Wendy Cutler: Please share with us, from an Asian perspective, why it’s so important for the United States to have an active economic agenda with its Asian trading partners?

Minister Han-koo Yeo: There are many countries in the region that want strong, credible, and also predictable U.S. leadership and economic engagement in the region. Let’s think of this as two categories of countries: first, advanced countries and second, developing countries in the region. First, advanced countries, including Korea, Japan, and Australia, have gone through a paradigm shift in the trade environment and have also experienced supply chain disruption, climate crises, and other challenges. These countries need to tackle these global challenges with a strong partnership with the United States. Additionally, China’s economic ride for the past couple of decades has been phenomenal, and I think the United States could play a constructive role of balancing it out in the region.

When it comes to developing countries in the region, e.g., ASEAN (Association of Southeast Asian Nations) countries, India, they need market access to the United States and they want to be integrated into the U.S.-led global supply chain. In fact, many countries in the region, starting with Japan, Korea, and Singapore, have moved up in the industrial and technology ladder through economic cooperation with the United States. So, from the perspective of both developed and developing countries, U.S. economic leadership in the region is critically important. The current U.S. administration should get credit for returning to the region and resuming its leadership, even if the economic and market access engagement in the region is not as robust as many would have preferred.

Cutler: You mentioned that developing countries in the region welcome becoming part of the U.S.-led supply chain network. But, would this not be at the expense of China?

Yeo: No. These countries are being rapidly integrated into the supply chain led by China. But they realize that if there is too much dependence or too much concentration on one country, that becomes a vulnerability and a risk. It’s a matter of overall overdependence on one partner, especially China. So, developing countries want to expand their trade and supply chain integration with China, while also seeking a more active regional role from the United States and participating in these U.S.-led supply chains as well.

Cutler: Under the Biden administration, the United States has basically retreated from pursuing market-opening agreements or free trade agreements. Is there still a hope in the region that at some point the United States will go back to that model, even if not as robustly as it has in the past? Are countries still interested in pursuing free trade agreements with the United States?

Yeo: Obviously, they woke up to this brutal reality that things have changed in the U.S. political environment. In my view, it’s inconceivable to go back to this previous era where the United States played a leadership role in bilateral, regional, and multilateral trade negotiations. But I also think that there’s wishful thinking that maybe four years or even eight years from now, a return to a market-opening agenda could happen.

Cutler: Let’s discuss the Indo-Pacific Economic Framework (IPEF), the cornerstone of the Biden administration’s economic engagement in the region. Many people, both in the United States and Asia, have been skeptical about this initiative. But I note, Minister Yeo, that you have been supportive and have written a number of pieces pointing to potential benefits and the importance of this initiative. Can you share with us your views on IPEF, and in particular do you think it will be able to deliver concrete outcomes and provide benefits to all its members the way it’s constructed now?

Yeo: Yes. We live in a different world right now. For example, Korea has gone through a series of supply chain shocks and disruptions for the past few years. Like others, we quickly realized the absence of a new template for internal cooperation to cope with these new kinds of global challenges. Korea is one of the most wired countries with its extensive FTA network with countries all around the world, including RCEP, and Korea has been aiming to join CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership). But these traditional FTAs weren’t really designed to deal with the new types of challenges that we are facing. That’s why I think that these new types of economic cooperation agreements, such as IPEF, could play a meaningful role to fill the gap left by more conventional types of trade agreements. I believe that we should continue to advance trade liberalization through conventional FTAs (bilateral and plurilateral) but also, we need these new templates for new challenges, such as supply chain resiliency, decarbonization, and so on. Although IPEF is not perfect, it’s a meaningful first step.

Cutler: If Vice President Harris becomes president, there is an assumption that she would continue many of Biden’s policies and initiatives in this space, including IPEF. If you could offer her some words of advice on how to build on the current IPEF to make it more meaningful for Asia, what elements would you suggest could use strengthening?

Yeo: Vice President Harris is known for her strong advocacy on climate change and her environmental agenda. So, for example, the clean energy agreement in IPEF could be a starting point on which to build. The current text creates a cooperative work program, which is a way in which IPEF member countries can launch concrete projects that are of common interest to these countries and then aim to produce tangible outcomes. For example, they launched a regional hydrogen power project, which is a promising new source of clean energy, with new supply chain development and new ways to trade hydrogen. However, there’s a lot of work to do to develop tangible ways to activate this hydrogen power market. I think that this kind of project could show that IPEF could be useful in bringing tangible outcomes and benefits to these member countries through dedicated implementation.

