“Made in America” policy can actually hurt the U.S., economist says

Sabri Ben-Achour, Alex Schroeder, and Erika Soderstrom Apr 17, 2023
Heard on:
One example of industrial policy is subsidies for companies doing work in clean energy, like the kind that the Inflation Reduction Act provides. Michael M. Santiago/Getty Images

“Made in America” policy can actually hurt the U.S., economist says

Sabri Ben-Achour, Alex Schroeder, and Erika Soderstrom Apr 17, 2023
Heard on:
One example of industrial policy is subsidies for companies doing work in clean energy, like the kind that the Inflation Reduction Act provides. Michael M. Santiago/Getty Images

Bringing manufacturing and technology jobs back to the United States from overseas has been a major talking point in economic policy throughout the Donald Trump and Joe Biden presidencies. Campaigns built around “Made in America” are popular among voters. And part of this is about dealing with economic and national security concerns from China. Biden’s Inflation Reduction and CHIPS acts address those points by subsidizing U.S. manufacturing and trying to curb China’s semiconductor industry. But is tipping the scales in favor of American companies the right way to address these concerns?

But is the attempt to partly shift the global economic order — who produces what, who gets access to which new technologies — an effective way to address these concerns?

Adam Posen, president of the Peterson Institute for International Economics, said these types of policies can be self-defeating. He wrote about it in a piece for Foreign Policy magazine titled “America’s Zero-Sum Economics Doesn’t Add Up.” He spoke with “Marketplace Morning Report” host Sabri Ben-Achour. The following is an edited transcript of their conversation.

Sabri Ben-Achour: You basically argue that the emphasis under both the Biden and Trump administrations on bringing manufacturing production home in one way or another has gone a bit too far. What are some of the policies that particularly trouble you?

Adam Posen: I think the problem is threefold. First is they very much focus on the American-headquartered companies and discriminate against companies even from close allies, like Japan and Western Europe. And this diminishes competition, this diminishes innovation. This leads to more corruption, frankly, in the patronized companies in the U.S. But it also leads to really bad backlash. I think a second point of why they’re taking their version of industrial policy — the common thread of “has to be American,” “produced goods in manufacturing at home” — too far is because of what it does to the rest of the world. Not in the sense that the U.S. has to suffer for the sake of the rest of the world, but that it’s going to blow back on us. You’re basically telling developing countries that they have no choice but to buy from the U.S. You’re basically telling middle-income and high-income countries that they want to subsidize, too, and have a race and divide up the world economy. You’re basically telling people that the U.S. is now trying to grab technology from others, rather than try to make technology available. This is foolish, frankly. The third thing I think they’re messing up with this excessive focus on domestic manufacturing is that they’re misunderstanding the nature of the threat from China in the economic sphere. China’s leadership is a problem for human rights, for democracy, and in some insistences, for security. But the way you get around that isn’t by obsessively trying to get this one or that one particular technology. The way you get around that is by having a better innovation space and having more people included in it.

Ben-Achour: You mention that the threat to economic security from China is overblown. But on the other hand, China defines its national security partly as economic security. It uses state-sponsored industrial espionage. It offers generous subsidies to some of its companies. It’s done everything it possibly can to transfer innovative technology from the U.S. to China. How should we respond to that if not through the measures that we’re currently taking?

Posen: I think the issue is not just, “Do you want to be like the Chinese economy and regime?” which is bad, but “What’s going to actually work?” And so the fact is, of course, they’ve been stealing technology and reverse engineering, even if not outright stealing. But it actually doesn’t matter as much as people think it does. People have been stealing intellectual property, company to company, country to country, for decades, in fact, for centuries. Part of the U.S. industrial base in the early 19th century was based on intellectual property theft from the U.K. That’s not to say it’s cost less, and we shouldn’t pursue prosecution about it. But it is not something that, frankly, should be driving our whole policy. It’s just not what’s there. Subsidies, the same thing even more so. Yes, the U.S. puts in less money in corporate subsidies than some other countries, but it actually puts in quite a bit. There’s a chart in the recent Economist [magazine] showing that as a share of [gross domestic product], except for China, the U.S. is pretty comparable to the other large economies on this. But the problem is subsidies, for the most part, don’t work when they’re targeted at particular companies and particular technologies. What we need is more U.S. investment in [research and development], in universities, in training, in all these things that are not handouts to companies or fixating on particular technologies. We need more investment, more public spending. There I’m totally in favor. But not on the things that the Biden administration and previously the Trump administration advocated [for].

