The Comeback of Industrial Policy: Bidenomics and the Global System

by | July 17, 2023

In case you didn’t know, 2023 marks the 300th anniversary of the birth of Adam Smith, founding father of economic thinking. Now you might wonder what Smith has to do with global economic issues almost two and a half centuries after he published his famous Inquiry into the Nature and Causes of the Wealth of Nations, but there is a lot in Smith’s writing that frames and resonates with contemporary economic and policy issues. 

I thought it interesting to refer to Adam Smith, because his work, channeled by protagonists of both the left and the right over time, is all about the intersection between the market, the state and civil society, how people should organise and behave, and what role the state should play, to realise better well-being, or welfare, for citizens.

The new interventionism or industrial strategies that are planting roots – let’s refer to all this as Bidenomics – is highly controversial. Some argue angrily that it is blatantly protectionist and that there is no reason to believe that 21st century industrial policy will be any more successful or effective than it was when it was last wheeled out 40-50 years ago. And which, to be fair, was abandoned in the 1980s as the Reagan-Thatcher era spawned a neoliberal order in which it had no place. Current sceptics live by variants of the motto made popular by Edmund Burke, George Santayana, and Winston Churchill to the effect that those who forget or cannot remember or learn from the past are condemned to repeat it.

I am going to explain why, despite its being protectionist and having a poor historical pedigree from that earlier time, industrial policy is both necessary and justified in the circumstances of our time. Not the time of our youth, or our parents’ or grandparents’ time, but today. These circumstances did not exist then, and however cute the historical parallels might be, there is so much that is different today that it cannot be deduced that things that didn’t work 40 years ago must be equally dismal today.  As L.P Hartley wrote in his novel, The Go-Between, ‘the past is a foreign country: they do things differently there’. 

I agree with sceptics that newfangled industrial policies smack of a new nationalism and undermine the principles of comparative advantage, efficiency, market discipline, and gains from trade which are among the crown jewels of economic thinking, championed by Smith.

However, these are not the only crown jewels in economics, and Smith was certainly aware that the ‘invisible hand’ and the pursuit of self-interest had to be tempered to avoid bad behaviour and outcomes, monopolies, and wealth concentration. And no one can say with a straight face that the holy grail of efficiency and market discipline, by which we have lived since the 1980s, hasn’t already cost us dearly in terms of economic and financial crises, dangerous populism, egregious corporate behaviour, rising inequality, and JK Galbraith’s cocktail of private affluence and public squalor.

I also agree, of course, that trade and industrial policy, which are two sides of same coin, are important, but trade is not the only pursuit that’s important, and it is certainly not more important than other economic and social objectives, or than advancing the causes of national security and accelerating climate change mitigation, which occupy the space in which Bidenomics and its imitators want to set up camp. This is not the industrial policy from yesteryear that may have been motivated by GDP growth aspirations, national pride, or the creation of national champions. 

To repeat, the intersection between the market, the state and civil society, which was central to Smith’s thinking at the end of the 18th century, is pivotal to our interests, especially today.

Curiously, we have lapsed into rethinking this intersection roughly every 40 years:  We did it in the 1900s after Globalisation 1.0, we certainly did it in the 1940s and 1950s;  we did it once more in the 1980s and 1990s; and now we are doing it again. Doubtless our children will do it yet again, in their time. 

But we are doing this today after being buffeted over the last 15 years by a succession of transformational shocks that have rattled our institutions, resilience, and well-being. Smith would be concerned, for sure. 

Think about:

  • Globalisation, which produced asymmetric benefits, with many experiencing only inequality, insecurity, and a withering of the industrial base.
  • The global financial crisis, which shattered the middle class and its faith in the elite.
  • The rise of China, which threatens the system of beliefs and values we hold dear and according to which we prefer to be governed.
  • The pandemic, which exposed the weakness of supply chains and poor resilience. 
  • The Russian invasion of Ukraine, which exposed dependency relations, including with China, that are unacceptable now.
  • And climate change, which was always an abstract existential threat, but is now increasingly present and desperately urgent.

Transformational shocks call for transformational responses. 

We are faced with challenges that mean that the status quo is unacceptable, and that we must support key sectors, strengthen resilience and dependability, and nurture greater stability and inclusiveness. In this context, the new industrial policy focus isn’t a trip down memory lane. 

Rather, it acknowledges: 

  • That economic insecurity and inequality are secular problems. 
  • That climate change and geopolitical competition are systemic and existential problems.
  • And that market failure, in terms of adequate and timely solutions, is an important reason for the state to intervene to try and fix problems. 

Regarding climate change, for example, the world doesn’t have enough ability to produce batteries, solar farms, wind turbines, heat pumps, and other equipment in adequate value to be consistent with 1.5 or 2C of climate change mitigation without government action. We need, therefore, government to create new ‘externalities’, which private firms can then internalize into their businesses. 

It is inevitable that the current batch of initiatives may fall short or have been mis-specified in some respects and that they will have to be revised or supplemented in good time.  But we should be under no illusions to what this shift in action and mindset means. 