You may also know that a couple of months ago, Singapore hosted an IPEF clean energy investor forum, and it was reported that about $23 billion of potential clean energy investment opportunities were identified. Of course, what matters is how much of these investment pledges can actually materialize into projects; but in order to do that, IPEF members need to work together to resolve investor grievances, including extensive red tape and bureaucratic hurdles.

Cutler: As you know, the United States has put the IPEF trade pillar effectively on hold through the election season. A lot of progress was made, but we also hear that a number of developing country members of IPEF had concerns about the labor provisions, in particular. Do you think if these talks were resumed quickly after the election that they could be swiftly concluded or do you think that there are larger differences in positions between the countries that could necessitate a lengthy negotiation?

Yeo: I think it’s more of a problem on the U.S. side than for other IPEF members. What I’m particularly worried about is the digital trade component. Recently, the WTO (World Trade Organization) e-commerce plurilateral joint statement initiative was concluded with its text “stabilized.” Although there is a shortage of more ambitious outcomes, I still think this is a meaningful achievement. The digital trade and e-commerce market in the region is exploding. These markets have young populations and growing middle classes, and many are interested in joining the Digital Economy Partnership Agreement (DEPA). China is also showing interest in DEPA, so now the United States is falling behind. There are no rules of the road for digital trade and without globally agreed, high-standard, digital trade rules, I think these countries in the region tend to copy and paste the standards and infrastructure available from China. So, I am afraid that the United States is falling behind in developing new global standards and rules for digital trade.

Cutler: Former President Trump has made it clear that if he is elected, he would, early on in his administration, instruct the United States to exit IPEF, calling it “TPP-2” (Trans-Pacific Partnership). How do you think the region would respond to such a move? My sense is that many countries in the region are still trying to get over the U.S. exit from TPP, so how would such an act by President Trump be perceived in the region?

Yeo: First of all, IPEF is not TPP-2 — it’s completely different. U.S. withdrawal from IPEF is a very undesirable scenario that we want to avoid at all costs. I also think if that happens, the credibility of the United States will be damaged severely. And, I think it’s not just short-term fallout but would impact relations in the more medium and long term too. To have a flagship U.S. economic engagement project and make a 180-degree U-turn would be damaging to U.S. credibility and leadership in the region.

Cutler: Trump also has been very vocal about his intention to increase tariffs against China as high as 60%, but he is also advocating for an across-the-board tariff increase of 10% on all products and for all trading partners. While there may be exceptions, that’s his current proposal. How would these actions be viewed in the region?

Yeo: This is very, very worrisome. If you look at the big picture of what is happening in the region, I believe that U.S. industrial policy has been quite effective, at least up to this point, such as the U.S. Inflation Reduction Act (IRA) and the CHIPS and Science Act. Because of these policy actions, many cutting-edge companies from Korea, Japan, and Taiwan are investing massively in the U.S. market for semiconductors, batteries, EVs, etc. This new trend of diversification and “China plus one” business strategies is providing countries like ASEAN members or India with new opportunities to develop their industries. They weren’t really given such opportunities before because everything was concentrated in China, but now they are being integrated into new global supply chains led by the United States. Against this backdrop, if the United States takes a complete opposite turn in its policy direction and imposes tariffs against the products from its friends and allies, it will be very counterproductive to the momentum building in the region and will damage U.S. national interests in the end.

Cutler: A number of countries retaliated against the United States during the first Trump administration, when tariffs were imposed, particularly on steel and aluminum, and China retaliated with its own sizable tariffs on U.S. imports. Are countries in the region likely to try to negotiate a deal to head off tariffs, or do you think that they are already planning retaliation moves against the United States?

Yeo: I think China will definitely retaliate, but it’s a more complicated picture for other countries in the region. In terms of security cooperation, I think many of these countries are under the U.S. “nuclear umbrella” or under some sort of security arrangement, so countries will take into consideration economic aspects as well as security aspects when deciding on the appropriate response.