Ben-Achour: On the topic of subsidies, part of the idea is, for example, moving to a green economy, that the market needs a lift to get us there and to make sure that the U.S. benefits from that new economy. Don’t we need some intervention to make that happen?

Posen: We definitely need intervention to decarbonize our economy. And that is, of course, a key difference between the Biden administration and the Trump administration that I support, that we have to move away from fossil fuels toward a greener economy. The issue, again, is in the implementation. If the key components are about making stuff in factories in the U.S. through handouts to particular corporations and discriminating against the behavior or the companies or the rules of our allies, it’s going to backfire. It’s not going to work. Because what’s going to happen is you have the world divided up into different standards and different districts, and the Europeans have an interest in benefiting from their green technology and the British and the Indians and the Brazilians and the Chinese each have an interest in benefiting from their technologies.

It’s like with vaccines, with Russia and China deciding that they’re going to only buy the vaccines they produce from their knowledge. They end up with inferior vaccines, we have broken-down standards in the world and then we have less spread of health, more spread of disease. The same thing is going to be true with clean energy. If the U.S. and Europe, not to mention China, all go down different paths, then it’s not clear that everybody gets the same level of innovation. And as much as in vaccines, you want to have everybody coming to the same standard. This is the key point: The advantage of technology is not in its production, it’s in its use. And the whole point of the Biden and the Trump view is that it’s in the production, not the diffusion and use. And this is a fundamental fallacy.

Ben-Achour: That, I think, is a really important point. So basically, we don’t have to invent a technology in order to benefit economically from it?

Posen: Yeah. The huge revolution in the information technology age in the ’90s and early 2000s — what it was was not that the U.S. had all the right hardware, let alone that we were producing the actual chips. That wasn’t what was happening. What threw the U.S. ahead and made the U.S. benefit was the adoption and adaptation of these technologies throughout the economy. What kept China and Europe, frankly, behind was they were so intent on trying to create their own national champions and put up their own barriers to foreign technology that they didn’t adopt and take advantage of IT as widely and as flexibly as the U.S. did. So we have just, in our lifetimes a very real example of this kind of difference between production obsession versus adoption.

Ben-Achour: Another fear that’s behind the policies that we’re talking about is a fear of globalized supply chains, which once were an ideal. But, during the pandemic, disparate, far-flung supply chains became a liability for a little while. And I think people look ahead in time and think, “Well, you know, what if China invades Taiwan or something? Could that be another argument for not having such a globalized world? Is that not an argument for a little less globalization?

Posen: There is definitely an argument for reconsidering supply chains, particularly in critical industries, like semiconductors or vaccines. And it’s important to recognize that global supply chains grew up kind of organically. There was no central planning, even within large multinational companies. Somebody says, “Oh, we’ve got to save money,” and three levels down, that person decides to outsource a particular thing to Turkey or Mexico. And then that person decides, “Oh, there’s additional suppliers here we can use,” and it just grew up that way. So there’s a legitimate correction to be made that the private sector companies in a decentralized way didn’t do enough providing against disruption or geopolitics or things like that.

But the way to get around that is through redundancy and diversification, not through closing off and politicizing the supply chains. In other words, even as big as the U.S. is, if we concentrate all our semiconductor production here and take nothing from Korea and Taiwan, then we’re subject to the problem of you get a crazy governor in a given state, or you get a flood in a given state, or you get a military attack in a given state, or a terrorist attack, God forbid, and you’re vulnerable there. You need to have multiple sources of supply. And it also depends on the particular industry. There are large numbers of things, including steel, for example, where you can produce a huge amount and buy cheaply from around the world and stockpile it. Not everything you need just in time in that moment, even if you assume that there’s going to be, God forbid, again, a military conflict. There are very few industries and goods where you both have the need to put everything in one place and the inability to stockpile from other places. So yeah, there are some places the government should step in, but we should be not doing that as a general principle of industrial policy.

