where we are now, one is the recognition that there's change all around us, and we have to respond. We have to be positive about where we're driving towards. The other is to recognize that we're not writing on a blank slate, that the current economy that we have reflects decades of trade policies, but also economic policies, that have led us to a certain set of outcomes. So if you look at overall US GDP, we are still the largest economy in the world, we are extremely vibrant. But you also have to recognize that sectorally there's a significant unevenness. And while parts of our economy are incredibly strong, powerful, growing rapidly, that other parts of our economy are eroded from maybe where we have been in the past, but also where we would like to be. And certainly in terms of our industrial capacity, we do still make things here, don't get me wrong. But I think that we have a recognition that unless we start to do things differently, we will continue to see this trend of erosion in areas that we cannot afford to have erosion. And I think that goes to this focus on a reinvigoration of the American economy, of American manufacturing, this embrace of what I will call a very unique type of American industrial policy.

And I'm really glad you have asked me about this because I think that in the trade community for a very long time industrial policy was something that you used to, to accuse people of doing a bad thing. Industrial policy was a bad thing. And I think that, the traditional way we have talked about and thought about industrial policy is it's a thing that you did for yourself, to enrich yourself, to empower yourself at the expense of others. I think that the major change that we're introducing into this conversation is yes, there are things that we need to do for ourselves. There is a correction that we have to accomplish through reshoring for instance, bringing back online a critical level of manufacturing activity, for example, but at the same time, we are interconnected with the rest of the world, that this is in a way, part of what we are aiming for, but we want to be interconnected in a way that is positive. And so from a trade policy perspective, the question is, can you pursue industrial policy in a way where you can do it in a complementary fashion with other economies? So whether that's through supply chains, through coordinating defenses against unfair policies, we are looking for better ways of acknowledging the challenges that we have encountered to ensure that we can safeguard the the freedoms that we so value in our economic market based situation.

Is current U.S. industrial policy as Tai describes it different from what came before? She seems to distinguish between two types of industrial policy: (1) reshoring for ourselves, and (2) coordination of certain policies with others. 

On the reshoring, if I understand her correctly, I think she would accept that this part of current U.S. industrial policy is the same as what came before. Using protectionism and industrial policy to keep more manufacturing in the U.S. in the hopes of enriching ourselves at the expense of others has been a standard feature of U.S. trade policy for decades. As with anything, you can ratchet it up of course, but this isn't something new.

On the coordination point, based on things she has said in the past, the supply chain coordination that is under consideration now seems to mean, at least in part, that developing countries will supply natural resources for manufacturing to be done in the U.S. To me, that seems more like a traditional approach to industrial policy than something new.

And on unfair trade defenses, these have been heavily used for a long time. Is the coordination something new? I'm not sure. Perhaps someone who has worked on trade remedies might have a better sense. Regardless, given the level of recent usage of trade remedies around the world, I have doubts that efforts to coordinate trade remedies will have a noticeable impact. They already have a significant effect on trade, even though they don't get much coverage in the media and people outside the trade policy field don't understand them very well.

Next was the global steel and aluminum arrangement:

Question:

I wanted to ask about the global arrangement on steel. You said I'm hoping, or I'm expecting, to be able to share progress in the next weeks. Do you think it's possible that there'll have to be a partial solution at this point, and then a commitment to continue to work on the full ambition of both countering the non-market production and the green production and how that interplays with trade?

Tai:

So let me take a step back on what we're trying to do with the US - EU global arrangement. I talked about it in my remarks. But I also want to acknowledge how fundamentally paradigm shifting the vision is that we are pursuing, and actually how difficult a task it is that we have set out to accomplish with the Europeans. It really is a paradigm flip, right, from race to the bottom to race to the top, US and the EU coming together, putting our market forces together to drive, through trade, cleaner production, cleaner trade, in these carbon intensive industries, but then also to defend against non-market excess capacity, and then to drive incentives for fair trade and fair production. So it's a really big remit that we have.

The second thing I'll just talk about is that it's really a very technically challenging thing that we are proposing to do, although on that I will say that there are probably as many if not more trade lawyers in Brussels as there are in Washington. So if there are two partners that could come together to solve a really difficult task, it should be the two of us.

The third thing that I'll note is, I think that what we are asking the EU to do on this, I feel confident that they are committed to doing it and they recognize the need to do it. But I think that on some level it is also very, very difficult for Brussels on an emotional level. Because what we are doing is quite different. And as I note all the time, change is really hard. And on this I've also had the opportunity to reflect with my team on the record of US-EU trade negotiations and engagements. And I think that despite our best efforts, that our record has been, I would say sometimes we seem like star crossed lovers. It seems like we should be able to get the thing across the line and, maybe the most obvious recent point is on the Transatlantic Trade and Investment Partnership (TTIP), that despite the high level political commitment, that that was something that ultimately we weren't able to get across the line. So from my perspective, you never give up. Trade and economic collaboration is something you necessarily have to do with your partners. So this is a long way of saying, let's see, hang with us for I guess we've got exactly three weeks to get to our deadline. And I think that I will just say, as of right now, as hard a task as this has been, I'm extremely proud of our US negotiators. And I will say that we remain extremely committed to our partners and working with them.

On the issue of the EU state of mind, I would say the EU folks are mostly detached and analytical about all this, as evidenced by this quote from the FT:

The EU is planning to announce anti-subsidy investigations against Chinese steelmakers at a summit with the US this month as they further develop a common front against Beijing.

Brussels had agreed to join Washington’s efforts to shield industries from cheap competition, two officials with knowledge of the move told the Financial Times. Washington had asked Brussels to move against Chinese steel producers in return for avoiding the reimposition of tariffs on EU steel imposed by president Donald Trump in 2018, the officials said.

...

The EU officials said they understood the need for president Joe Biden to protect steelworker jobs in swing states such as Pennsylvania and Ohio to prevent Trump winning an election rematch next year.

We'll have to wait and see how the political calculations turn out of course. Ohio seems like a stretch for any Democratic presidential candidate these days, and Pennsylvania is looking tougher than I expected it to be for Biden.

More generally, on the issue of taking joint action with the EU to address carbon emissions and Chinese non-market practices, I think there are things that can be done on both, although I'm not sure what I've seen so far in the leaks about the global steel and aluminum arrangement will achieve much. On the non-market practices issue, based on the reporting so far, the arrangement will involve a club that excludes non-market economies, and therefore excludes China. Then the idea seems to be that the US will impose tariffs on non-club members in a way that will almost certainly violate WTO rules, and the EU will try to impose tariffs on them consistently with WTO rules by using AD/CVDs. But regardless of the WTO-consistency of the measures, these types of unilateral actions seem, based on past experience anyway, unlikely to change China's policies and practices. I think the better way to do that would be through WTO complaints (such as a complaint focusing on the behavior of China's state-owned enterprises). I've heard people offer up explanations for why those cases haven't been brought, but the explanations don't seem convincing to me as a matter of strategy.

Finally, there was something about digital trade:

Question:

There's a question from Robert Kuttner from the American Prospect about pressure coming from big tech companies in the US to define the European Union's pro-consumer regulations as trade discrimination. He asked, do you have a position on this and might we expect some news about this any time soon?

Tai:

Let me just start out by stating a couple of facts. One is that the European Union has an incredible superpower as a political entity, and they're very good at regulating, in this sense, that they're able to get regulations going through very, very complex processes. You know, I think that my partners in Brussels have some of the hardest jobs in terms of navigating between 27 member states, but their regulations often have extraterritorial reach that cause all of us to sit up and have to respond.

On their regulations in the digital arena, I recognize, and this is through a lot of engagement with our partners in Brussels, that they are very, very concerned about the rights of European citizens with respect to privacy, for instance, the opportunity and the economic vibrancy in this arena of the economy to allow for opportunities for new entrants, and for new entrants to grow, startups to grow into small and medium sized, and to compete with the very largest.

I also recognize that in terms of this industry, the largest players, and they're really large, are almost all American companies. And so I think that ... that's where the tension comes up, which is in the trade policy conversation, our guiding disciplines are around discrimination. Are you treating foreign companies the same way you're treating your own? Are you treating this foreign company the same way that you are treating that foreign company? Right? That's the traditional trade conversation. I think that as it then crosses over into regulatory efforts that impact these big technology companies, we have to really be cognizant that measures that may look like they have a discriminatory effect may or may not be advanced with a discriminatory intent. And so I think from a trade perspective, that is the additional nuance that we have to bring to our engagement with our partners around their intentions, and then also around the impacts.