Cutler: Under the Biden and the Trump administrations, the United States has retreated from its leadership role in the WTO. How do you see the WTO operating in the coming years, particularly as issues like supply chain resiliency, export controls, and advanced technologies become more and more prominent? Do you think the WTO risks becoming sidelined or irrelevant? Or, in light of the recent announcement on a digital trade agreement between many of the participants in the Joint Statement Initiative (JSI) on E-commerce, do you think that there is hope for the WTO to take on some of these challenging issues?

Yeo: Yes, obviously there’s a leadership vacuum at the WTO, and because of all these global challenges that we have discussed, today, more than ever, we need an organization like the WTO. But obviously, the WTO is not living up to the needs of the time. However, what is encouraging, despite overall difficulties that we are facing, is that recently middle-power countries have stepped up and have been playing a constructive leadership role. For example, the negotiations for the Investment Facilitation for Development (IFD) were led by Korea and Chile. The JSI e-commerce agreement that you mentioned, which was concluded recently, was led by Japan, Australia, and Singapore. I think, more and more, these middle-power country groups need to step up to fill the void left by the superpowers at the WTO. I also think that the WTO needs to tackle these newly emerging global challenges. For example, while there are widespread concerns with Chinese export surges and overcapacity issues, there is no global dialogue on this issue. I think the G7 is probably the only dialogue raising its voice on this issue, but its approach is more confrontational than collaborative.

If you look at WTO data on ongoing anti-dumping and countervailing duty investigations which were reported to the WTO after 2020, actions against China have comprised 30% to 40% of the total actions. This means that there is a structural issue, not just a case-by-case temporal matter. This also means we need more evidence-based, objective discussions on the extent and nature of the problem, and how it is impacting not just U.S. and China relations but also third nations including the EU, Korea, Japan, and the Global South. We need to explore global solutions to address these global issues. But there is no such global discussion underway right now. I think the WTO will need to play a more authoritative role as the only global trade body that is supposed to discuss and find solutions to these international trade issues. Also, as you mentioned, we have all of these newly emerging national security arguments regarding export controls, investment screening, and so forth. We have to decide whether to bring these matters into the realm of the WTO.

Cutler: How realistic is it though for the WTO to have a reasonable conversation on the overcapacity issue when top officials from China are denying that there actually is a problem?

Yeo: It is a difficult issue. I understand that some Chinese scholars acknowledge the need to have a global dialogue, but it’s very challenging to expect the WTO to have an effective role in taking up these very sensitive and difficult issues. However, if we were to find any place where we could have these kinds of conversations, I can’t see any other venue than the WTO.

Cutler: My final question is that if you had the opportunity to go into the Oval Office and brief our next president on these issues with very little time, what points would you highlight with respect to policy actions that they should or should not take? As the United States contemplates some of the policy measures we’ve been discussing, how would you urge the president to think about the region?

Yeo: It’s a very difficult question. If I had 30 seconds, I would make three points. First, U.S. trade and industrial policy can have a significant impact on shaping the economies and supply chains in the Indo-Pacific, as we have witnessed for the past few years. Second, nevertheless, sometimes the U.S. policy goal of strengthening U.S. leadership in the region and encouraging diversification and friendshoring of allies and partners doesn’t match its policy actions to achieve that. Third, therefore, it would be critical for the United States to step up its economic engagement in the region by providing tangible incentives for allies and partners with market access, industrial policy benefits such as the IRA tax credits, and digital trade rule-making leadership.

Han-koo Yeo is a Senior Fellow at the Peterson Institute for International Economics and Former Korean Trade Minister.

Wendy Cutler is Vice President at the Asia Society Policy Institute and the managing director of the Washington, D.C. office.

To read the interview as it was published on the Asia Society Policy Institute webpage, click here.

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However, two years on it is becoming increasingly clear that the legacy of the IRA is tethered to a renewed pact between government and the US economy, with key implications for trade, technological competition with China, and foreign policy writ large.

Since the early 1980s, the prevailing dogma on both sides of the aisle regarding US economic policy has largely been one of skepticism about direct government intervention in the economy. Trade and domestic market liberalization have been features of Republican and Democratic rhetoric since at least the Reagan administration. Of course, US government spending did increase over this period, and Washington did often step in with, for example, countercyclical spending during economic downturns. Nonetheless, most US politicians took as axiomatic that the government should not be “picking winners and losers” in the economy. The IRA has ushered in a new era in which this reflexive aversion to economic intervention may be vanishing.

