Biden is using a panoply of policies not only to protect and promote “strategic” American industries but also to slow China’s economic development. —Reuters
THE world is in the early stages of the biggest revolution in geoeconomics in decades.
From the late 1970s onward, a collection of institutions and policies were gradually but relentlessly marginalised: state-owned enterprises (SOEs), national champions, import and export-controls and industrial policy.
Now they are coming back along with a few newfangled phrases for the same thing such as “techno-nationalism” and “critical technologies.”
This confronts neo-liberals with a dilemma: Do they imitate William F. Buckley and “stand athwart history, yelling Stop,” or do they make strategic compromises with the new fashions in order to reduce the chances of disaster?
The pace of change is startling: For all his impression of being a doddering stop-gap, Joe Biden is both consolidating the Trump revolution and pushing it in a progressive direction.
Trump dealt in bluster and crude policies such as tariffs. Biden is using a panoply of policies not only to protect and promote “strategic” American industries but also to slow China’s economic development.
America must pursue “as large of a lead as possible” in chipmaking, quantum computing, artificial intelligence, biotechnology and clean energy, said Jake Sullivan, America’s national security adviser.
The CHIPS and Science Act provides US$52.7bil (RM228bil) of incentives to produce microchips in the United States in order to break America’s dependence on foreign suppliers of an essential input into the modern economy.
The oddly named Inflation Reduction Act – a slimmer version of the Build Back Better package the Democrats failed to pass last year – includes nearly US$400bil (RM1.7 trillion) of incentives to boost America’s clean energy industry and reduce its dependence on China for supplies of batteries for electric vehicles or other crucial parts of the clean-energy economy.
Americans can get a tax credit worth up to US$7,500 (RM32,437) if they purchase an electric car assembled in the United States.
Other changes are either in the works or on the books: Rules aimed at reducing China’s ability to manufacture advanced computer chips, including preventing Western companies from exporting high-end microchip manufacturing equipment to China, restrictions on capital flows into China, a new federal authority to regulate US investments in China, an executive order to evaluate the ability of Chinese apps like TikTok to collect data from Americans.
Containing China
The momentum of these changes is unlikely to slow with the Republican takeover of the House of Representatives, because containing China is one of the few things that both sides can agree on.
All this has shifted the overall aim of American trade policy: from engaging China in the global free-trading system to breaking America’s reliance on China’s economy. It has also changed the sort of people charged with decision-making.
The neo-liberals have been sidelined and replaced by an odd coalition of defence intellectuals who are worried about military competition and progressive economists who spy in all this a chance to create a modern New Deal.
A resurgent China delivered a one-two punch to the reigning neo-liberal orthodoxy. Punch one: It embraced an economic model that was supposedly discredited.
Neo-liberals claimed that you can’t pick winners: China did precisely this by picking small groups of companies and getting them to compete.
Role of SOEs
Neo-liberals claimed that SOEs are relics of a bygone era. China reinvented SOEs by radically reducing their number, introducing professional management and obliging them to compete abroad.
The result confounded Western predictions: Even as China modernised, it consolidated an economic approach based on industrial policy and national champions.
Punch two: China turned itself into a military rival to the United States. The neo-liberals had expected China to become more pro-Western – and indeed more democratic – as it became more entangled in the global trading system. “Peace through trade,” in the classic liberal phrase.
Instead, it became more autocratic and aggressive. The result is a paradox: America will be obliged to adopt some of the key features of the Chinese model – industrial strategy and even national champions – if it is to prevent China from overthrowing the American-dominated global order.
The combination of four developments – the coronavirus pandemic, Vladimir Putin’s invasion of Ukraine, China’s repression of protests in Hong Kong and China’s blockade of Taiwan – put paid to all doubts.
If America couldn’t make enough face masks on its own because it was so dependent on Chinese textiles, what about the rest of the manufacturing sector?
If Russia could freeze Europe by invading Ukraine, what were the potential consequences of an invasion of Taiwan for the supply of microchips?
Even if China hadn’t forced Biden to rewrite the rules of geopolitics, two developments would have eventually forced a rethink.
Energy transition
The most obvious is the energy transition. Most economists – and not just progressives – agree that reconfiguring an entire energy supply system will take some government intervention.
You may need to subsidise the price of new electric products in the short term to allow economies of scale to kick in.
You may also need to subsidise the construction of a new charging system to encourage people to switch.
China’s generous use of subsidies has allowed it to leapfrog past the West and grab more than 60% of the global electric vehicle market.
Nuclear energy, newly fashionable since the invasion of Ukraine, also tends to encourage state intervention because the upfront costs are so great and the risks of anything going wrong so catastrophic.
The other is the rise of the emerging world. Most emerging countries rely heavily on SOEs in general and national champions in particular. Many of them also embrace industrial policies that give the state a major role in the economies.
Again, neo-liberal predictions that they would “grow out of it” as they became richer have failed to materialise.
Many SOEs are formidable companies thanks to the use of market-friendly techniques such as public listing, external accounting and reducing the state’s ownership to minority status: Would you rather fly with Singapore Airlines or Emirates than American Airlines or United?
Both Singapore and South Korea have embraced industrial policy without becoming stagnant wastelands.
The result is a hidden revolution on the nature of capitalism.
SOEs account for some 30% of the output of typical emerging economies.
The share of SOEs in the world’s 2,000 largest firms doubled to 20% over the past two decades and their collective assets increased to US$45 trillion (RM195 trillion) of global gross domestic product.
Giant sovereign wealth funds such as those of Singapore and Qatar also hold a growing share of the private-sector economy. — Bloomberg
Adrian Wooldridge writes for Bloomberg. The views expressed here are the writer’s own.