Last thing I'll say on this as well is, in this area, and I'll bring it back to climate as well, in these two areas, digital and also climate, what we are able to do in trade negotiations and trade policy is limited by where the American policy consensus is represented. And I want to really put a fine point, and this is truly out of deference and respect, on the US Congress, that in areas where the US Congress continues to debate and has not settled regulatory questions, in digital and also on climate, that there is going to be a limit to what we can do in trade in the international sphere. So I know that my partners in Congress love having us lead in all things, especially in trade. And I would just say that, in some areas, that we cannot lead until Congress speaks and acts. And I would just say on digital and on climate, those are two incredibly important areas where we cannot afford to sit on the sidelines, where I will be very, very eager to work with our Congress.

She's definitely right about the last point. When there isn't a clear U.S. domestic policy, as there is not on digital, how is the U.S. supposed to create and shape international consensus and agreements?

Finally, I may be reading too much into this, but I found it noteworthy to hear the way she talked about the issue of digital trade and discrimination. It came across to me as though she is getting pressure from Congress and interest groups to pursue this with the Europeans, but she doesn't feel like this is necessarily the right priority for U.S. trade policy. To some extent, she is trying to arbitrate between the big tech companies/Congress, on the one hand, and the Europeans on the other, to get them all to recognize the nuances of discriminatory effect and intent (which I agree that everyone should do!) and how they apply here. But again, maybe I'm reading too much into her language and tone.

Biden’s ‘Do as I Say, Not as I Do’ Approach to Trade and Industrial Policy Could Harm America in the Future

On June 15, United States Trade Representative Katherine Tai delivered a major trade policy speech advocating for the development of “resilient supply chains” to promote greater national” and economic security. It is difficult to argue with such a goal; resilient supply chains are obviously beneficial for many U.S. businesses, as well as for consumers and workers. Governments and stakeholders around the world have learned in the past three years, often painfully, that long supply lines are dependent on pandemics, natural disasters, and the discretion of foreign governments, and that they are subject to changing restrictions based on national security. It has become clear that “just-in-time” operating procedures should be replaced with a more prudent “just-in-case” business model. And the policy is strongly supported by manufacturing labor unions, many U.S. companies that are competing with imports,  and their supporters in Congress.

That being said, it will be difficult to implement such objectives without the U.S. broadly if implicitly endorsing other nations’ right to promote their own “resilience” and “national security. ” For many other nations, —including the United States’ major trading partners, this "resilience” approach will be viewed as simply a different way of describing the “buy American, invest American, employ American workers” protectionism that has been the hallmark of trade policies under President Joe Biden and the Donald Trump administration before him. The risk is that legitimate national and economic security concerns could morph into even more protectionist trade and industrial policies, with subsidies and  import and export bans as well as broad local content requirements.

Few in the U.S. would quarrel with the need to reassert American leadership in the development of innovative technologies for sophisticated chips, and, as the global auto market shifts from combustion engine-powered vehicles to electric vehicles, major EV components and batteries. As Tai observed in her speech:

[T]he United States faces new challenges to its economic standing in the world, including unfair competitive pressures from foreign monopolies and firms that are state-owned or state-sponsored, or whose market power is directly supported by foreign governments. We must act now to reverse these dangerous trends, which constrain the growth and dynamism of our economy, impair the creation of high-quality jobs, and threaten America’s economic standing in the world.

Moreover, protectionism in the U.S., and even its opposition by major trading partners, is not a new phenomenon. Pascal Lamy, former director general of the World Trade Organization (WTO), has noted:

In Europe and elsewhere, the adoption by the US Congress of the Inflation Reduction Act (IRA) was a thunderclap because of the protectionist nature of certain provisions allowing subsidies for vehicle electrification which are contrary to international trade law. ... After the Trump presidency and its tariff aberrations, the US under the Biden-Harris administration was expected to respect its multilateral commitments within the WTO. But this naive view ignored the fact that the [U.S.] shift began about 15 years ago, and that it is the product of structural forces whose actions have gradually modified the political balance in favour of trade openness that had prevailed in Washington, not without some lurching, since the 1950s.

Unfortunately, the administration will face many challenges to the effective pursuit of its goals, including the production of goods with domestic content requirements. In the case of EVs, for example, these requirements will increase production costs, making them a driver of domestic inflation, discourage consumer purchases  and make EV producers in the U.S. less competitive with auto producers elsewhere in the world.

The administration’s domestic focus could also weaken the world trading system as it has developed over the past 75 years. After all, the United States has been a strong (and accurate) critic of China’s industrial policies, including its massive, WTO-inconsistent subsidies and the policies stemming from its “Made in China 2025” strategic plan. Through the plan, China openly seeks to establish world dominance in EVs, semiconductors, robotics, information technology, artificial intelligence, and other areas.

Current U.S. practices are different in degree but not in kind. This is particularly true for the EV and chip subsidies recently included in the Chips and Science Act (Chips Act), and the poorly named and drafted Inflation Reduction Act (IRA), much of which also appear inconsistent with WTO rules —although it seems that this is no longer relevant to White House or congressional decision-making. (The U.S., of course, is not alone in having used subsidies in its industrial policies, today or in the past.) Among other things, current U.S. industrial policy makes it much more difficult to castigate flagrantly illegal Chinese subsidies or rules that give preference to domestic, rather than imported, components, with any degree of credibility.

Moreover, as the U.S. moves further in this direction, other WTO members inevitably will imitate our policies and ignore any objections we raise on the grounds that the U.S. acted first. China, of course, is multiple decades ahead of the U.S. in its use of industrial subsidies and other protectionist measures and has learned to ignore WTO rules. More significantly, it seems inevitable that the EV and EV battery subsidies included in the IRA  —which exclude trading partners that lack free trade agreements with the U.S., including the European Union (EU) and Japan —, will encourage retaliation from other countries. The Chip Act subsidies exclude chip production that is not located in the United States. In order to discourage foreign chip producers from moving their production to the U.S. instead of expanding at home, they are likely to enact competing  subsidy programs.

Tai and National Security Advisor Jake Sullivan appear not to realize that when the White House emphasizes the overriding importance of restructuring supply chains for greater U.S. national and economic security, it is effectively forcing many other governments, including major trading partners and close allies such as the EU, South Korea, and Japan, to adopt similar policies to protect their own national and economic security (and their own producers and workers).

As trade expert Simon Lester wisely observed:

[W]here things get difficult is when you add foreign governments to the equation. What if these governments start worrying about ‘resilience’ and ‘economic security’ too? What if they decide to use domestic content requirements that keep U.S. products out? What if they ratchet up their subsidies and put U.S. producers at a disadvantage? What if they take actions that restrict U.S. agriculture exports, or digital services exports, or aircraft exports? If they do, U.S. producers are going to be harmed, and these producers will press the U.S. government to take action.

It is worth noting that the U.S. in recent decades has objected not only to protectionism in China, but also inter alia to the highly protectionist policies of major countries such as Brazil and India. U.S. manufacturing exporters and agricultural producers are both struggling with barriers to market access in dozens of countries. What happens when, for example, such governments as Mexico (as they are today) argue that their “national security” requires prohibiting imports of genetically modified corn in order to protect their food sovereignty?

Anyone knowledgeable about past U.S. trade practices, such as Lamy, would never suggest that past U.S. policies have been devoid of protectionism, given various restrictions on the imports of sugar, tomatoes, shrimp, textiles and clothing, small trucks, steel, and peanuts, among other goods. At the same time, it could be argued that the U.S. has been less protectionist overall than other major developed countries, including Japan, South Korea, and the EU, particularly in recent decades. Meanwhile, it is clear that opening our markets to certain developing countries has caused American job losses, most significantly an estimated 3.7 million to China. Under such circumstances, an increase in U.S. protectionism is probably inevitable, and the best that can be hoped for — given the strong support of many members of Congress and the Senate, as well the current and most recent presidents — is that the policies will be administered with at least a modest level of good judgement. This should include an assessment of the risks for U.S. exporters, workers, and consumers, as well as for stakeholders in other countries.

If the risks become more evident in the medium term, as it seems almost certain they will, it may well be that the U.S. will need to draw back from its more extreme Buy American policies — cloaked in national and economic security — because they are not really achieving the desired goals and are causing problems which may or may not have been anticipated. As Lester posits:

U.S. trade policy is likely to end up where it has always been: Trying to achieve an international balance of protectionism that everyone can live with. The U.S. can try to influence that balance through unilateral measures, but that approach does not have a good track record. Where we inevitably [end] up instead is with a set of international rules — including bilateral, regional, and multilateral trade agreements — to govern things.

My principal concern is that by the time this realization occurs, climate change measures will have been delayed or partially abandoned, the U.S. economy will have been seriously harmed, and the global trading system will have been badly, perhaps irreparably, damaged. The WTO’s rules, including its dispute settlement mechanism, may have become irrelevant to members’ practices, not only for China and the U.S., but also the EU, Brazil, and India, among others. There is also a significant risk that the stricter and exceedingly complex Buy American rules will slow the adoption of EVs and clean power in the U.S., as well as increase their cost. A substantial recovery, even with the support of future U.S. administrations and other major trading nations, may require not years but decades, with adverse impacts for everyone and a decline in living standards worldwide — including the manufacturing workers in the United States that this administration is intent on protecting.