Industrial policy has risen from the gutter

The IRA’s subsidies and grants for low-carbon electricity generation and technology manufacturing, along with its capitalization of the US Department of Energy’s Loan Programs Office, represent a divergence from the once-dominant economic policy consensus. The IRA is among the most significant government investments in the US economy since President Franklin D. Roosevelt’s New Deal. In fact, it is rivaled only by primarily demand-side stimulus packages, such as the American Recovery and Reinvestment Act (ARRA) of 2009 and the CARES Act of 2020.

According to Goldman Sachs estimates, by 2032 the IRA will provide $1.2 trillion in incentives with the intention of fueling the deployment of energy technologies. This includes technologies that are currently profitable, such as solar and onshore wind, as well as new market entrants, such as electric vehicles, grid storage, new forms of bioenergy, offshore wind, clean hydrogen for hard-to-abate sectors, point-source carbon capture, and carbon removal. If the broad-scale deployment of these technologies is achieved at the scale envisioned by prevailing models—which is dependent on additional regulatory reform—these effects of the legislation will be uniformly positive for climate mitigation and economic growth alike.

These positive effects are being borne out in data. Of an estimated seventy-eight billion dollars in public investment since the IRA’s enactment, the bill has shepherded between five to six times that figure in private investment. In fact, investment in low-carbon technologies and manufacturing has comprised about half of private investment growth since the IRA’s passage. That is a success.

The implications of the IRA as a shift in economic policy are not uniformly positive, however. The global consequences of this shift have manifested in at least two ways.

First, the floodgates of government market interventions have been opened. In 2023 alone, governments around the world implemented more than 1,600 industrial policies. The IRA is both an example of this general trend and, given the size of the US economy and the IRA’s intervention, something other countries have reacted to with their own interventions. For example, the United States’ use of subsidies for its economy has prompted adverse reactions from the European Union, whose single market makes the use of subsidies difficult, and prompted concerns regarding the comparative advantage of its domestic industry. This year, the European Parliament and European Council passed the Net-Zero Industry Act, which provides financial support through grants, loans, and other funding mechanisms to promote research, development, and deployment of clean technologies and manufacturing capacity—a direct response to the IRA.

In a sense, the IRA has prompted global competition among governments to make public investments in emerging industries and technologies.

Second, trade measures have arisen as a method by which to protect, or “ring fence,” domestic industrial policy strategies from foreign competition. Notably, the May 2024 suite of tariffs announced by the White House represent a substantial signal of intent to isolate encroachment of Chinese imports on domestic industries that have not yet been established and that the IRA supports. In the IRA, certain softly punitive measures impact trade, stoking additional tension. For instance, eligibility for subsidies under the Clean Vehicle Tax Credit is limited, based on the country of origin of critical minerals and battery components and excluding several US allies and partners.

Economic competition among the United States, the European Union, and China is increasing, and the decades-long criticism of China’s subsidy-centric growth model by Washington and European capitals is being usurped by a new industrial policy with US and European characteristics. In some sense, although all three blocs are competing, two distinct visions have emerged: the bottom-up, private sector-led and government-enabled vision of the United States and European Union, and the top-down, state-directed vision of China.

Trade-offs, tariffs, and technological innovation

Will this trend continue? Industrial policymaking in democracies is necessarily impacted by political feasibility, what is favored by those with power, and what works within the parameters of a state’s administrative capacity, as an International Monetary Fund publication recently reflected. As such, the IRA is also a product of the political moment, dubbed by the Breakthrough Institute as a period of “post-COVID congressional profligacy.” It is difficult to predict what the next major industrial policy package in the United States will consist of, but it will likely be bodog sportsbook review shaped as much by the political forces at play as by rigid economic analysis.

Careful reflection is needed going forward, as industrial policy, by definition, leads to concentrated benefits and carries diffuse costs. As such, it can also lead to unintended or counterproductive outcomes. The recent tariffs may prove this true, depending on one’s definition of the intended outcome.

