How Biden And Trump Forged India-China-Style ‘Industrial Policy’

→ Forget about free or managed trade as the dominant paradigm of world trade. Trade now is about framing supply chain management within industrial policy to advance national security. That’s as true for America as for Asia, and as true for the Republican and Democratic Parties as the Bharatiya Janata Party and Chinese Communist Party. America’s CHIPS and Science Act of 2022 is proof.

Two questions thread through all 64 On Point columns since their advent in January 2017: what is international trade about, and why?

On the first question, Donald Trump’s administration disrupted the Ricardian paradigm of comparative advantage, placing first national interests and aggressive management of trade over the pursuit of efficiencies extolled by economists and interdependence championed by multilateralists. That mercantilist Republican administration invoked Section 201 of the Trade Act of 1974 on solar panels and washing machines, Section 232 of the Trade Expansion Act of 1962 on aluminium and steel, and Section 301 of the 1974 Act against China.

No one dared utter ‘industrial policy’.

Amidst the Covid-19 pandemic, America deployed the Defense Production Act of 1950 to commandeer personal protective equipment and nationalise through procurements vaccines from its best and brightest pharmaceutical companies.

No one dared whisper ‘industrial policy’.

Joe Biden’s administration left the Section 201 and 232 actions in place (with minor exceptions for Canada and the European Union), retained and refined Section 301 measures, and tapped the DPA for more Covid-related merchandise. Like the one it replaced, this Democratic administration, too, pined for local manufacturing. If solar panels are needed, they ought to be made in America, hence the various legal and quasi-legal measures to onshore, or at least, friend-source, them.

No one saw a slippery slope (or praised a brave ascent) to ‘industrial policy’.

Everyone should now spot what is happening, and accurately label reality: ‘industrial policy’.

The CHIPS Act which President Biden signed on Aug. 9, could have been signed by his predecessor – or by Indian Prime Minister Narendra Modi, or by Chinese President Xi Jinping.

So, on the first question, international trade is now about securing supply chains for critical merchandise through a variety of measures. Inevitably, governments – Trump’s, Biden’s, Modi’s, or Xi’s – pick winners.

On the second question, national security drives supply-chain reorientation closer to home. Here, too, Trump and Biden are a jugalbandi: they play a duet against foes.

One side (Republicans) framed trade policy as a manifestation of national security, job and income preservation, and immigration control, and accused the other side (Democrats) of lacking a coherent trade policy. Until now. Geopolitical forces led the other side to the same conclusion as the first side. The CHIPS Act just as easily could have been a Trump Administration bill as a Biden one, and not surprisingly it passed by 64-33 in the Senate (with 17 Republican votes) and 243-187 in the House (with 24 Republican votes).

So, why does the rubric ‘industrial policy’ characterise as aptly what’s happening in America as in Asia?

Defining ‘Industrial Policy’

There is no standard meaning of ‘industrial policy’. Comparing and contrasting legal and policy initiatives, not only in the post-Second World War experiences of China and India, but also of Japan, Malaysia, and the Four Tigers (Hong Kong, Korea, Singapore, and Taiwan), and synthesizing them into a definition, is fraught with difficulty. The clue to start is what’s all the rage since President Trump launched the Section 201, 232, and 301 actions: supply chain management.

Aside from growth and development, the economic purpose of industrial policy is reliable supply chain management. ‘Reliable’, which refers to ensuring sources of vital merchandise and its inputs, has two dimensions. Sources should be robust (consistent and sustained), and resilient (capable of absorbing exogenous shocks without severe or prolonged disruption). Underlying both dimensions is scepticism of interdependence, particularly the theory countries with diverse political economies (e.g., America, China, India, and Russia) will gravitate to peaceful relations through comparative-advantage-driven commercial intercourse governed by multilateral legal regimes (e.g., the General Agreement on Tariffs and Trade and World Trade Organization) the hallmark of which is non-discriminatory trade.

Why the scepticism?

Because the adoption of interventionist planning by some countries un-levels the playing field and results in global overcapacity in some industries. Trade negotiations and litigation cannot make the world flat. Those countries are frozen in a historical narrative partly of their own making. Their egos are inseparable from their righting the wrongs of centuries of colonialism and neo-colonialism. Following rules crafted by hegemonic powers is less important than evolving into a larger role in the world trading system.

Nationalist stories in economically erstwhile peripheral countries beget nationalist stories in central ones. That is, supposedly declining powers need to respond with their own interventionist planning to preserve a status quo that still, on balance, favors them.

Three Styles Of ‘Industrial Policy’

Succinctly put, there is Chinese-, Indian-, and American-style industrial policy. The tools of that policy differ, which is to be expected given the different relationships of government to factors of production. But at least one policy instrument is the same: the financial contribution of benefits conferred by a government or government-like authority to specific enterprises of industries.