Ben-Achour: There’s another argument that probably informs the, basically, protectionism that we’re seeing rise right now. And that is the goal of reducing inequality. Is there an argument that having more production here in the U.S., even if it is inefficient, could benefit workers by providing jobs that, yes, they could be done more efficiently elsewhere, but maybe we should keep them here just to have jobs for people?

Posen: The great dream is to have lots of good jobs for people. Right now in the U.S., we have more jobs — and more of them are good in the sense of having benefits and higher minimum wages — than any time in decades. And this came from running the economy hot. And this came from big macro-picture things, including portable health insurance through Obamacare. And if we want to address inequality, we’re going to need to do those kinds of things. We’re going to need to make the tax system even more progressive by taxing forms of wealth and high income.

The issue of using industrial policy to address inequality is threefold. First, that it only affects a tiny number of people. Let’s say we put these billions and hundreds of billions of dollars into particular manufacturing industries. You’re essentially going to create, at most, a million jobs. And that’s the highest, that’s probably more than you actually want. And that’s a million jobs in a workforce of 160 million people. So you are increasing the number of jobs, even if they’re better-than-average jobs, by two-thirds of a percent. And those people mostly would be hired away from other places, because it’s not the skilled manufacturing workers and the engineers who are sitting around unemployed in the U.S. or underpaid in the U.S. So this doesn’t address inequality in any meaningful way.

The second problem is that it is targeted, and people have to admit this about particular congressional districts in western Pennsylvania, and West Virginia, and Wisconsin, and places like that, that they think — both parties think — are the swing voters. And driving your entire economic policy about those districts is really unfair. It’s a different form of inequality, frankly.

And the third issue is, all of these things that I was talking about earlier, about the backlash in the rest of the world, will affect people. It will affect the U.S. It’s not some abstract concept. It will affect the purchasing power of average American families. So there’s not a free lunch here. And if you want to address inequality, let’s do what the Europeans do, let’s do what the Australians do: raise the minimum wage, increase unionization, redistribute more when people are born, not just when they’re in the workforce, invest in education.

Ben-Achour: All of this said, what would be the smart way, the effective way to deal with all these concerns: inequality, competition with China, technological innovation? What’s the right way?

Posen: To me the right way is going to be a strategy where the competition from China is a separate issue from dealing with inequality and innovation. So inequality and innovation, the biggest thing we can do is continue to run the economy hot. Yes, the Fed has to raise rates now. But on average, over time, we need to focus on the fact that you can have an unemployment rate below 4%. You can have a Black unemployment rate historically low compared to white unemployment rate. And these things are attainable. We do have a workforce that wants to work.

We also have to focus on what goes into people before they enter the workforce. This is education. This is health. This is training. This is portability of benefits, and mobility — that people are able to move where jobs are, that they don’t feel trapped where they are. And that includes both transportation infrastructure, but [also] restructuring benefits. It includes things like licensing rules, where the Obama administration and now the Biden administration are rightly pushing into the deregulatory direction to allow, whether it’s cosmetics workers or painters, to not have to get licensed state to state. There are a bunch of things for our workforce we can do.

And in terms of innovation, take all the money that they’re talking about now putting into this form of industrial policy, and instead put it into universities, put it into STEM, put it into scholarships, put it into, yes, receiving immigrants from abroad who have skills and have educational interests.

The China competition is different. I think China needs to be confronted. The Chinese government needs to be confronted when they’re abusing human rights unduly or pressuring their neighbors or directly interfering with U.S. security interests. But the way to do that, unfortunately, is by directly confronting them in the security sphere. And part of the motivation for economic sanctions and industrial policy and all this going back decades in the U.S. is they keep trying to find a way that’s not warlike to deal with warlike threats. And unfortunately the economics doesn’t work as a substitute for that. We’ve been putting sanctions on Russia since 2014, they still invaded Ukraine. We’ve been putting sanctions on North Korea forever, and they’re still lobbing missiles. So there, unfortunately, is no substitute in the national security field for using national security means.

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