Take the 25 percent tariff increase that was imposed on imports of Chinese solar cells. While this may protect domestic solar manufacturers, it may also slow the rate of solar deployment overall, given the higher resulting price for panels. Absent this tariff, solar panels would likely be cheaper, so it would be fair to say that the Biden administration’s implicit target of countering China’s industrial prowess is countering its explicit goal of achieving a carbon-free power grid by 2035.

The effects of trade policies such as this are unclear. What is clear is that acknowledgement of the trade-offs is necessary.

Public investments in infrastructure do have an important role. They are critical conduits of productivity growth and are necessary in areas where clear incentives for the private sector are not present. For instance, while nuclear energy is critical for bolstering the reliability of the electric grid, its business model has suffered significantly from the natural gas production boom that the United States has experienced from 2005 to the present. The affordability of gas, and increasingly of other resources, such as solar power, has made nuclear power’s high operating and capital costs less attractive to utilities, among other factors. Programs such as the Department of Energy’s Civil Nuclear Credit Program, which provides financial assistance to the United States’ nuclear reactor fleet, play an essential role.

Looking forward, however, it is also worthwhile to recall what is historically the engine of growth for the modern US economy, and the principal root of US competitive advantage in the global economy—technological innovation. It was not the tariffs of the McKinley administration or the safety net of the Roosevelt administration that led the way in supercharging US growth, although safety nets and infrastructure definitively do breed innovation.

Attempting to reinvigorate domestic industry through grants, loans, or subsidies may be necessary to achieve goals such as “reshoring” manufacturing. At the same time, investments in research and development (R&D) are proven over decades to provide consistent macroeconomic returns and drive technological progress. An independent report commissioned by the Department of Energy’s Office of Energy Efficiency and Renewable Energy found that investments of twelve billion dollars made by the office since the mid-1970s have yielded more than $388 billion in total undiscounted net economic benefits to the United States.

However, public R&D spending in the United States has been stagnant for decades as a percentage of gross domestic product. If government investment is looking for the best rate of return, as sound investors do, R&D may be an underappreciated “asset class” that should increasingly be targeted by the United States and its partners.

William Tobin is an assistant director at the Atlantic Council Global Energy Center, where he focuses on international energy and climate policy.

To read the blog as it was published on the Atlantic Council webpage, click here.

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Industrial policy has enjoyed a major return to popularity in the United States, with the introduction of the Inflation Reduction Act and the CHIPS and Science Act in August 2022, driven by the need to expedite the clean energy transition and mitigate geostrategic concerns by reducing dependence on China.

The subsidies linked to domestic content requirements in these statutes have shifted sourcing patterns, while restrictions on the exports of advanced microchips to Chinese firms have directly affected trade. The World Bank’s October 2023 East Asia Update measures how these laws have reduced Chinese and ASEAN exports to the United States and increased those from Mexico and Canada.

The direct impact of US industrial policy extends beyond its borders by providing preferential treatment to FTA partners and discriminating against others. It may also have spillover effects by contributing to an already growing appetite for similar policies in East Asia and around the world, particularly Europe. This tit-for-tat policy game could apply to subsidies and other instruments of protection as countries try to compete on an increasingly uneven playing field.

To some, these developments signal the end of the export-led model in spearheading growth. While trade growth in East Asia averaged over 8 per cent in the years leading up to the 2008 Global Financial Crisis, it is expected to fall to 4.4 per cent in the post-pandemic years.

While diversifying trade patterns will increase the resilience of trade flows and the sustainability of the export-led model, the two-decade steady decline in the region’s trade growth rate is a cause for concern. Supply chains are shortening and some policy-induced reshoring has taken place. But the slowdown has mainly affected goods rather than services trade. There is huge potential for growth in services trade, especially intermediate services, with digitalisation further reducing barriers.

This has led some commentators to assert that globalisation is not dead but simply transforming. Similarly, if the export-led model of old is dead or dying, then it may be superseded by one in which the composition and the pattern of trade changes, but not its role or importance. The composition will shift away from goods towards services while the pattern of trade will be determined less by efficiency and more by geopolitical factors.

Rapid growth in digital trade is related to this compositional shift towards services. Digitalisation increases the scale, scope and speed of trade and will affect assessment of the export-led model’s viability in at least three ways.