David A. Gantz

Will Clayton Fellow,

Baker Institute for Public Policy,

Mexico Center

June 26, 2023

 

 

Jake Sullivan on International Economics and Industrial Policy

White House National Security Adviser Jake Sullivan gave a speech last week on the Biden Administration's international economic agenda, with follow-up questions from a Brookings senior fellow and the audience. The video and transcript of the whole event are here (a transcript of the opening remarks is also here).

In his remarks, Sullivan tried to put forward a coherent explanation of the Biden administration's approach to international economics. In doing so, I had the sense he was trying to persuade various listeners that the approach was a good one: Members of Congress, U.S. trading partners, U.S. policy wonks, among others. The dominant view within the administration seems to be something along the lines of the following:

- the long-standing U.S. approach to trade was heavily tilted towards liberalization;

- that approach became untenable at a certain point as a matter of policy;

- also, it was bad politics; 

- U.S. trade and economic policy needs to shift towards a more interventionist approach;

- the administration can do this in a way that brings allies on board.

As set out below, I have doubts about a lot of these steps in the administration's thinking. I'm not sure how coherently and comprehensively I can address all of this, because he covered a lot of ground, but here goes.

The big picture: Was the old approach flawed?

One point Sullivan made was that the traditional U.S. approach to trade policy had many successes, but in recent decades showed some flaws:

After the Second World War, the United States led a fragmented world to build a new international economic order.  It lifted hundreds of millions of people out of poverty.  It sustained thrilling technological revolutions.  And it helped the United States and many other nations around the world achieve new levels of prosperity.

But the last few decades revealed cracks in those foundations.  A shifting global economy left many working Americans and their communities behind. A financial crisis shook the middle class.  A pandemic exposed the fragility of our supply chains.  A changing climate threatened lives and livelihoods.  Russia’s invasion of Ukraine underscored the risks of overdependence.

The "international economic order" he references is a big thing, covering a lot of issues outside of trade policy. I don't know enough about the World Bank, the IMF, etc. to incorporate those issues into my analysis, so I'll focus here on trade policy. With that in mind, I'm going to put aside the financial crisis and climate change as issues to be considered here. I understand that some people like to blame the trading system for these issues, but those arguments are a real stretch.

As to fragile supply chains, if you think about a counterfactual in which countries didn't trade much with each other, I can imagine that a lot of people around the world would have actually been worse off during the pandemic. What we've seen in the baby formula sector in the U.S. is that relying almost exclusively on domestic production for an important product leads to just as much, if not more, fragility than having an international market for key products.

Could "overdependence" be a problem? Sure. I think people tend to exaggerate the circumstances in which it is, but certainly there could be situations where we are too heavily dependent on a foreign adversary. We just have to make sure to approach that issue with some objectivity, though, rather than relying on the word of domestic industries who are trying to come up with arguments to restrict foreign competitors.

As to the impact on American workers and their communities, there's no question that exposing domestic industries to international competition is going to disrupt people's lives. But so is protecting American companies from foreign competition. You may have to look more closely to see it, but it's still there. The question should be, how do specific trade policies affect Americans throughout the economy? During the entire era we are talking about, certain well-connected companies have been able to convince the U.S. government to protect them from foreign competition. That helped their profits and their workers, but on the whole, it has made Americans worse off. Having said that, it is true that particular companies and workers are hurt by foreign competition, and just like when people are hurt by advances in automation, there should be some government role in helping them adjust. That could take the form of job retraining, removing constraints on moving for a new job, etc. But thinking about this only as a trade issue doesn't make much sense, because trade isn't the main reason people lose their job.

How much tariff liberalization was there?

Sullivan then talks about tariffs:

The main international economic project of the 1990s was reducing tariffs.  On average, applied U.S. tariff rates were nearly cut in half during the 1990s.  Today, in 2023, our trade-weighted average tariff rate is 2.4 percent—which is low historically, and relative to other countries.

Of course, those tariffs aren’t uniform, and there is still work to be done bringing tariff levels down in many other countries.  As Ambassador Tai has said, “We have not sworn off market liberalization.”  We do intend to pursue modern trade agreements.  But to define or measure our entire policy based on tariff reduction misses something important.

Was "[t]he main international economic project of the 1990s" reducing tariffs? I would have thought the 1990s was when we saw a shift away from reducing tariffs, moving instead to IP protection, regulatory standards, services, labor, and other issues.

And while he's right that average U.S. tariffs are low these days (putting aside the recent Section 301 tariffs of course), there's a big caveat: trade remedy tariffs can be quite high. (To be honest, I'm not sure the current trading system can make much progress until we deal with anti-dumping. Back in the early 1990s, there were serious discussions about this, but recently it hasn't gotten any traction.)

In addition, as Sullivan notes, tariffs outside the U.S. are still fairly high. I often wonder how U.S. trade politics would look these days if the U.S. had pushed for lower tariffs over this time period, rather than for strong IP, labor, and environment provisions in trade agreements. Could lower foreign tariffs have helped U.S. manufacturers? And going forward, would a good way to boost U.S. manufacturing be to push for lower foreign tariffs? It does not seem like this is the focus of the Biden administration's trade policy efforts, even though Sullivan's remarks acknowledge that there is an issue here.

Is the U.S. working with others?

Turning to how the U.S. is engaging with other countries, Sullivan says:

That’s why the United States, under President Biden, is pursuing a modern industrial and innovation strategy—both at home and with partners around the world.  One that invests in the sources of our own economic and technological strength, that promotes diversified and resilient global supply chains, that sets high standards for everything from labor and the environment to trusted technology and good governance, and that deploys capital to deliver on public goods like climate and health. 

Now, the idea that a “new Washington consensus,” as some people have referred to it, is somehow America alone, or America and the West to the exclusion of others, is just flat wrong.

I would say this issue is one of degree. There have been limited efforts to work with others, but arguably they are not at the level they should or could be. If you take the Inflation Reduction Act as an example, the Congressional version was much more America alone, and the Biden administration has been trying to interpret it in a way that works more closely with certain allies.

Sullivan also says:

At the same time, it isn’t feasible or desirable to build everything domestically.  Our objective is not autarky—it’s resilience and security in our supply chains.

Now, building our domestic capacity is the starting point.  But the effort extends beyond our borders.  And this brings me to the second step in our strategy: working with our partners to ensure they are building capacity, resilience, and inclusiveness, too.

Our message to them has been consistent:  We will unapologetically pursue our industrial strategy at home—but we are unambiguously committed to not leaving our friends behind.  We want them to join us.  In fact, we need them to join us.

...

So we are leveraging the Inflation Reduction Act to build a clean-energy manufacturing ecosystem rooted in supply chains here in North America, and extending to Europe, Japan, and elsewhere. 

This is how we will turn the IRA from a source of friction into a source of strength and reliability.  ...

When I think of working with others, I think of a relatively equal partnership. By contrast, "leveraging" your economic power to get others to do what you want is a very different approach. And if you talk to people outside the U.S., the friction here is real. People do feel like they have to accommodate the U.S., but at the same time, I think this approach is also steering some of them towards making sure they are not too reliant on the U.S.

What role for the developing world?

In terms of the role of developing countries, Sullivan says:

Fundamentally, we have to—and we intend to—dispel the notion that America’s most important partnerships are only with established economies.  Not just by saying it, but by proving it. Proving it with India—on everything from hydrogen to semiconductors.  Proving it with Angola—on carbon-free solar power.  Proving it with Indonesia—on its Just Energy Transition Partnership.  Proving it with Brazil—on climate-friendly growth.

...

This brings me to the fourth step in our strategy: mobilizing trillions in investment into emerging economies—with solutions that those countries are fashioning on their own, but with capital enabled by a different brand of U.S. diplomacy.

We’ve launched a major effort to evolve the multilateral development banks so they are up to the challenges of today.  2023 is a big year for this.

As Secretary Yellen has outlined, we need to update the banks’ operating models—especially the World Bank but the regional development banks as well.  We need to stretch their balance sheets to address climate change, pandemics, and fragility and conflict.  And we have to expand access to concessional, high-quality finance for low income and for middle-income countries as they deal with challenges that span beyond any single nation’s borders.

...

At the same time as we are evolving the multilateral development banks, we’ve also launched a major effort to close the infrastructure gap in low- and middle-income countries.  We call it the Partnership for Global Infrastructure and Investment—PGII.  PGII will mobilize hundreds of billions of dollars in energy, physical, and digital infrastructure financing between now and the end of the decade.

A big question for U.S. relations with the developing world is, do we see them as a source of natural resources to be extracted, or can they be industrialized partners whose manufactured goods we will purchase? If it's only the former, I'm not sure how well this will go. (And my sense so far is that it's the former).

How much does the current system rely on markets?