It portends:

  • A change in emphasis away from finance, consumerism, and globalism – and their asymmetric benefits – to production, supply, and localism/communities.
  • A sharper focus on better quality jobs, better wages, and better distribution throughout regions and segments of the labour force.
  • An attempt to tilt market prices to make certain industries (semiconductors, renewables) more profitable and hence larger than they otherwise would be.
  • Efforts to exploit complementarity between public and private goods and services (e.g., electric vehicles need adequate charging stations, semiconductor manufacturing requires adequate throughput of STEM qualified workers, electrification needs power grids, and transportation and broadband need physical and digital infrastructure). 

Finally, a few words on Bidenomics and trade, and on China.

Bidenomics has been charged as being protectionist, which of course, in a limited way it is. But protectionism is also a bit like beauty – existent in the eye of beholder. 

To trade policy specialists and legal experts, trade barriers (including a broad range of non-tariff barriers and subsidies) are all protectionist policies.

In a broader economic context, though, the bigger issue is whether they are so much worse than modern trade rules that go into the long grass of regulation, health and safety, investment, finance and banking, labour markets, data management, technology standards, the environment and so on. These rules are always deemed to be liberalising, but there is also a deeper nuance. They are often shaped by the rent-seeking and self-interest of export nations with balance of payments surpluses, banks, pharma companies, and multinational corporations. Yet these are only ever scrutinised meekly, if at all; normally it is those with import interests that put up barriers to import competition that are cast as villains. That is both unfair and misguided. 

Even more importantly, the impact of Bidenomics and its possible copycats on trade is likely to be swamped by the far greater effects of macroeconomic developments and policies on trade flows. You only have to see the negligible—or even zero—impact of Trump’s tariffs to realise that trade is much bigger than some of the measures that countries adopt which interfere with it. 

While Trump’s policies were self-defeating and largely peripheral, the realisation that China was a global commercial problem was not wrong. China’s industrial policies, including subsidies, direct grants and lending, technology transfer and procurement policies and so on have been tolerated, in fairness, for a long time. Yet the idiosyncrasies of trade and commerce in the face of China’s policies eventually reached a tipping point as political circumstances changed, and that tolerance snapped.

China’s behaviour almost certainly sharpened the US pivot to compete more aggressively in technology and climate change-related production.

For US, the choice was to match some aspects of Chinese policy in renewables and chip making – mostly via tax breaks for any firm and from any country that manufactures in US or has a free trade agreement with the US – or cede those sectors to China. The truth is that market was never going to finance the US effort to catch up on its own in the face of unconstrained Chinese subsidies.

For the US, as well, the fundamental challenge is to strengthen its own technology resilience and reduce dependency on China, and indeed on Taiwan, and to try to change the technology supply chain geography by the 2030s.

Is the new industrial policy interventionism worthwhile? Everyone will have to judge for themselves.

Criticising the new industrial thinking for where it might fail is fair game, but not if you don’t also pose the counterfactual, which is how we are already in a bad place and will hardly improve in the absence of a fresh approach.

More valid criticisms may be that the measures are too few, that they need to be better aligned with allies, that they may become hostage to corporate lobbying, or that they are inadequate to generate good jobs and more robust communities.

But we should be open minded and indeed welcoming of new attempts to address some of the deep seated economic and social ills of our society in the 2020s, even at the cost of a few neoliberal shibboleths. Smith might not have been delirious about all this, but he most likely would have understood. And he even might have had some supportive things to say in the interest of the well-being of society.

Filed Under: Politics

About the Author

George Magnus is an independent economist and commentator, and Research  Associate at the China Centre, Oxford University, and at the School of Oriental and African Studies, London. George was the Chief Economist, and then Senior Economic Adviser at UBS Investment Bank from 1995-2012. He had a front row seat and key managerial position for multiple episodes of boom and bust in both advanced economies and emerging markets, including notably the Great Financial Crisis of 2008. George famously anticipated it in 2006-2007 with a series of research papers in which he warned of an impending Minsky Moment. Whilst at UBS, he served for four years as the Chair of the Investment Committee of the pension and life assurance fund. For four years until 2016, he served finally as an external senior adviser with clients of the investment bank. He had previously worked as the Chief Economist at SG Warburg (1987-1995), and before that in a senior capacity before ‘Big Bang’ at Laurie Milbank/Chase Securities, and before that, Bank of America in London and San Francisco. George is closely followed nowadays for his insights and observations about the global economy in general, and China and demographics, in particular. His China focus derives from a long period of observation and study that goes back to his first visit in 1994. He also opines regularly on demographic trends around the world, as well as on key issues nowadays such as Brexit, and the US and world economy. He is a regular contributor to the Financial Times, Prospect Magazine, BBC TV and radio, Bloomberg TV and other outlets. His written work and a blog can be found on his website at George’s current book, Red Flags: why Xi’s China is in Jeopardy was published in September 2018 by Yale University Press. It examines China’s contemporary economic and commercial challenges and aspirations to modernity in the light of a governance system that is a throwback to much earlier times in the People’s Republic.  His earlier books are The Age of Aging (2008), which investigated the effects of the unique experience of demographic change on the global economy; and Uprising: will emerging markets shape or shake the world economy? (2011)which examined the rise of China and other major emerging markets, and questioned controversially the widely accepted narrative that China was destined to rule the world.

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