Reviews | Wonking Out: economic nationalism, Biden style
If you’re under 50, you probably don’t remember when Japan was going to take over the world. But in the late ’80s and early’ 90s, many people were obsessed with Japan’s economic success and feared America’s decline. The allegedly documentary sections of the airport bookstores were filled with volumes featuring samurai warriors on their covers, promising to teach you the secrets of Japanese management. Michael Crichton had a bestselling novel, “Rising Sun”, about the looming threat of Japanese rule, before moving on to dinosaurs.
The political side of japonophilia / japanophobia has taken the form of widespread calls for a national industrial policy: government spending and perhaps protectionism to foster industries of the future, especially semiconductor production.
Then, Japan largely disappeared from the American conversation – cited, if at all, as a cautionary tale of economic stagnation and lost decades. And we’ve entered an era of self-righteous arrogance, supported by the dominance of US-based tech companies.
Now the truth is, Japan’s failures have, in their own way, been overstated as much as the country’s previous successes. The island nation remains rich and technologically sophisticated; its low economic growth mainly reflects low fertility and immigration, which has led to a decline in the working-age population. Taking demographics into account, the economies of Japan and the United States have grown at about the same rate over the past 30 years:
Either way, we appear to be entering a new era of concern over the US role in the global economy, this time driven by fears from China. And we are hearing new calls for industrial policy. I must admit that I am not entirely convinced by these calls. But the justifications for government action are much smarter this time around than they were in the 1980s – and, of course, immensely smarter than the economic nationalism of the Trump era, which they superficially resemble. .
Which brings me to the 250-page supply chain report that the Biden-Harris administration released a few days ago. It was one of those reports that can turn out to be important, although few people will read it. Why? Because it offers a kind of intellectual model for policymaking; When drafting legislation and rules, this report and its analysis will be hidden in the background, helping to shape the details of spending and regulations.
Now, the world economy has changed a lot from the days when America’s rulers tried to reinvent themselves as samurai. Countries made things like cars and airplanes; nowadays they make parts of things, which are combined with other parts of things which are made in other countries and ultimately put together into something that consumers want. The classic example – and a little tired at this point – is the iPhone, assembled in China from pieces from everywhere. Last year’s World Bank’s World Development Report, obviously written before the pandemic, focused on global value chains and featured a fine alternative example: bicycles.
I’m a little surprised to learn that Japan and Singapore have such a large market share for pedals and cranks. I thought America was really cranking the world (charlatans too).
Either way, the World Bank offers a measure of the global value chain of global trade – the share of exports that cross at least two borders on their way to their end buyers:
This measurement shows that the strong growth of global supply chains is not new; in fact, it took place mainly between 1988 and 2008. But the dangers of fragmented production have been highlighted by recent events.
The Biden-Harris report focuses on four sectors: semiconductor chips, batteries, pharmaceuticals and rare earths which play a key role in many technologies. It’s not hard to see why.
The modern economy uses chips with just about everything – and chip production is very globalized. So we have a situation where US auto production is reduced due to the drought in Taiwan and a factory fire in Japan disrupting the supply of these tiny but essential components. In addition, much of the world’s supply of rare earths comes from China, whose regime is not known to shy away from carrying its full weight.
And vaccine nationalism – countries restricting the export of vaccines and the key components to make them – has become a real problem in the age of Covid.
As you can guess, much of the Biden-Harris report focuses on national security issues. National security has always been recognized as a legitimate reason to depart from free trade. It is even written into international agreements. Donald Trump gave the national security argument a bad name by abusing it. (Seriously, is America threatened by Canadian aluminum?) But you don’t have to be a Trumpist to worry about our addiction to Chinese rare earths.
That said, the supply chain report goes far beyond the national security argument, arguing that we need to retain domestic manufacturing across a wide range of sectors to maintain our technological competence. It’s not a stupid argument, but it’s very open-ended. Where does it stop?
One thing is clear: If you thought the revival of economic nationalism was purely a Trumpist aberration, you are wrong. The Biden administration won’t engage in silly stuff like Trump’s obsession with bilateral trade imbalances, but it won’t return to the uncritical embrace of globalization that has characterized much of US politics for decades. . Will this lead to a new era of trade wars? Probably not, but don’t expect many big trade deals in the years to come.
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