With regard to the role of markets, Sullivan says:

The vision of public investment that had energized the American project in the postwar years—and indeed for much of our history—had faded.  It had given way to a set of ideas that championed tax cutting and deregulation, privatization over public action, and trade liberalization as an end in itself.

I hear the "trade liberalization as an end in itself" line quite a bit from critics of the existing system, and I'm not sure where it comes from. I've never met anyone who thinks it's an end in itself. Rather, people think trade liberalization means more competition, greater efficiency, higher economic growth, consumer benefits, etc.

Sullivan also says:

There was one assumption at the heart of all of this policy: that markets always allocate capital productively and efficiently—no matter what our competitors did, no matter how big our shared challenges grew, and no matter how many guardrails we took down.

Now, no one—certainly not me—is discounting the power of markets. But in the name of oversimplified market efficiency, entire supply chains of strategic goods—along with the industries and jobs that made them—moved overseas.  And the postulate that deep trade liberalization would help America export goods, not jobs and capacity, was a promise made but not kept.  

One reason why industries moved overseas is because of gaps in the rules and their enforcement -- subsidies have long been used to lure investments, but responses such as AD/CVDs aren't likely to stop the subsidies. So what we ended up with under the current trading system was not so much market efficiency, but rather a significant degree of policy space that was used to distort markets. To address this, what would be most helpful is stronger trade disciplines. Instead, the approach we are taking seems to be to copy the subsidies others have been using. Will that lead to more investment in the U.S.? We'll see how it all plays out after a few years, but my concern is there won't be significantly higher levels of investment, but rather corporations will just receive subsidies for the investments they would have made anyway.

Are some sectors better than others?

As many other people seem to believe these days, Sullivan thinks the U.S. should focus more on manufacturing:

Another embedded assumption was that the type of growth did not matter.  All growth was good growth.  So, various reforms combined and came together to privilege some sectors of the economy, like finance, while other essential sectors, like semiconductors and infrastructure, atrophied.  Our industrial capacity—which is crucial to any country’s ability to continue to innovate—took a real hit.  

In the past, we favored agriculture, IP-based industries, and aircraft (we still support those). Now it's semiconductors and clean energy. Are those the right sectors? What will the next administration favor? Is this more about a particular ideology or which interest groups (domestic industries, labor unions) lobby most effectively?

Does trade bring peace?

Just as Katherine Tai has done recently, Sullivan questions the idea that trade brings peace:

Much of the international economic policy of the last few decades had relied upon the premise that economic integration would make nations more responsible and open, and that the global order would be more peaceful and cooperative—that bringing countries into the rules-based order would incentivize them to adhere to its rules.

It didn’t turn out that way.  In some cases it did, and in lot of cases it did not.

Just to be clear, there is an argument that trade contributes to peace, but I don't think anyone believes that trade alone will bring peace. Foreign policy has to be the driving force on these issues.

What will be the impact of the IPEF?

And finally, Sullivan touts the IPEF:

And we have designed the elements of an ambitious regional economic initiative, the Indo-Pacific Economic Framework, to focus on those problems—and solving those problems.  We’re negotiating chapters with thirteen Indo-Pacific nations that will hasten the clean-energy transition, implement tax fairness and fight corruption, set high standards for technology, and ensure more resilient supply chains for critical goods and inputs.  

Let me speak a bit more concretely.  Had IPEF been in place when COVID wreaked havoc on our supply chains and factories sat idling, we would have been able to react more quickly— companies and governments together— pivoting to new options for sourcing and sharing data in real-time.  That’s what a new approach can look like on that issue—as on many others.

Sullivan makes a very specific claim here: "Had IPEF been in place when COVID wreaked havoc on our supply chains and factories sat idling, we would have been able to react more quickly." It's hard to evaluate that claim without seeing the actual text of the IPEF, but I would like to see the Biden administration walk us though how the IPEF would have allowed us to react more quickly on supply chains and idle factories. More generally, it's not clear to me what impact the IPEF will have on economic activity or behavior. As I've heard them described, the rules sound like they will mainly be aspirational, and they won't be enforceable (at least in the traditional way, and it's not clear what the alternative way might be). 

Katherine Tai on Protectionism, Free Trade, and Industrial Policy

At a recent press conference, U.S. Trade Rep. Katherine Tai offered a few thoughts on U.S. industrial policy. 

First, in response to a question about how she would evaluate the criticism that the Inflation Reduction Act constitutes protectionism, Tai said the following (39:35 of the video):

I generally don't like to use the term protectionism because I think it creates a false dichotomy, that there are certain things are protectionist, and then I think, on the other side, it's free trade. ... So that assumes that there are only these two categories -- something that is protectionist and something that is free trade.

In fact, if you look at the policies around the world, I think it is a much more of a spectrum. If you look at the Inflation Reduction Act, it does have and reflect a much more open embrace by the United States today of the idea of an industrial policy. But it reflects also a very specific American approach to industrial policy, which is not a planned economy, but how you can use more tools to create the incentives in the marketplace to create the outcomes that you want. And in the case of the Inflation Reduction Act, more innovation and adaptation to clean energy technologies.

In the traditional conversation around industrial policy, it has been closely associated with this concept of protectionism, that you only advance industrial policy to benefit yourself. I think that even if you're looking at the electric vehicle provisions in the Inflation Reduction Act, you see baked into it this acknowledgement that it is not just for the United States, that ... it reflects a recognition that there are supply chains that involve the collaboration of multiple countries and economies. And so that's why we have negotiated the critical minerals agreement with Japan to bring in parts of the Japanese electric vehicle battery supply chain into these benefits. And ultimately what I really want to drive home is, the reason why this is not, as you describe it, all for us is that we recognize that in order to realize that clean energy future that I think all of us want, it is something that we are going to need to do with others.

Later, Tai was asked this question (49:06 of the video):

[This question is] about the new global order and basically the outcome you want by the new kind of ... industrial policy in the United States. Looking at it from a European and some Asian perspective, it seems, yes, there is a will to redefine industrial policy. There's a will to redefine supply chains, but with a very US-centered, very West-centered direction. There are complaints especially on the semiconductor side that the IRA, if you want to get some subsidies, ... it restricts companies' investment in other countries, for example. So how do you deal with these issues with ... your strong partners that you want that are investing billions of dollars in the United States, and that are now facing restrictions on their own business? And I also have to think whether they want to apply ... for subsidies or not.

Tai responded as follows:

So I tried to get at this in my earlier answer, but this gives me an opportunity to be more clear, and I've spoken about this quite a bit recently, which is, our vision for an industrial policy is really ... a corrective measure. It does reflect that there's a correction that needs to be made, for instance, in clean energy technology, that there needs to be an infusion of energy, if you will, incentive to create the innovations that are going to be required. But in other areas, we as the United States have experienced deindustrialization over the past decades in several areas. You will also see some of our policies go to that correction of reinvigorating in certain areas.

What I would say is this, in very clear terms. Our industrial policy is one that has to work with trade policy. So our vision is for an industrial policy that is collaborative, that can be complementary, where we can be talking to each other about the kinds of investments that need to be made, and how we can ensure that we're de-conflicting. We're not all trying to reinvent the wheel at the same time. And this is something that's quite relevant in the conversations between the US and the EU, for instance, where we both have our own Chips Acts. And I guess I will not resist the temptation to say that for many of the countries who have practiced industrial policies in the past, and even in the present, that complementary piece, that piece that works with trade policy is not always present there. And so I do want to draw attention to the fact that as we correct for imbalances, places where markets have fallen down, we are doing it with a vision that the world and our partners have to come with us.

Tai referred to a "spectrum," and I'm going to focus on that concept here.

Let's start with the terms "protectionism" and "free trade." As I've said several times before, in my view, protectionism and free trade are two of the clearest and most useful terms in the trade discourse. Many other terms are vague, but these two have a widely understood meaning, although of course there are debates about certain aspects, especially for "free trade." As a result, I try to push back against any push back against using these terms (if you can follow that!). Having said that, I agree with Tai that there is a spectrum here. There are degrees of protectionism and degrees of free trade, and for practical purposes, the policy question is where we want to fall on the spectrum.

Turning now to industrial policy, Tai says that the IRA "reflects also a very specific American approach to industrial policy, which is not a planned economy." I agree that the U.S. does not have a planned economy. However, keeping with the idea of having a spectrum of policy, I think the IRA shifts the U.S. a bit on the spectrum in the direction of a planned economy. As Tai puts it, "you can use more tools to create the incentives in the marketplace to create the outcomes that you want." Well, that involves some planning, even if only a limited amount.

