FOR better or worse, industrial policy is back. The European Union (EU) is placing “green tariffs” on carbon-intensive imports. The US is giving green-energy subsidies to domestic firms. Guaranteed access to high-quality semiconductor chips is a priority for various nations, including China, the US and the UK, for economic and geopolitical reasons.
And of course, there is now far greater appreciation, after Covid, of the benefits of a domestic vaccine industry. It would be a mistake, however, to think that these policies represent a move away from globalisation. In fact, they are an extension of globalisation — and they likely will enable yet more globalisation to come. That sounds counterintuitive, so let me explain.
Start with the domestic subsidies for green energy, as embodied in 2022’s Inflation Reduction Act. Those policies favour domestic firms in industries such as electric vehicles (EV), batteries and solar power. You could call that nationalism or even mercantilism. Yet those subsidies rely not only on a prior history of globalisation but also an expected future for globalisation. To the extent the US is able to extend its domestic battery production, it is because more lithium and other raw materials can be produced overseas and exported to the US. To the extent the US succeeds with its domestic solar industry, it is by drawing upon earlier advances in Spain, Germany and China — and undoubtedly future advances to come.
Even the most successful “nationalistic” industrial policies rely on a highly globalised world. If carried out strictly on a one-nation basis, industrial policy is doomed to fail. Globalisation has been so thorough, and has gone so well, that at least a little industrial policy is now thinkable for many nations.
Consider the semiconductor policies being pursued by China and the US. Currently, the highest quality semiconductor chips rely on an engraving technique from one company, ASML Holding of the Netherlands. US sanctions have made it difficult for that company to trade with China, while the US is glad to diversify its sources of supply. The result is likely to be a further expansion of trade networks in the chip industry, with more suppliers in more countries.
Another example of industrial policy enabled by globalisation is Operation Warp Speed, as implemented during the early stages of the pandemic. The Moderna Inc vaccine involved components from Spain, the Netherlands, France, South Korea and Switzerland, while Pfizer Inc drew upon trade and cooperation with Canada, the UK, Germany, Belgium and other nations.
The recent baby formula shortages have shown that autarky does not guarantee secure supplies. The US had legal restrictions on importing baby formula, namely that the Food and Drug Administration (FDA) has not approved most mixes and there are tariffs and quotas on foreign baby formula. When the shortages hit, the US was too dependent on domestic supply. A more globalised world offers greater protection against unforeseen external shocks and domestic supply chain disruptions. In this particular case, it was a Michigan factory that turned out to have safety problems.
Just as globalisation can enable or support nationalist industrial policy, so the converse is true. Assume that these various industrial policies meet with some degree of success, and that China, the EU and the US all become more self-sufficient in various ways. Those same political units are more likely to then embrace and support further globalisation.
The vaccine industry is an interesting case. If a country has its own national production facilities, it will be more willing to allow them to gear up their capacity for export. That same country will also be more likely to encourage information sharing, international efforts to fight pandemics, and (at least partially) the free movement of people during a health emergency. It is easier for a nation to be more open when it has its own layers of protection. It is striking that Australia and New Zealand, which came relatively late in the queues for foreign vaccines, stayed closed to most visitors for long periods of time.
If a country has its own secure supplies of green energy, it is more likely to support international agreements to address climate change — as well those that encourage trade, knowing it can do so in a relatively environmentally friendly way.
Some conservatives criticise globalisation while praising industrial policy. They are playing right into the hands of the Davos globalising elite. In fact, that is the best argument for many of these ideas: Today’s industrial policy is not an alternative to globalisation. It is preparing the world for the next round of it. — Bloomberg
- This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
- This article first appeared in The Malaysian Reserve weekly print edition