If former U.S. President Donald Trump had not been so incapable of governing, and felt so threatened by his own civil servants, his administration might have done what his successor, President Joe Biden, did last week: Create a blueprint for an “America first” economic policy that consigns decades of liberal internationalism to the ash heap of history.
With a 250-page White House report on “supply chain resilience,” and the U.S. Senate’s approval of a $250-billion bill to compete with a rising China, the administration is trying to launch the United States on a new path toward rebuilding economic self-sufficiency, jump-starting innovation, and spreading economic benefits more broadly among Americans. Trump promised in his first speech as president to “remove the rust from the rust belt and usher in a new industrial revolution,” and then accomplished nothing of the sort. Biden may usher in that revolution.
The new White House report is ostensibly focused on supply chain security in four technologies: semiconductors, advanced batteries, critical minerals, and pharmaceuticals. But the document offers a far-reaching critique of the last several decades of U.S. international economic policy, arguing that both government and the private sector have “prioritized efficiency and low costs over security, sustainability and resilience.” It calls for a fundamental redirection with an ambitious set of goals: revitalizing U.S. manufacturing, speeding up deployment of green technologies, improving supply security and resilience in critical sectors, creating new union jobs, reducing economic and racial inequality, and spreading wealth regionally across the country.
The Senate legislation—the U.S. Innovation and Competition Act—is a first step in putting some of those ideas into action. Most notably, the bill includes $52 billion in subsidies aiming to reshore fabrication of high-end semiconductors, a business now dominated by Taiwan and Korea, and a more modest sum to roll out wireless broadband. It funnels billions into new research at the U.S. Department of Energy, NASA, and other agencies on technologies like 5G, artificial intelligence, and quantum computing, and expands funding for scientific and technical education. The bill also authorizes $10 billion to create new regional technology hubs, many likely to be in the industrial Midwestern states where Trump did so well in 2016. Astonishingly in an era of gridlock, the bill had significant bipartisan support, winning votes from 19 Republican senators who were largely motivated by the growing economic and security threat from China. While the bill must still pass the House of Representatives, it looks certain to land on Biden’s desk.
To fully understand the revolution in economic priorities that Trump started and Biden is now implementing, consider what came before. Since the creation of the World Trade Organization in 1995, the United States had been firmly committed to the proposition that government had no business in telling companies where to do their business. The rules of the liberal international economic order—based on the principle of non-discrimination—required that governments largely keep their hands off as companies decided where in the world to invest, manufacture, and sell their goods and services. Policies that distorted those market-based economic decisions—such as tariffs, quotas, and government subsidies—were to be eliminated to the greatest extent possible. The liberal economic era was in many ways an enormous success. World trade soared, and developing countries, which offered the allure of lower wages and fast-growing markets, saw their share of the global economic pie rise significantly for the first time since the West leapt ahead with the first industrial revolution in the 19th century. Hundreds of millions of Asians, Africans, and Latin Americans finally escaped poverty.
But Trump won the White House in part by telling voters that the liberal world was a raw deal for Americans. The “global elites” who negotiated those arrangements had sold out ordinary Americans, he said, and handed a windfall to China, which often ignored WTO rules. Trump had plenty of fodder: The “China shock” of the 2000s and the financial crisis of 2008-09 had contributed to the loss of millions of U.S. manufacturing jobs and left many Americans poorer and less secure nearly a decade later. Trump promised to restore U.S. manufacturing jobs and crack down on cheating by China. But his deep distrust of government experts left his administration with few who were capable of conceiving or carrying out such an ambitious agenda. Trump’s only major accomplishments were a huge corporate tax cut that did nothing to return business investment to the United States, and a prolonged tariff war with China that mostly hurt small U.S. manufacturers and consumers and did little to change Chinese behavior.
The Biden team shares many of Trump’s convictions on the need to restore U.S. manufacturing and stand up more effectively to China. But instead of corporate tax cuts and a splashy trade war, it has developed an elaborate and nuanced program for building a different sort of economy. The starting points are China and the COVID-19 crisis. Both, the administration believes, have shown the danger of relying on global supply chains controlled by multinational companies and their shareholders for vital inputs. In its narrowest form, many of the report’s prescriptions—stockpiling of pharmaceuticals and other goods, reducing dependence on China for rare earth elements and other critical inputs, investing in research and development of advanced batteries—could be seen as prudent planning in an era when supply chain disruptions have become more common.