Also on industrial policy, Tai offers a contrast between a U.S. industrial policy that focuses on the U.S., on the one hand, and a U.S. industrial policy that works with (at least some) others, on the other hand. Here I would say that recent U.S. industrial policy legislation such as the IRA also represents a point on a spectrum. In this regard, it's worth noting that Congress perhaps intended a more U.S.-focused industrial policy, whereas the Biden administration -- for example with its interpretation of "free trade agreement" to include special agreements on critical minerals that don't free much trade -- is shifting the policy along the spectrum towards an industrial policy that takes into account our relationships with allies, so there is now a bit more working with others. I would note here that an even more collaborative industrial policy would work with allies in drawing up the policy, rather than trying to adjust the policy to respond to their concerns after the fact. I would also note that the idea of working with some countries but not others limits the degree to which the policy is "collaborative" and "complementary."

For Better or Worse, We Have Another Chance to Evaluate Industrial Policy

Over on the Baker Institute website, I have a piece entitled "Will the Biden Administration’s Industrial Policy Experiment Succeed?" You won't be surprised to hear that I am skeptical that the administration's industrial policy moves will be good for the U.S. economy overall, for the following reasons:

-- past industrial policy efforts have generally not gone very well

-- regulatory capture is hard to avoid

-- corporations play governments off each other to get subsidies for the investments they already plan to make

-- subsidies shift financial resources from one sector to another, so if we are doing more of one thing, we are doing less of some other thing

-- domestic industrial policy leads to international trade conflict

-- wealthy countries can afford more subsidies, putting economic development in poor countries at risk

-- if every country followed this approach, it would lead to a terribly inefficient global economy

-- some of the efforts to get the U.S. to manufacture more seem to reflect nostalgia for the 1950s, but based on what I know about that era, I don't think we should be trying to go back there, and anyway those were special circumstances that couldn't be replicated now

Regardless of all that, we seem to be going ahead with various industrial policy initiatives, which leads me to conclude the piece with these points:

If we are going to do industrial policy, there are better and worse approaches. For example, subsidies that go directly to consumers (e.g., tax breaks for buying an electric vehicle) are better than subsidies to specific producers, as producers are highly skilled at regulatory capture. Thus, if fighting climate change is the goal, then a “light touch” industrial policy that favors the clean energy vehicle sector as a whole — by subsidizing purchases of its products rather than giving subsidies directly to individual auto manufacturers — makes the most sense.

For a mix of reasons, the Biden administration is going forward with many of the initiatives it labels as industrial policy. As noted, studies of past efforts show serious flaws in these policies, but it is all being tried again, so there will now be a chance to do some new assessments. What we need is an objective evaluation of these efforts. How well are the policies achieving their stated objectives? Are there unanticipated effects?

Industrial policy is being put to the test. Let’s use this opportunity to give it another thorough evaluation.

How Is the Biden Administration Thinking about "Industrial Strategy" and International Economic Relations?

Last week, Deputy Secretary of Commerce Don Graves made some remarks on "Modern Industrial Strategy for U.S. Competitiveness, Equity, and Resilience." In his remarks, Graves explained how the Biden administration was providing direct subsidies and other government support to promote certain sectors of the U.S. economy. Here's an excerpt:

For the first time in decades, we have a generational opportunity to lay claim to the competitive industries of the future, along with the good-paying jobs and economic security that will come with them. But it’s going to require government, business, workers, and communities to work together in new and innovative ways, and it will require the private sector to consider national competitiveness and economic security as part of their corporate social responsibility.

...

With the passage of the American Rescue Plan, the Bipartisan Infrastructure Law, the CHIPS and Science Act, and the Inflation Reduction Act – all major legislative accomplishments of its first two years – the Biden-Harris Administration is making transformational investments in manufacturing innovation, research and development, infrastructure, workforce training, and community development. 

We’re focusing these public investments and leveraging private investment in key areas such as semiconductors and clean energy technologies where private industry, on its own, had not factored in our national and economic security interests. ...

...

The bipartisan CHIPS and Science Act that President Biden signed into law in August provides $50 billion to the Commerce Department to revitalize our domestic semiconductor industry. We are administering this funding through our new CHIPS for America program. 

The funding will drive R&D and manufacturing incentives that will facilitate domestic production of the most advanced chips and expand production of mature chips essential to our national and economic security.

...

Similar to CHIPS, under the Inflation Reduction Act, the Administration is making the largest-ever federal investment in clean energy innovation and leveraging private capital to scale clean technologies of the future—from electric vehicles to clean hydrogen to offshore wind. ...

So that all seems pretty clear: In the Biden administration's view, subsidies and other forms of government economic intervention are a good way to promote certain domestic industries, and are appropriate domestic policies.

At the same time, Graves pointed to other countries' subsidies and economic intervention, but also expressed concern about their "unfair subsidies and dumping":

Even as we seek to address these vulnerabilities, our competitors and trading partners are not standing still.  They are moving ahead with strategic public investments, along with private investments, in their own domestic manufacturing, including in semiconductors and other emerging tech.

Some are also using use unfair subsidies and dumping and becoming increasingly sophisticated at finding loopholes in our antidumping and countervailing duty laws.

Our  adversaries are ever-more aggressive in their efforts to control supply chains that we rely on – including critical minerals – and expropriate critical technologies. 

The problem here is that many other governments are likely to see the U.S. financial support for particular sectors as "unfair subsidies and dumping," and react negatively to the U.S. policies. In order to prevent trade conflict from arising over these kinds of measures, we are going to need international agreement on what is acceptable and what is not.

Existing WTO obligations set forth a carefully negotiated balance on these issues. For example, there are detailed rules on when subsidies are prohibited and when they cause adverse effects for trading partners.

At times, the Biden administration seems to want to renegotiate the existing balance, although exactly what new balance they are seeking is unclear. For example, do they think domestic or regional content requirements, such as those in the Inflation Reduction Act, should be permissible under WTO rules? It would be a pretty radical departure from the current rules if these were permitted and everyone started using them.

If the subsidies Graves described above are going to continue, the Biden administration, or some future administration, will have to come to a view on the right balance in terms of domestic policy and international economic relations. What level and kinds of government economic intervention are acceptable? How will international rules provide disciplines? At the moment, it seems as though we are stumbling into trade conflict, and out of that conflict we may develop some new boundaries. However, it would be better if these issues could be fleshed out in advance, with a goal of reaching a domestic and international consensus quickly and (trade) peacefully.

Some Questions about the Biden Administration's Plans for Industrial Subsidies

This is from a speech last week by White House NEC Director Brian Deese on "Executing a Modern American Industrial Strategy":

Some have raised a valid concern that countries may keep one-upping each other on ever-larger industrial subsidies, reducing their efficiency.  But the investments we’re making will pay enormous global dividends in expanding supply, speeding adoption, and driving down costs.  And for industries like semiconductors and clean energy, we’re nowhere near the global saturation point of needed investments.  We should welcome actions by most countries if they’re structured fairly and scaled appropriately.

This passage raises several question for me.

First, I agree that the concern about a subsidy war ("countries may keep one-upping each other on ever-larger industrial subsidies") is valid. This sort of thing has been common for a long-time with location incentives provided by national and local governments. Governments compete for investment with subsidies in a way that doesn't lead to much, if any, additional investment, but rather just better deals for companies who were planning to invest anyway. So what's the plan to deal with this potential problem here? The last sentence of the passage says: "We should welcome actions by most countries if they’re structured fairly and scaled appropriately." Does "scaled appropriately" mean some sort of limit on the amounts involved? Does "structured fairly" mean some forms of subsidies are allowed while others are not? Would this be like the Agriculture Agreement subsidy limits, but applied to industrial subsidies, with the result being some sort of WTO agreement with specific maximums on these subsidies? That's one possibility, and I think I recall that some people have suggested this approach recently. If that's not what Deese has in mind though, what is the plan exactly?

Second, what does he mean by "[w]e should welcome actions by most countries"? The obvious answer here is that Chinese actions would not be welcomed, but what does that mean? Does it mean they think China shouldn't be giving these subsidies, and we won't "welcome" it if China does? How exactly would the Biden administration react to Chinese subsidies of this sort? A Section 301 investigation and tariffs?

Third, he says that with "semiconductors and clean energy, we’re nowhere near the global saturation point of needed investments." But how do we know what the saturation point is? If we get to a moment when most of the companies in one of these industries are losing money because there is overcapacity, are we at the saturation point then? And do we change course at that point, or do we just keep the subsidies coming and maybe even increase them?

And finally, domestic countervailing duty law allows for tariffs to be imposed on subsidized imports. With all these new subsidies, is the Biden administration anticipating that other countries will impose tariffs on subsidized U.S. goods that are exported? Are they expecting U.S. industries to ask for tariffs against subsidized foreign goods? How do they see CVDs playing out here? With the level of subsidies they seem to have in mind, I'm not sure how long we can go before these CVD cases start coming.

Neoliberalism vs. Post-Neoliberalism vs. Plain Old Mixed Economies

I recently went to an event on industrial policy hosted by the Roosevelt Institute, and on one panel Rana Foroohar of the FT said the following about neoliberalism and post-neoliberalism:

So let me scene set a little bit about where we've been, and in particular, the neoliberal paradigm, and where we're headed into this post-neoliberal world, this world of Biden-omics, this world of industrial policy that we're hearing about.