First, digital goods and services are likely to make up most future trade growth, while digitalisation will facilitate future services trade growth. Second, reported statistics on trade may underestimate the true volume of digital trade, given a host of measurement difficulties. Third, many of the barriers that inhibit goods trade in developed countries do not apply to services trade, while increasing digitisation enhances the ability of traders to circumvent protectionist barriers.

The export-led model is unlikely to die anytime soon. Though the shift towards embracing industrial policy may represent more than a transitory phenomenon in the United States, the fact that Washington’s security-driven trade policy has favoured friend-shoring and near-shoring more than reshoring implies a change in the pattern rather than the volume of trade.

Such policies have so far favoured countries which have free trade agreements (FTAs) with the United States, at the expense of China and ASEAN member states. But this could change if attempts by ASEAN countries like Indonesia and the Philippines to sign limited FTAs with the United States for critical minerals materialise.

Similarly, the rapid growth in digital trade is altering the product composition of trade, as new digital goods and services are traded and modes of delivery change. Trade statistics probably underestimate the true significance of these changes on volumes of trade, given measurement difficulties that lead to under-reporting.

The main reason why the export-led model is likely to survive, in one form or another, is the region’s long-standing commitment to free and open trade, which has facilitated massive economic transformation and social progress. The growth and spread of supply chains in the region has underpinned its economic success and is largely irreversible.

There is evidence that this commitment is still present. Recently, Malaysia decided to remove price controls and subsidies on sensitive agricultural products. The Philippines has removed the long-standing and controversial foreign equity limitation on public services, allowing 100 per cent foreign ownership in all public service sectors outside of public utilities. The ASEAN-led Regional Comprehensive Economic Partnership initiative, with its open rules of origin at a time of global pressures against liberalisation, is another indicator of the region’s commitment to openness, as is the recent launch of negotiations for the ASEAN Digital Economy Framework Agreement.

If there is a risk to the export-led model, then it is likely to come from outside. But the primary question, of whether the region’s long-standing commitment to openness will be sufficient to withstand disruption and fragmentation from a sharp escalation in geopolitical tensions, remains.

Jayant Menon is Senior Fellow at the ISEAS-Yusof Ishak Institute in Singapore.

To read the full article as it appears on East Asia Forum, click here. 

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The US National Security Advisor told the Brookings Institution in April that the Biden administration will be driven by domestic considerations.

“That is part of what we have called a foreign policy for the middle class. The first step is laying a new foundation at home—with a modern American industrial strategy,“ he said.

This was no real surprise given the legislation championed by President Joe Biden from the moment he came to the White House. Moreover, the United States has embraced industrial policy almost since its inception. In agriculture, maritime, textiles and clothing, steel, cars, semiconductors and many other sectors, the guiding hand of the government has always been present, offering financial assistance and protection from competitors. Justification for this assistance has taken many forms, including national security, the protection of jobs, regional development, and the national economic interest.

There are compelling reasons for the shift the administration is undertaking. But the track record of US industrial policy is mediocre at best and too often such policies have brought more harm than good.

Populist elements in the Biden administration harbor deep skepticism about markets and their ability to deliver for the middle class. Mr. Sullivan said policymakers in the United States were too often captured by the rationale “that markets always allocate capital productively and efficiently…And the postulate that deep trade liberalization would help America export goods, not jobs and capacity, was a promise made but not kept.“

It is true that markets have not always provided all the answers. Market-based mechanisms have done little, for instance, to offset the negative externalities of environmental degradation. Leaving the development of basic infrastructure entirely to the private sector has left roads, bridges, and ports in a sorry state.

Yet, the suggestion that the United States has run its economy on strictly market-based criteria is fantasy. And just as bodog online casino markets have their shortcomings, the government’s track record in picking winners and losers has been less than stellar.

Once governments go down the rabbit hole of industrial policy, they often find it difficult to claw their way out again. Companies that have drawn deeply from the government trough rarely volunteer to surrender this patronage. That a cohort of Biden administration progressives is actively seeking a taxpayer- and consumerfunded crutch to prop up specific sectors is extraordinary – particularly when such programs often line the pockets of the already rich.

