Globalization may have lifted hundreds of millions of people out of poverty, but to critics it has long been a dirty word. They associate it with strengthening corporate power, lowering workers’ wages and deepening divisions between the rich and the rest.
During the pandemic, globalization was also blamed for placing the United States in a position of over-reliance on foreign supplies as diverse as medical equipment and semiconductors.
This has led many politicians – Democrats and Republicans – to a subject that has also been a dirty term for a long time: industrial policy. They are looking for a greater role for the US government in shaping what is manufactured where. The idea has been championed by Presidents Donald Trump and Biden and members of Congress, from conservatives like Marco Rubio and Josh Hawley to progressives like Alexandria Ocasio-Cortez and Elizabeth Warren.
But this enthusiasm for spending billions of dollars on certain industries may not work in today’s globalized economy. If it is to focus on clearly defined and agreed-upon goals – including some that may involve sacrificing some economic efficiency to achieve national security or pandemic preparedness – then an entirely national industrial policy can. in fact backfire.
Instead, success will require what we see as a hybrid industrial policy. This would incorporate some of the good aspects of globalization, preserve competition, and coordinate policy with like-minded countries to achieve common goals.
A few examples suggest the potential pitfalls and opportunities.
Personal protective equipment and semiconductors
The main argument in favor of a US industrial policy in both PPE and semiconductors is the risk that foreign sources of supply are too geographically concentrated.
For PPE, when the coronavirus struck, the lack of hospital gowns and masks around the world – let alone the United States – set off alarm bells among policymakers. There was an additional global supply, but it was mostly stuck in China.
To remedy this, the Department of Defense spent nearly $ 1.2 billion. Dozens of US companies are now making N-95 respirators, surgical masks, hospital gowns and gloves, and even some of the key raw materials the supply chain needed to secure production in the United States. .
For semiconductors, just over a year ago no one seemed to care about the United States’ reliance on high-end chips made in Taiwan and South Korea. But with the global shortage, we all do it now – the automakers in particular.
Both countries are geopolitical hotspots and are not immune to droughts, typhoons and other natural disasters that can disrupt supplies. Congress is using the situation to push forward bipartisan legislation for more than $ 50 billion in federal subsidies for the US semiconductor industry.
But the goal should not be national self-sufficiency at all costs. When the pandemic recedes, there will be less demand for some of these products and prices will drop.
For PPE, that means budget-conscious hospitals will look to purchase cheaper, non-US-produced options. American businesses will want continued subsidies or protection against imports. In fact, a group of small businesses have already organized themselves into the American Mask Manufacturer’s Association to complain that overseas-made masks are “dumping” into the US market, and they can ask for tariffs. to stop imports. But the fees would increase costs for a health care system that is already extraordinarily expensive.
The goal of industrial policy should be to preserve the right amount of national capacity to be ready for the next health emergency with the equally important goal of keeping medical costs low. Targeted government subsidies, along with regulations whereby medical distributors, states and hospital systems hold more emergency stocks than they had before the pandemic, would be better industrial policy than brutal trade restrictions and blank checks.
For semiconductors, congressional efforts to move capacity to the United States through subsidies pose additional challenges. The potential good news is that the bulk of the grants could be one-off payments that provide a level playing field for leading manufacturers – not just US companies but also some overseas, like Taiwan’s TSMC and South Korea’s Samsung. . Still, there is no guarantee that foreign companies would start manufacturing their advanced products on American soil. In fact, they are less likely to do so if Washington continues to adopt unilateral export control policies that can limit where U.S.-made semiconductors can be sold – that is, not. in China.
And there are also downsides to bringing back production. The United States is not immune to geographically concentrated risks, as the February arctic storm in Texas revealed when a power grid disruption temporarily shut down a cluster of semiconductor factories. And if the costs of US-made chips are too high for automakers, sustaining these product lines may require more than one-off payments to companies.
Better “Made in America”
For both economic and security reasons, greater geographic diversification is needed. A better “Made in America” policy would allow globalized production chains, especially with trusted suppliers in like-minded countries.
This implies that, if the goal is to diversify away from China – or, for some items like semiconductors, Taiwan or South Korea – the United States and its allies should take a coordinated approach. This requires setting limits on government payments to industry and determining who in the supply chain is doing what – a high level of political cooperation.
Without such coordination, even like-minded countries could find themselves in bidding wars by granting increasingly large subsidies to lure semiconductor manufacturers to their shores. This could lead to excess industry capacity, trade disputes and tariffs that would shut down markets.
This is not a fancy scenario. The United States and the European Union have long fought for counterproductive agricultural subsidies, and the two sides recently resolved a costly and long-standing battle over subsidies to Boeing and Airbus that also included tariffs on unrelated products like wine and cheese.
Moreover, just as the United States works with other major economies to eliminate tax havens and impose a global minimum tax on multinational corporations, governments should not be fighting to return tax revenues to these corporations. another way.
The Biden administration appears willing to try this coordinated approach. At the Group of 7 summit in June, the administration agreed to a proposal highlighting both PPE and semiconductors as aspiring to create “open, diverse, secure and resilient supply chains.” At a summit in September, the administration and the European Union agreed to try to avoid a “race for semiconductor subsidies and the risk of crowding out private investment that would itself contribute to our security. and our resilience “.
Cooperating on the details will prove difficult. A hybrid industrial policy is extremely difficult to achieve, but it is also the most likely to work. For security reasons, it accepts certain costs to move part of the production from where it is currently abroad, but without requiring self-sufficiency and a complete dismantling of international production chains that give Americans access to best products at reasonable prices. He accepts that some coordination with the allies is necessary, but seeks to avoid controlled trade or government-protected cartels that reduce competition. In short, it is based on a solid economic strategy in the service of national security.
Chad P. Bown is Principal Investigator at the Peterson Institute for International Economics. Douglas A. Irwin is Professor of Economics at Dartmouth.
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