...

I think that we are moving into a post-neoliberal, post-globalized world. Not that globalization is going away, but we're gonna see much more of a focus, not just in the US, but globally on regionalization, localization and re-mooring wealth and place, because that's really what's been lost in the last 40 years. So, Heather and Felicia, I want to kind of sketch my paradigm of neoliberalism and see if you agree with it, and then get your sense of where we're going.

When I think about neoliberalism, I think about the Reagan-Thatcher revolution, you know, taxes were slashed, markets were deregulated, global capital was unleashed. And the assumption was that capital, goods and people were all going to be able to cross borders seamlessly, and, guess what, land where it was most productive for them to do so.

The problem with this paradigm is the global capital moved much faster and sort of began to float 35,000 feet above the challenges of the nation state, and that has become an issue that we're all grappling with. So while you saw more global growth than ever before, particularly in the years leading up to the financial crisis, you also saw increasing and dramatic growth in global inequity in almost every country around the world, not just the US. That of course has economic and political ramifications. And so that's where we are now. To me, the financial crisis, COVID, the pandemic, war in Ukraine, all have been sort of like a scrim that's been pulled up and shown us the fragility of the old world. From the debt crisis, the financialization, the imbalances in trade, you know, the rise of an asset based economy in the US versus one on actual income growth and good jobs.

I hear a lot these days about neoliberalism dying and post-neoliberalism emerging, generally from people who don't like neoliberalism. It's not always clear what they mean by neoliberalism, and what they don't like specifically, but in some general sense they want more government involvement in the economy and more regulation of markets.

One issue I have with these suggestions of the death of neoliberalism is that it makes it sound like we have gone through radical shifts in the economy over the years. The critics of neoliberalism seem to view the neoliberal period as an extreme journey into free markets, and the post-neoliberal world as -- they hope -- a return to heavier government regulation, industrial policy, and, for some people at least, economic nationalism.

But I don't think this view of how the U.S. economy has been run is correct. My sense is that the U.S. economy was, is, and in all likelihood will be a mixed one, with some market-oriented parts and plenty of government intervention. There are changes to the mix now and then, but they are fairly small shifts along the continuum. Reagan did push for a bigger role for markets; and then Bill Clinton pushed back. We saw this pattern repeated with Bush and Obama. But neither side's vision made very much progress in the direction they were pushing, and no matter which party has been in power, or if they were sharing power as they often were, there was always a mix of government-led and market-oriented economic policies. Our economy is a mixed one and the changes that occur now and then are mostly just tinkering at the margins of this mix.

So to sum up: Neoliberalism is not dead (if it ever existed!) and post-neoliberalism is not on its way in. We have a mixed economy, pretty much like the one we have always had.

That's kind of a boring story of the economy, and therefore may not get much attention. If I could think of a clever-sounding name for this state of affairs, maybe I could convince more people.

Meet the New Industrial Policy, Same as the Old Industrial Policy

Here is a piece I published last week on the Baker Institute blog:

MEET THE NEW INDUSTRIAL POLICY, SAME AS THE OLD INDUSTRIAL POLICY?

With the recent enactment of the CHIPS and Science Act, longtime advocates of industrial policy are feeling a sense of triumph, and proclaiming that U.S. economic policy has entered a new era. The old “laissez-faire” approach is dead, they say, and state-directed economic policies are back in favor. While this new legislation is clearly significant, portraying it as transformational may be overstating its impact, and big questions remain: How much has actually changed in U.S. economic policy? And will the new initiatives work?

Let’s start with whether there really is a big shift in policy here. It is fair to say that “industrial policy” has long been looked down upon by many leading economists. Nonetheless, a wide range of actual U.S. economic policy falls squarely within it: ethanol subsidies, high tariffs on steel and aluminum imports, very long copyright terms, and price supports for sugar are just a few examples of how the U.S. government has tried to support specific U.S. industries. Whether or not people referred to this as “industrial policy,” that’s what it is. Thus, regardless of what leading policy thinkers had to say about industrial policy, policy makers have been very willing to adopt it (often at the behest of the corporations that benefited).

But now people are using the term “industrial policy” more, and expanding the scope of industries covered, with semiconductors the most prominent one. That is a shift, although not an unprecedented one. In the beginning of Bill Clinton’s first term, industrial policy was also a hot topic. And in the 1980s, the Reagan administration pushed its own version of support for the semiconductor industry.

Longtime advocates of industrial policy such as Dani Rodrik say the new CHIPS Act is significant “because it is a sign that we have moved well beyond market fundamentalism and because it shows there is now bipartisan support for industrial policies.” Of course, the idea that we were ever in a place of “market fundamentalism” is contradicted by the facts of actual U.S. economic policy, as noted above, which involved a wide range of economic interventions by the government. Industrial policy advocates are looking to spin these new developments in a triumphalist way, in an effort to demonstrate that their policies are in vogue. But the degree of change is less clear, and it will likely take a few years to gather enough evidence on past and current U.S. government economic interventions to do a proper comparison and make an assessment of how big a shift we are seeing.

The second question is whether new initiatives such as the CHIPS Act will be successful. This law offers more than $50 billion in subsidies to semiconductor companies to build new production facilities in the United States. Will this work? This depends in part on how we define “work.”

One problem is that these companies might just be trying to extract government money for projects they would undertake anyway. Such efforts are fairly common, as companies play governments off one another to extract financial concessions for already planned investments. (This is why Bernie Sanders and others worry that these subsidies are just “corporate welfare.”) So we might see new semiconductor investment in the United States in the coming years, but it will be hard to determine whether it is more than what would have happened without the subsidies.

Assuming that these subsidies do increase investment beyond what we would have seen otherwise, we then run the risk that the industry has been distorted in ways that are unsustainable in the market in the long run. If we incentivize companies so much that they over-produce, it could lead to some companies becoming unprofitable, and then demanding a new round of subsidies to keep then afloat. Once companies become dependent on government support, it is hard to wean them off it.

Underlying all of this is a fundamental question: Is there a problem with U.S. semiconductor production being too low right now? Surely there are some sectors (e.g., military aircraft) where we would not want to be too dependent on other countries. But is semiconductors in that situation at the moment? It can be hard to answer this, because some of the data being used as a justification for the subsidies is misleading. For example, a Washington Post article titled “A new era of industrial policy kicks off with signing of the Chips Act” noted that: “About 37 percent of the world’s semiconductors were manufactured in the United States in 1990 versus about 12 percent in 2020.” But in 1990, China was not an economic powerhouse, and as its consumption of semiconductors in domestic manufacturing sectors grew, it was sure to increase its share of global semiconductor production. It may be that the U.S. industry is performing badly, but commonly cited figures such as these are not convincing evidence of that. The public debate needs an objective assessment of just how many semiconductors the United States needs to produce domestically or buy from friendly countries in order to be secure.

There are many questions about the future of U.S. industrial policy, and it could take years to answer them. Will the CHIPS Act’s semiconductor subsidies have their intended effect? Will these types of economic interventions be extended to other industries? Will the current enthusiasm for industrial policy fade away as it did after an early burst in the Clinton years? And could the sudden prominence of the issue lead to a rethink of any of the long-standing industrial policies in sectors that are much less strategically important? The conversation over industrial policy has started up again, but it remains to be seen where we end up.

Constructing an effective industrial policy is a challenge, because of (1) inherent limitations in policymakers' ability to direct the economy in a positive way and (2) lobbying by interest groups. The ethanol subsidies I mentioned in the piece are a good illustration of both. Note that these subsidies are not only industrial policy, but some people used to argue that switching to ethanol was a good way to reduce carbon emissions: "research conducted at Argonne National Laboratory (ANL) compared the greenhouse-gas emissions of ethanol and gasoline. That research, which has been widely accepted by federal agencies, found that the use of corn ethanol as it is currently produced—using coal-fired and natural gas-fired plants—reduces life-cycle greenhouse-gas emissions by about 20 percent when compared with the use of gasoline." I'm not sure many people believe this anymore, but despite this and all the other flaws with this policy, ethanol subsidies are still around.

Commerce Secretary Raimondo on Section 232 Steel and Aluminum Tariffs

If any doubts remained six months into the Biden Administration that the Administration would be any less protectionist or “Buy American” oriented than its predecessor, they were largely laid to rest by recent comments from Commerce Secretary Gina Raimondo in an interview with Bloomberg  News *[1] (reported in World Trade Online[2]). In the interview, Secretary Raimondo extolled the virtues of the Section 232 “national security” tariffs and quotas on imported steel and aluminum originally levied by the Trump Administration and maintained to date under President Biden.