At some point, when that instrument – subsidies – is manifest so openly, in coordination with the other tools, the non-traditional planned economy, which had long prided itself on free markets, becomes an industrial policy ecosystem. International trade becomes about framing supply chain management within that policy.

The common framework means governments of capitalist economies (e.g., U.S.) seek what those of other types of economies want: reliable supply chains on strategic goods and services. Geopolitical tensions (e.g., Kashmir, Senkaku Islands, South China Sea, Taiwan) plus public health emergencies (e.g., Covid-19) convince these governments supply chains that lie too far offshore are unreliable.

Hence, capitalist governments become more legislatively aggressive, and draw on more executive branch powers, to onshore supply, or at least friend-source it (e.g., in Mexico and Vietnam), and decouple it from elsewhere (e.g., China and Russia). The just-announced U.S.-Taiwan 21st Century Trade Initiative’ negotiations are a case in point of deepening mutual trade and investment ties, and promoting sound labour and environmental practices, which inevitably will decouple the two long-time friends further from China (which “firmly opposes” the deal) and facilitate enforcement of another Biden bill that could have been Trump’s, the Uyghur Forced Labor Prevention Act.

The CHIPS Act As Industrial Policy

With the U.S. CHIPS Act, America reached the point at which China’s and India’s planners stood since Mao Zedong raised the Red Flag at Tiananmen Square on October 1, 1949, and Jawaharlal Nehru gave his Tryst with Destiny speech at Parliament to mark Freedom at Midnight on Aug. 15, 1947: promote structural transformation by enhancing capabilities of targeted domestic industries.

Ironically, America’s visible hand in its economy dates to Alexander Hamilton’s 1791 Report on Manufactures, traces through Franklin Roosevelt’s 1933-39 New Deal, and was on display with Jimmy Carter’s 1980 Economic Revival Plan. As Economic Policy Institute’s founder Jeff Faux wrote in 2009, “the great and tragically aborted cause of his [Carter’s] Administration – a long-term alternative-energy policy financed and nurtured by government – was, in fact, industrial policy.” Carter’s successor, Ronald Reagan, rejected interventionism, but the Great Communicator’s heirs embraced it by voting for the Act.

The key provision of the Act is the ‘Advanced Manufacturing Investment Credit’. American companies can obtain a 25% tax credit for investments in new or expanded domestic manufacturing of semiconductors, including the cost of making specialised tooling equipment. The Act also establishes a voluntary ‘National Supply Chain Database’ to help the government and industry minimise supply chain disruptions by assessing production capabilities in the U.S., and tightens research security (e.g., by mandating university foreign funding reporting over $50,000).

This AMI Credit could be worth $20 billion to the chip industry. Vitally, any U.S. taxpayer that is not a “foreign entity of concern” is eligible for this credit.

Other than Foreign Terrorist Organizations, persons listed by the Office of Foreign Assets Control as Specially Designated Nationals, and convicted spies, guess who are “foreign entities of concern”? Any entity owned or controlled by, or subject to the jurisdiction of, China, Iran, North Korea, or Russia, or which the Department of Commerce determines is engaged in unauthorised conduct detrimental to America’s national security.

World Trade Org… What?

Is the AMI Credit a prohibited Red Light subsidy, or an actionable Yellow Light subsidy, under the WTO Agreement on Subsidies and Countervailing Measures?

Oops, chhotee see samasya (छोटी सी समस्या) …

but, yah kuchh bhee nahin hai (यह कुछ भी नहीं है).

The small problem is nothing because industrial policy signals a post-WTO, “us” versus “them” world in which not light-, but heavy-, handed intervention to promote national champions in localised supply chains is de rigueur.

Hence, the U.S. isn’t playing the old ‘three-year pass’ game with the WTO. Under standard dispute settlement rules, 12-18 months are needed for a WTO case to be adjudicated, plus another 15 months for compliance by the losing member. But, if you don’t care about a WTO case, why worry about that timeline?

Roses

International lawyers need to agree on an accurate characterisation of facts if they are to reduce conflict and resolve disputes. That’s one reason why calling interventionist policies that rise to the level of ‘industrial policy’ as such matters. Another reason is to improve the status quo, to establish a new, better set of facts.

Who better pierced through labels to underlying realities than the Bard of Avon, to whom On Point has frequently referred? “A rose by any other name would smell as sweet,” Shakespeare writes for Juliet Capulet in Romeo and Juliet (Act II, Scene 2).

Ditto for industrial policy.

Once the fragrance of Red (Chinese), Saffron (Indian), and Blue (American) roses of industrial policy is appreciated, then the Rose Garden won’t end in tragedy.

Raj Bhala is Senior Advisor to Dentons U.S. LLP, Member of the U.S. Department of State Speaker Program, and Brenneisen Distinguished Professor, The University of Kansas. The views expressed here are his and do not necessarily represent those of Dentons or any of its clients, the U.S. government, State of Kansas, or University, nor do they constitute legal advice.

The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.