Since World War II, the global economy has run under a system of rules and norms to which America has subscribed. This has created unprecedented economic integration that has fostered economic growth, helped lift hundreds of millions of people out of poverty and helped the West defeat Soviet Russia in the Cold War. Today, that system is under threat. Countries compete for green industry subsidies, attract the products of friends and foes alike, and restrict the movement of goods and capital. Mutual gains have disappeared, and national gains have come to the fore. The era of zero-sum thinking has begun.
The old system was already under pressure as American interest in keeping it waned after the Great Recession. But President Joe Biden gave it a new blow when he abandoned free market rules in favour of an aggressive industrial policy. America has supplied massive subsidies of USD 465 billion for green energy, electric cars, and semiconductors. These demands are accompanied by a requirement that production must be local. Bureaucrats, whose job it is to control foreign investment to prevent undue foreign influence on the economy, now dominate sectors that account for 60% of the stock market. And officials are increasingly banning exports, especially the flow of high-end chips and chip-making equipment into China.
For many in Washington, a muscular industrial policy is appealing. It could help entrench American technological dominance over China, which has long sought independence in vital areas through state intervention. Given that carbon pricing is politically unfeasible, it could help reduce the country’s carbon emissions. And it reflects the hope that public intervention can succeed where private enterprise fails and reindustrialize America’s heartland.
But the immediate consequence is that it will unleash a dangerous spiral of protectionism around the world. Build a chip factory in India and the government will charge you half the price; build it in South Korea and you will receive help from generous tax breaks. If the other seven market economies that have announced policies for ‘strategic’ sectors from 2020 onwards reach the level of US spending as a share of GDP, total spending will reach $1.1 trillion. Last year, a third of cross-border trade transactions that came to the attention of European officials were checked. Export controls are applied to countries with raw materials for battery production. Indonesia has banned exports of nickel; Argentina, Bolivia and Chile may soon cooperate OPEC-style in the exploitation of their lithium mines.
Economic conflict with China seems increasingly inevitable. As China became more deeply integrated into the world economy at the turn of the century, many in the West predicted that it would become more democratic. The fading of that hope, with the transfer of a million manufacturing jobs to Chinese factories, made America fall in love with globalisation. Today, the Biden administration fears that batteries will become dependent on China, just as Europe depended on Russia for gas before the invasion of Ukraine. Both Democrats and Republicans fear that America’s loss of leadership in advanced chip production in Taiwan will undermine its ability to develop the artificial intelligence on which the military will rely in future strategy planning and missile guidance.