Industrial Policy’s First Cracks Are Starting to Show – DNyuz

Industrial Policy’s First Cracks Are Starting to Show

U.S. President Joe Biden’s economic policies don’t seem to have the makings of a reelection platform. Despite low unemployment and falling inflation, his campaign team has already mostly retired so-called Bidenomics as a slogan because the underlying economic record hasn’t proved popular with the American public.

U.S. President Joe Biden’s economic policies don’t seem to have the makings of a reelection platform. His campaign has almost completely retired the slogan “Bidenomics” despite low unemployment and declining inflation because his economic record is not popular among the American people.

However, the place of Bidenomics in economic history already seems secure. Biden’s administration is responsible for a move away from free trade, globalization and a focus on industry policy. Inflation Reduction Act used tax incentives and subsidies to increase the domestic production of electric cars. The CHIPS and Science Act similarly subsidized semiconductor firms, while export controls aimed to prevent China from dominating the technology.

These are policies that are part of an international trend. The barrier between domestic politics and foreign trade is breaking down. The results are mostly predictable, for better and for worse. In the United States, domestic subsidies are driving an increase in manufacturing just like they do elsewhere. But global trade and cross-border investment have fallen from previous highs. Biden’s administration is stepping back from the most aggressive rhetoric it used against China. Mentions of decoupling are being replaced by discussions of “de-risking”.

The White House has also sought to mend ties with allies in Europe and Asia that felt mistreated by growing protectionism. Meanwhile, China has struggled to overcome economic stagnation after years of overinvestment in its domestic real-estate sector produced a bubble that finally seems on the verge of bursting.

For such reasons, critics argue that the industrial-policy era already contains the seeds of its eventual decline. It is a question of how long it will reign. The beginnings of an answer can be found below, in Foreign Policy‘s top reads on industrial policy from 2023.

1. America’s Zero-Sum Economics Doesn’t Add Up

By Adam Posen, March 24

Western commentators have become so accustomed to describing the negative sides of globalization that it has become easy to lose sight of its positives. This essay by Peterson Institute of International Economics President Adam Posen, which appeared in the spring edition of our print magazine, offers a bracing reminder of what the turn toward industrial policy has jeopardized.

Posen admits that the trend toward protectionist economic measures was a defensive response to years of unfair Chinese economic policy. He writes, “There’s no doubt that Chinese economic policies are aggressive.” This essay reminds the reader that China poses a challenge that can be met in many ways. It also warns that policies like those the West pursued recently could have unforeseen consequences.

“Washington may feel frustrated with the lack of quick wins here, but that is no reason to take that frustration out on the rest of the world,” Posen writes. “In fact, doing so will make U.S. security worse by hindering the technological progress necessary for resilience and by eroding the United States’ influence on third countries.”

2. The World Will Regret Its Retreat From Globalization

By Eswar Prasad, March 24

In many ways, emerging-market countries were the great beneficiaries of globalization–indeed, it is the reason that they may have “emerged” in the first place. The free trade enabled their manufacturing sector and middle class to grow, as well as allowing them access to the technology and expertise of richer nations. The resultant increases in productivity, and competition between developed and developing countries, benefited consumers worldwide.

Cornell University professor Eswar Prasad’s essay, which also appeared in FP’s spring print issue, describes how emerging markets may now end up as losers of the new turn toward industrial policy. He writes that as countries begin to retreat from globalization, and look inwards more and more, it could have wide-ranging consequences for economic and geopolitical instability. “Just as with the surge in globalization, however, the consequences of this pullback are proving to be unevenly distributed, with low- and middle-income countries bearing the brunt.”

3. The Risks of the CHIPS Act No One’s Talking About

By Howard W. French, March 1

Although widespread industrial policies mark a shift from the era of globalization, they are nothing new in the broader context of economic history. The U.S. CHIPS Act, which subsidizes domestic manufacturing, resembles a strategy widely used by countries in the early stages of their development. But those that stick with industrial policy beyond that initial jump-start often come to regret it: “China has had very mediocre results in identifying the most important frontiers of economic activity for the future,” FP’s Howard W. French writes.

French then goes on to examine why industrial policy’s history has not been good and whether it is possible to believe that the past will be a thing of the past. “A traditional answer, not without a solid basis in logic, is that governments and bureaucrats are poor at assessing both the complexity of markets and rapidly changing technology horizons,” he writes. The fact that those who use public funds to formulate and implement grand industrial policies don’t have to worry about losing money is perhaps the most important. That danger is an incredible tonic, and we haven’t figured out how to replace it.”

4. Biden’s Turn Against Trade Makes It Hard to Win Friends

By Edward Alden, June 22

It is to Biden’s credit that he achieved significant bipartisan consensus at home for restoring a major role for government in the economy. But no such consensus exists internationally, especially among U.S. trading partners that see themselves on the losing side of the resulting policies, FP’s Edward Alden writes.

“The Reagan model of cutting tariffs and reducing regulatory obstacles had the virtue of letting the chips fall where they may,” Alden writes. “In championing a different model, the Biden team has struggled to address the concerns of trading partners who fear private investment will now flow away from their economies to the United States as companies around the world chase the enormous new subsidies on offer.”

5. Does Japan’s Economy Prove That Neoliberalism Lost?

By Michael Hirsh, Sept. 23

East Asia is a long-running laboratory for industrial policy, but Western analysts have typically assumed that the results of that experiment were negative. The West’s current policy shift involves, in this way, a reassessment about old debates on the effectiveness of government interventions in the economy.

FP’s Michael Hirsh surveys these controversies amid recent headlines about Japan’s return to economic growth, describing how former economic apostates are now being vindicated. He writes that “new empirical data over the past few years shows many East Asia industrial policy investments made decades ago are paying off in a big way.”

“Younger economists such as Ernest Liu of Princeton University have debunked some of the old biases against industrial policy–mainly that it lacks the reliable information necessary to target appropriate sectors–by showing that new measures of market distortions can supply just that.”

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