But the report goes far beyond that narrow critique, arguing that the U.S. model of capitalism developed in the era of deregulation and free trade is harmful to Americans. Says a White House summary: “Unfair trade practices by competitor nations and private sector and public policy prioritization of low-cost labor, just-in-time production, consolidation, and private sector focus on short-term returns over long-term investment have hollowed out the U.S. industrial base, siphoned innovation from the United States, and stifled wage and productivity growth.” The blueprint calls for rebuilding U.S. industrial capacity using “Buy American” government procurement, subsidies, and other incentives to reshore production. It also calls for applying regulatory muscle to encourage a different sort of capitalism—one that prizes security and resilience over efficiency, a highly paid workforce over a low-wage one, environmental preservation over natural resource exploitation, and domestic supply chains over global ones.
The risks in this new approach are considerable. One of the virtues of the liberal international economic system was that governments focused on setting rules, not dictating outcomes. Over time, however, the exceptions—from the European subsidies that built the Airbus consortium to China’s top-down industrial policies to U.S. auto industry and financial-sector bailouts—overwhelmed the rules. And emerging challenges like climate change and pandemics are less amenable to private-sector solutions; without government incentives or sanctions, companies will under-invest in tackling problems that require short-term private costs for longer-term public gains. But the more government becomes involved in managing the economy this way, the more vulnerable it becomes to lobbying from industries currying favor, and the greater the risk of making big bets with taxpayer money that produce mediocre results and white-elephant projects. History also shows that industrial policies tend to favor established, well-connected corporations at the expense of smaller companies and start-ups.
A second familiar danger is that such economic nationalism tips over into the sorts of “beggar thy neighbor” trade policies that were so damaging in the 1930s. Critics who see no daylight on trade between Biden and Trump fear this outcome. But the report quite clearly acknowledges U.S. dependence on others and calls for the U.S. “to work with allies and partners to secure supplies of critical goods that we will not make in sufficient quantities at home.” The administration is urging the creation of a global forum among “key U.S. allies and partners”—China need not apply—to develop collective approaches to supply chain resilience. Rebuilding an alliance of democracies to challenge China was at the top of Biden’s agenda for the G-7 and U.S.-European Union summit meetings this week. The report even coins a new term—“friendshoring”—to describe how Washington should work with allies to improve manufacturing capacity and reduce dependence on China. The long history of trade skirmishes with U.S. allies such as the EU and Japan suggests this won’t be easy, but an explicit trade and investment preference for friendly nations is new—and may help Washington, Brussels, and Tokyo turn over a new leaf.
The biggest danger is that such a dramatic reorientation of U.S. capitalism could result in less of the innovation and dynamism that continues to be the envy of much of the world. It is easy to forget that the less globalized U.S. economy of the post-World War II era left the United States with enormous competitive vulnerabilities. When the Japanese in the 1960s and 1970 started capturing one industry after another—from televisions to steel to cars—critics pointed directly at the complacency of U.S. companies that weren’t used to global trade and competition. The 1989 MIT Commission on Industrial Productivity concluded: “The legacy of these years of self-sufficiency is an economy ill-equipped to compete to compete for worldwide markets or exploit foreign innovations.”
Globalization was the savior. It was U.S. companies like computer maker Dell that pioneered the creation of just-in-time global supply chains that fully integrated production into developing economies like China, aided by the rise of new information technologies that eased the challenge of coordinating operations, staff, and suppliers across the world. MIT scholar Suzanne Berger called this “the Lego model of production,” in which manufacturing was increasingly broken into its component parts to maximize cost-efficiency. This global model was later adopted by most large U.S. companies, from Apple’s worldwide sourcing and final production in China to Qualcomm’s use of fabricators in Taiwan and Korea to produce the world’s most advanced microchips.
For corporate America, the results speak for themselves: In the 21st century, the U.S. share of the world’s top 100 companies by stock market capitalization kept rising even in the face of a rapidly growing China. The United States is now home to 60 percent of the world’s largest companies, while Europe—which has pursued the more inclusive, less shareholder-oriented model of capitalism envisioned in the Biden plan—has seen its share fall in half.
Implementing the new model is still a work in progress. The Republicans who supported the China bill are opposed to many other elements of Biden’s Build Back Better plan, such as increased spending on infrastructure and the social safety net. U.S. companies are sure to fight back if the new menu includes higher taxes, as Biden wants, and stricter regulation. But the revolution that Trump started is alive and well—and continuing in abler hands.