Secretary Raimondo asserted that “those tariffs have been effective at helping American workers in the steel industry that, you know, folks are back to work . . .We’re seeing steel operations back up to capacity or producing more. So, we cannot simply say we are going to get rid of the tariffs because we need to protect our steel industry and those workers.” She also justified the continuation of the tariffs and quotas by asserting  that “China had been dumping cheap steel and aluminum into America.” Raimondo conceded that the Trump Administration’s imposition of additional tariffs on steel and aluminum imports from US allies in Europe (U.S. allies in other parts of the world were not mentioned) raised “challenges” for the Biden administration and confirmed that negotiations with the EU were ongoing. However, she emphasized that simply eliminating the tariffs was not the solution being pursued by the Administration.

The comments also reveal a misunderstanding of the effects of the tariffs. They have not had a measurable impact on U.S. imports of steel from China, since most such imports were made subject to substantial anti-dumping and countervailing duties under the Obama Administration. In 2016, the final year of the Obama Administration, China was only the tenth largest source of steel imports into the U.S., responsible for only 0.08% of imports.”[3] (To be fair, I  note that  China’s flooding of the world steel market adversely affected producers in most national markets because the glut of commodity-grade Chinese steel world-wide drove prices down everywhere.)

Further, as National Foreign Trade Council President Rufus Yerxa has observed,[4] the section 232 tariffs have benefitted a small group of U.S. [steel] manufacturers but have had a much more significant negative impact on downstream users of steel (and aluminum).[5] These impacts affect workers in those enterprises as well; 12 million persons are employed in industries that use steel in their production processes, and 2 million of those are in industries where steel in “intensively” used. In contrast, even pro-steel-industry studies indicate that the section 232 tariffs have created only about 3,200 new steelmaking jobs.[6]

At a time when the United States is experiencing levels of inflation at levels not seen for several decades (caused by various factors including the pandemic and supply chain glitches as well as tariffs), it seems strange to me that the Biden Administration insists on  adhering to a bogus program—steel and aluminum imports from allies such as Germany, South Korea, Japan (and originally Canada and Mexico) have never posed a threat to U.S. national security or even economic security. Moreover, the continuation of the tariffs  occurs while both Secretary Raimondo and Treasury Secretary Janet Yellen agree that tariffs on Chinese goods (levied by Trump under section 301) have harmed U.S. consumers. Between the China tariffs and those on steel and aluminum, most consumers are or will ultimately be impacted whether they are purchasing automobiles, washing machines or other goods that require steel and aluminum for production, as at least a significant portion of the tariffs are being passed on to consumers.[7]

 

Will Clayton Fellow for Trade and International Economics, Baker Institute for Public Policy.

[1] Commerce Sec. Raimondo on Chip Shortage, Skills Gap, China Tariffs, July 28, 2021, https://www.bloomberg.com/news/videos/2021-07-28/u-s-commerce-chief-on-chip-shortage-skills-gap-tariffs-video.

[2] World Trade Online, Raimondo: U.S. will not “Simply” get Rid of Section 232 Tariffs, July 29, 2021, https://insidetrade.com/trade/raimondo-us-will-not-%E2%80%9Csimply%E2%80%9D-get-rid-section-232-tariffs-eu.

[3]Int’l Trade Administration, Global Steel Trade Monitor, March 2018, https://legacy.trade.gov/steel/countries/pdfs/2017/annual/imports-us.pdf.  

[4] World Trade Online, op. cit.

[5] Econofact, Steel Tariffs and Jobs Revisited, February 6, 2020, https://econofact.org/steel-tariffs-and-u-s-jobs-revisited;.

[6] Economic Policy Institute, U.S. Section 232 Tariffs Lifted the Steel Industry—and Should be Continued, March 24, 2021, https://www.epi.org/press/u-s-section-232-tariffs-lifted-the-steel-industry-and-should-be-continued-new-study-shows-steel-import-measures-benefited-workers-and-created-jobs/.

[7] Econofact, op. cit.

If Everything Is Industrial Policy, Is Anything Industrial Policy?

Law professor Ganesh Sitaraman has a piece arguing in favor of an industrial policy for the United States. He laments that "[o]ver time, industrial policy ultimately became the Lord Voldemort of economics, so evil and dangerous that it must not be named," and he wants to make it safe to talk about industrial policy again. To this end, he notes that "the United States has always had one," and sets out what he describes as four American industrial policy "traditions," as follows:

1. "the Franklinian tradition in industrial policy emphasizes what comes before industrial production: knowledge and infrastructure. In this tradition, the public directs industrial-policy priorities in these arenas and the government provides them, either directly or through a regulated monopoly." Two examples are: "Land Grant Colleges Acts in the 19th century" and "the Franklinian-style post office."

2. "Hamilton is widely (and rightly) considered the founder of American industrial policy. In his Report on Manufactures, Hamilton outlined a system that included tariffs, subsidies, and investments"; "In his report advocating for the creation of a national bank, Hamilton also hoped to expand the national debt, extend more legal tender, and develop America’s fledgling financial system"; "The oft-decried 'military-industrial complex' was the Cold War heir to the Hamiltonian tradition."

3. "regulated competition is perhaps best associated with anti-monopolist and Supreme Court Justice Louis Brandeis, but it has its roots in Madisonian political economy. The Madisonian tradition sees the route to economic success as requiring competitive markets, but it holds that there must be an active government regulating and channeling market activity to ensure a fragmented and separated industrial ecosystem"; "the Madisonian tradition found expression in the anti-monopoly movement and in regulatory policies based on the principle of separating functions."

4. "The Jacksonian tradition in industrial policy differs from the other three traditions in that it opposes the development of a coherent federal strategy or system of industrial policy in favor of decentralization to the states and privately directed activities"; "For the last 40 years, American industrial policy has largely followed the Jacksonian approach. ... Deregulation, privatization, trade liberalization, and austerity all caution against government action." 

I disagree with various aspects of his four categories, but what I want to focus on here is the idea that these are all part of something called "industrial policy." What exactly is industrial policy? At one point, Sitaraman offers what I would have thought of as the traditional definition: "They want policymakers to encourage domestic production in specific sectors, a practice known as industrial policy." Later, though, he provides a much broader view of the term: "any public policy that shapes or structures a sector of the economy is an industrial policy." The problem I see is that, under that definition, and if all of his four traditions constitute industrial policy, then just about everything is industrial policy. If I propose the multilateral elimination of tariffs, is that industrial policy? I wouldn't have thought so, but when you characterize things so broadly, perhaps it is. How about school choice and charter schools? If this "shapes or structures a sector of the economy," which it clearly does, then that's covered too. How about occupational licensing? Or copyright terms? Or restrictions on abortion providers? Or gun regulations? Or limits on inter-state provision of medical services? Under his broader view, there's a pretty good case that these are all part of industrial policy.

If everything is industrial policy, however, I wonder if anything is really industrial policy. If you make the scope of industrial policy so broad, at a certain point you are really just discussing economic policy (or even just domestic policy more generally, or possibly even just policy of any sort). And if industrial policy is really just economic policy, then perhaps we should be talking about economic policy, rather than spending time trying to recharacterize it as "industrial policy."

It seems like his push for saying "industrial policy" is about finding a good marketing term for these ideas, and he believes that "industrial policy" could serve this purpose. But if you just want to talk about economic policy, and are trying to argue for particular policies, there's no need to put the term "industrial policy" out there. It may actually confuse more than it enlightens.

In my view, the key to all of this is not really the terminology. I can see how catchy slogans are useful (although I think people may overemphasize the importance sometimes), but just saying "industrial policy" doesn't really get us anywhere. What specifically are industrial policy advocates proposing? Tell us the details and then we can debate it.

Can Industrial Policy Be Kept Out of the Wrong Hands?

Todd Tucker has a new paper in which he argues in favor of "industrial policy and planning." I was planning to follow a policy of industriously ignoring it, because I didn't want to call attention to it. Better just not to talk about it, I thought. But Todd is clever and cited me in his paper, which he knew would induce me to respond. Excellent trolling, Todd!

His cite is to this blog post I did. In particular, he cites one passage, which he describes as follows:

A final objection is more rooted in an observation about the nature of democratic regimes. Simon Lester at the Cato Institute writes that advocates of industrial policy “need to take into account that they are not always going to be in power…You can’t just say, we want economic statecraft but only the good kind. Once the principle has been established, it can be used for anything, and you know that in advance.” Even if one wants the tool for only progressive ends, “that also means President Trump has the power for some non-progressive thing. Given the way such power will actually be used, it’s worth considering whether it would be better if the US government simply didn’t exercise this power, or exercised it a lot less” (Lester 2019).

To clarify, I was talking about "economic statecraft" here, not industrial policy generally. My point was that once you start messing around in other countries' affairs, it inevitably goes in a bad direction at some point. Your intentions might be good (albeit misguided and probably ineffective), but those of your successors might not be good.