Pushing the needle in one direction or the other leads to unintended consequences that bring their own set of risks. These include souring of relations with other countries, adverse environmental repercussions, threats to health and safety, corruption, and inflation. Often the impact goes unnoticed, at least in the beginning. But over time – and many industrial policies have lasted for decades – a slow slide into a more inefficient, less productive state is inexorable.

Washington is a town which develops ecosystems devoted to the preservation of corporate subsidies, government contracts, and protection from competition. Although the CHIPS and Science Act, the Inflation Reduction Act (IRA), and the Infrastructure Act are only in their embryonic stages, this dynamic is already at play.

Industrial policy also tends to get very complicated, very quickly. Just look at the contortions into which the administration has twisted itself in determining who qualifies for tax breaks under the IRA.

Any assessment of the administration’s policy must weigh the gains to the specific sectors receiving government subsidies and protection, versus the cost to the taxpayer and the consumer. The evaluation must take into consideration how US allies respond to the policy, whether the government can minimize the inevitable distortions and inefficiencies that arise, and whether these policy byproducts become a long-term burden on the economy.

To read the full report, please click here.

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In two landmark speeches in recent weeks, Treasury Secretary Janet Yellen and National Security Advisor Jake Sullivan articulated the core principles of a new international economic order centered on industrial policy. In this vision, the U.S. government will take an active role in reshaping supply chains to ensure its national security, fight climate change, and reduce inequality. Contrary to common conception, Yellen and Sullivan argued, pursuing industrial policy at home is compatible with an open, fair, and cooperative global economic order.

The two speeches declared the intent of President Joe Biden’s administration to revise the rules and practices that drive global trade and investment. However, a number of questions surround the strategy and vision that Yellen and Sullivan tabled.

WHAT DOES INDUSTRIAL POLICY HAVE TO DO WITH INTERNATIONAL ORDER?

Industrial policy is any intentional government effort to bolster priority industries or create structural economic change. It has been an integral part of climate politics since China pushed to increase its market share of wind and solar manufacturing in the 1990s. Yellen’s and Sullivan’s speeches took industrial strategy global. They expressed a goal of drawing countries into new efforts to create rules and investments that will drive decarbonization and increase geopolitical resilience, among other aims.

Two kinds of global industrial policy are emerging: foreign industrial policy and joint industrial policy. Foreign industrial policy refers to countries using the tools of foreign policy to advance their domestic industrial policies abroad. Joint industrial policy is when countries align their domestic strategies through international coordination. Both varieties were highlighted in the speeches and are currently being advanced by U.S. officials and agencies.

U.S. foreign industrial policy involves using its existing foreign policy apparatus—diplomatic, financial, and trade tools—to friendshore global supply chains. One key goal is to strategically deploy finance so that other countries can contribute to U.S. industrial strategy goals, such as diversifying the battery supply chain. For example, Washington is seeking to focus its overseas financing through the Partnership for Global Infrastructure and Investment, which funds clean energy and semiconductor supply chain projects overseas. And Washington has used the International Development Finance Corporation to make an equity investment in a nickel and cobalt mining facility in Piaui, Brazil.

Institutions and agreements that coordinate domestic industrial policies are the key drivers of U.S. joint industrial policy. Examples include the Global Arrangement on Sustainable Steel and Aluminum with the European Union, the U.S.-EU Trade and Technology Council, the Minerals Security Partnership, as well as a host of bilateral and trilateral initiatives. Such partnerships seek to allow countries to pursue and focus industrial policy at home without driving subsidy competition abroad.

WHY WAS A NEW VISION NECESSARY?

The basic structure of international economic order has been in disrepair since former president Donald Trump’s administration, which neglected the order’s core institutions and challenged its principles. Biden’s administration has taken up a leadership role, but the Inflation Reduction Act (IRA) and other policy initiatives that disregard the World Trade Organization have challenged the trading order anew. The IRA led allies and competitors alike to question whether Washington was turning inward and was only out to bolster its own economy.

The two speeches contested this, arguing that industrial policy at home is compatible with internationalism abroad. If all states engage in smart, fair industrial policy, then active government support for clean energy deployment can create a positive-sum global dynamic. The key premise of the argument is Yellen’s “modern supply-side economics,” in which the government makes strategic investments to expand potential economic output. If productivity increases, then the economic pie increases too—eliminating the need for zero-sum competition.

