Failed at free enterprise? Well, try industrial policy, China style
- Despite Western criticism, Beijing should be proud that in Washington and Brussels it’s now all strategy and trade protectionism all the time
This year apparently marks the 125th anniversary of Friedrich von Hayek’s birth. But I only read about it in a Marxist magazine. The grandaddy of neoliberalism seems to have gone to history’s graveyard where ideologies go to die and be buried.
These days, in Washington and Brussels, it’s all industrial policy and trade protectionism all the time. China should be proud.
Imitation is supposed to be the sincerest form of flattery. The West has gone from denouncing Chinese industrial policy, to pursuing a version of its own. It’s still rounding on China, though, for doing it too well. Hayek, the prophet of free enterprise, small government, and unfettered market must be turning in his grave.
US Treasury chief Janet Yellen’s recent charges of overproduction against China may also be seen as a backhanded compliment to Beijing’s long-standing industrial policy, which Washington is only now trying to play catch-up.
Beijing has counterclaimed that its global supply of affordable goods has alleviated inflationary pressures on the world economy, while its dominance of green technology has been helping fight climate change. This is especially the case with low-cost electric cars, solar cells and lithium batteries.
In May, at a Group of Seven meeting in Italy, finance ministers declared together that the US and its European allies must coordinate their protectionism and industrial subsidies to counter China’s dominance in key industries.
Unfortunately, playing catch-up is hard, and pursuing industrial policy even harder.
China accounts for about 80 per cent of all green-energy manufacturing investment. It has spent roughly 1.7 per cent of gross domestic product on industrial support, of which green tech is a key sector. That’s roughly the same percentage of GDP it spends on its military!
By contrast, the US spends about 3 per cent of GDP on defence. Can any industrial policy, under President Joe Biden or anyone else, possibly match that?
In an essay published with the Institute for New Economic Thinking, economist James Galbraith argued that the US political system was no longer capable of pursuing industrial policy except at a superficial level. “The American state has lost the capacity for concentrated and decisive effort at the forefront of technology and the associated science,” he wrote.
Under Biden’s three initiatives – the Bipartisan Infrastructure Law (BIL), the Inflation Reduction Act (IRA), and the Chips and Science Act – “for the first time in decades, the United States has a plausible simulacrum of an industrial policy”, he said. But not a real policy.
On BIL, Galbraith wrote, “the projects have few, if any, implications for competitiveness or industrial productivity. They fade quickly into the warp and woof of urban and suburban existence; their implications for commercial endeavours largely benefit real estate developers, who have no presence in the international economy”.
On IRA, he said: “The very nature of energy policy … ensures that the political benefits of the policy are likely to be small. Like roads and water pipes, electricity fades into the background of daily life.”
On the Chips Act, he observed, “the policy itself may prove to be a chimera”. Why? Domestic US chip production will push up prices for equivalent capability in other parts of the world. If China can’t get advanced chips due to US restrictions, it will develop its own, following a history of industrial policy successes. China also controls important precursor materials such as germanium and gallium. Meanwhile, Taiwan may or will balk at losing its greatest economic asset (producing advanced chips).
“For 40 years – and especially since … the triumph of neoliberalism in the Clinton and Bush years – the US government has been working hard to eliminate its own technical capacities,” Galbraith wrote.
The US political system is too much dominated by Wall Street financiers, tech oligarchs, and the defence industry. Now, the US wants to jettison the very ideology championed by Hayek in a grand contest with an adversary by imitating its opposite economic practice. It may be too late in the day for that.