Todd offers this reaction:

But to some extent, these critiques could be successfully levied about any activist government policy. Why legislate at all if one’s program could be repealed or co-opted in the future? ...

My response, of course, is: Exactly! This critique CAN be made about any government policy, including industrial policy. Even assuming there is a way to make industrial policy and other activist government policies work in the hands of clever and unbiased administrators, how can you ensure that they won't be ruined later by whomever is in charge next?

Now, I don't mean to suggest that, on the basis of this concern, the government should never do anything. I just mean that people should be a bit circumspect about what governments can do effectively, and "industrial policy" is a great example. How can the government take actions that help specific companies without getting stuck in a cycle of lobbying influence? I'd like to see Todd grapple with that question a bit more. I know he puts "nationalization" out there as a possibility, but it is very unlikely this would play much of a role. In practice, industrial policy is going to involve helping particular industries. Picking the right ones (and cutting them off from aid at some point) and making the whole thing work is really difficult.

To illustrate this point, let me put one of Todd's examples out there for your consideration:

policymakers now are frustrated that China appears to be dominating so many different industrial sectors. The Washington, DC Metro system, for instance, needs new railcars—but there are no American companies left that can supply them. The system also has been stymied by poor rail infrastructure, which has led more and more commuters to switch to driving Chinese-made electric scooters. An inclusive industrial policy might ban scooter imports and fund railcar and bus construction in West Virginia (ground zero of the opioid crisis) and impoverished-majority areas like Black Southeast DC and Prince George’s County, Maryland.

If this is the model, any experiment with some sort of new and expanded industrial policy might not last long. (The flaws seem obvious to me, but we can talk about this proposal if others see things differently).

(I should also note that Todd is not limiting himself to "industrial policy" in the way that most people think of it. He includes "and planning" in the paper's title, which perhaps was a clue that he had something bigger in mind, but when I first read that I took it to mean the planning of industrial policy. In fact, he seems to have in mind economic planning and governance reform more generally. There are many elements of traditional industrial policy in the paper, but he goes much further.)

Industrial Policy as a Tool of U.S. Foreign Policy

This is from Jennifer Harris and Todd Tucker in Politico:

President Donald Trump’s threat to levy tariffs on Mexico has triggered a political war in Washington, and not the usual partisan kind. Some Republicans are girding to fight their own president, rightly finding it absurd that he would take out his frustrations over immigration by increasing the cost of trade. As Sen. James Lankford (R-Okla.) told Politico, the White House "is trying to use tariffs to solve every problem but HIV and climate change." Trump supporters like Sen. Marco Rubio (R-Fla.), meanwhile, don’t see many options. “[W]hat alternative do my GOP colleagues have,” he tweeted, “to get Mexico to secure its southern border… & act on intel we provide on human traffickers?”

Much as it pains their colleagues—and as hard as it is for Washington to process this—Trump and his backers have a real point. Not about his immigration policies, which are part of a harmful cultural war and stand a real chance of inflicting long-term damage on the American economy. But the Administration’s use of tariffs to push its foreign-policy goals is not as irrational as Trump’s enemies make it seem. It shouldn’t be this way, but in 2019, if the United States wants to fix some of the big policy arguments it has with its trading partners, it has left little leverage besides the blunt tool of tariffs.

For that, the blame lies with Democratic and Republican administrations alike, including Trump’s predecessor Barack Obama, who collectively have let US economic policy shrink in ambition—a battle fought on a narrower and narrower field, leaving us with so few weapons that tariffs have become the most useful last resort.

A nation as powerful as the United States would traditionally be expected to have a fully developed economic and industrial policy, one that integrates incentives and priorities on the domestic front with carrots and sticks for foreign partners. In that universe, Mexico’s own immigration enforcement might be part of a much wider package of goals negotiated between the two nations, one that creates strong incentives for Mexico to comply, without hurting American consumers and companies the way tariffs would.

This fuller agenda, which some experts call economic statecraft, has been the norm for much of the country’s history. But unlike America's competitors, the United States has largely shelved this kind of economic thinking. President Obama, for instance, pitched the Trans-Pacific Partnership (TPP) trade agreement as a way to ensure that America, rather than China, would write the rules of the global economy. But under the hood, it was never a very compelling economic argument for the United States: The rules that China negotiates in its own trade deals overlapped considerably with the American proposal, meaning that the TPP was more a matter of diplomatic gamesmanship than a real plan to advance workers here at home.

There are two aspects to their argument: domestic and international. As they put it: "A nation as powerful as the United States would traditionally be expected to have a fully developed economic and industrial policy, one that integrates incentives and priorities on the domestic front with carrots and sticks for foreign partners."

With regard to the domestic aspects, they argue for industrial policy rather than neoliberalism:

For the last few decades, policymakers have embraced neoliberalism, a broadly open-market political philosophy whose effects have been to redirect more power toward the economically powerful and marginalize the economic majority. Things may be changing. Leading academics, public intellectuals on both the right and the left, and even the IMF are calling for a return to a robust domestic industrial policy.

I have two reactions to this. First, I would say that, in fact, industrial policy may be more likely to "redirect more power toward the economically powerful and marginalizes the economic majority." Industrial policy means lots of subsidies for big business. Some of that will trickle down, of course, but just as agricultural producers like farm subsidies, manufacturers and other businesses like industrial policy. And second, from what I can tell, rather than some major shift taking place, arguments for free markets vs. industrial policy are about the same as they have always been. The perception on the left that free markets dominated the 1990s is way off base. Harris and Tucker talk about the "the heyday of the global free-market consensus," but I can assure you that, as someone in the free market camp, there was never a time when I thought, "Wow, we are really winning the policy debate!" It was an uphill struggle, and any victory was outweighed by two defeats. At one point, farm subsidies were supposedly being phased out, but they quickly and quietly came right back. And anyway, there have always been U.S. policies that can be classified as industrial policy (e.g., military spending). It might not be the precise industrial policy that some people want, but that's how things tend to go. The ingenious policy innovation you just came up with is not going to be implemented as you hoped. Interest groups of various sorts will get involved and turn it into something else.

But nobody is ever going to convince anyone to change his/her mind on the value of industrial policy as a domestic matter, and I want to focus here instead on the idea of "economic statecraft," or using "carrots and sticks for foreign partners," or to put it more bluntly "using American economic power to boss other countries around." To me, this seems like a strange thing for progressives to want, but I confess that I'm a little unclear on who the progressives are (and for that matter, who the neoliberals are).

First off, I think we could really use some empirical assessment of whether "economic statecraft" is effective in achieving its goals, in both the short- and long-terms. Maybe it does accomplish some things, like restricting asylum seekers from getting to the United States, in the short-term. On the other hand, in the long-term maybe it pushes the countries we are trying to influence into alliances with other countries. I'd like to see some studies of all this before we assume it is effective, as Harris and Tucker seem to.

Second, advocates of this approach to foreign policy need to take into account that they are not always going to be in power. For those on the left who want to use U.S. economic power to do "good things," keep in mind that the specific government action that triggered the Harris/Tucker article was Trump's use of tariffs to get Mexico to take actions to restrict migration. Harris and Tucker are careful to point out that Trump's immigration policies are part of a "harmful cultural war" and they certainly don't support that sort of thing. On the other hand, they do seem to support the general concept of using U.S. economic power to coerce our trading partners:

the Administration’s use of tariffs to push its foreign-policy goals is not as irrational as Trump’s enemies make it seem. It shouldn’t be this way, but in 2019, if the United States wants to fix some of the big policy arguments it has with its trading partners, it has left little leverage besides the blunt tool of tariffs.

The problem is, if you endorse the principle behind this sort of "economic statecraft," you kind of have to take some responsibility for whatever comes out of it. You can't just say, we want economic statecraft but only the good kind. Once the principle has been established, it can be used for anything, and you know that in advance. I recognize that Harris and Tucker want President Warren/Sanders/or somebody to have this power for some progressive thing, but that also means President Trump has the power for some non-progressive thing. Given the way such power will actually be used, it's worth considering whether it would be better if the U.S. government simply didn't exercise this power, or exercised it a lot less.

Finally, it is also worth pointing out that it may be possible to accomplish these things without bullying other countries at all. For example, if we wanted Mexico to be able to handle migrants from Central America better, which Mexico probably wants as well, we could spend some of our own money to help them. That's closer to being a carrot than a stick, although maybe it's not even a carrot, but rather just the right thing to do. By contrast, Harris and Tucker seem like they are just looking for big sticks. They refer to "fixing some of the big policy arguments [the United States] has with its trading partners," but that sounds like a euphemism for what I think they really mean, which is using U.S. power to coerce other countries into doing what we want.

That's not to say that nobody should ever try to influence anything that goes on in other countries. But when you are considering the possibility of doing so, it's worth thinking carefully about what would be effective and appropriate. Sometimes just setting a good example may be the best approach.