In addition, the world requires so much investment and innovation to build the global net-zero economy that there is room for everyone in global value chains for clean energy technologies for batteries—whether that’s designing batteries, mining minerals, or assembly the batteries in automobiles. As Sullivan put it, “We’re nowhere near the global saturation point of investments needed, public or private.” But the key is to ensure that everyone engages in smart, fair industrial policy.

Finally, policymakers’ nationalist intentions notwithstanding, firms tend to create what Jonas Nahm, my colleague at Johns Hopkins University, calls collaborative supply chains, in which different countries find niches in complex global production networks. These chains distribute economic value-added across the globe, giving multiple countries an opportunity to benefit.

HOW DO WE DRAW THE BOUNDARY BETWEEN FAIR AND UNFAIR COMPETITION?

The argument for a positive-sum dynamic makes sense in principle. But Yellen’s comments that the United States will benefit from healthy economic competition without seeking “competitive economic advantage” are somewhat confusing. Perhaps what Yellen meant is that the United States will not seek a structural or unfair advantage—which raises the question of what constitutes fair and unfair advantages in a world of industrial policy.

Yellen noted a number of “unfair” practices: aggressive use of state-owned enterprises, intellectual property theft, barriers to market access, and economic retaliation for diplomatic disputes. At best, this is a list of practices that do not have clear boundaries. Even friends are wont to disagree where the lines lie. At worst, this list will seem disingenuous because the United States itself engages in some of these practices, such as economic retaliation.

Drawing the boundaries will require considerable intellectual and diplomatic work, and whatever the principles end up being, they need to be clear and defensible. For example, the United States’ and Europe’s efforts to forge a steel deal that allows green industrial policy at home while creating a shared international market for low-carbon steel are critical. Similarly, a proposal for coordinated production subsidies among certain partners would allow countries to bolster specific sectors without creating subsidy races.

IS THERE ROOM FOR ALL, INCLUDING THE GLOBAL SOUTH, IN CRITICAL SUPPLY CHAINS?

The positive-sum argument can only serve as the basis for international order if all countries, including those in the Global South, can see places for themselves within it.

This will mean different things to different countries, but since World War II, developing and emerging economies’ participation in U.S.-led international order has been premised on the promise of capitalist development. The most effective strategies for development have involved the use of industrial strategy, as in the manufacturing-led drives of Japan, South Korea, Vietnam, Taiwan, and China. If the United States and Europe are seeking to bring manufacturing home, the industrial policy route could appear closed to the Global South. Moreover, African countries have struggled to copy the “Asian tiger” model, since they have more agricultural land and resources than the low-wage labor that Asian manufacturers and exporters capitalized on.

Nonetheless, the proposed U.S. vision must create space for the use of industrial strategy in developing and emerging economies. One key will be reforming the International Monetary Fund and World Bank so that they respect rather than close the political and fiscal space for industrial policy in these economies. Another will be ensuring that new institutions, such as the EU’s carbon border adjustment mechanism, do not kick away the ladder.

Enter, for example, resource nationalism in countries such as Chile, Indonesia, and Zimbabwe. All three seek to use their mineral resources as a means to add value to their economies and secure public revenues, with Indonesia banning the export of raw nickel, Zimbabwe banning the export of lithium, and Chile announcing that the state would play a larger role in lithium projects. Indonesia aims to leverage its nickel resources to increase domestic battery processing, so that more of the highest-value parts of the battery supply chain stay within its borders. By securing foreign direct investment backstopped by the ban on raw nickel exports, Indonesia hopes to achieve technology transfer based on the Chinese and Korean models. Zimbabwe aims to do the same with lithium. Chile’s strategy is to secure stronger state equity positions in the next round of lithium investment.

There are many ways for developing countries to benefit from mining resources, but not all countries can be competitive players in the battery supply chain. This supply chain is mature and dominated by large, sophisticated firms. Only smart industrial policies that target sectors in which countries have a real potential advantage are likely to work.

HOW CAN STATES DESIGN EFFECTIVE INDUSTRIAL POLICIES AND MAKE SMART INVESTMENTS?

The positive-sum vision hinges on countries engaging in smart industrial policies that make good interventions to bolster clean energy technologies. But in complex areas, such as clean energy supply chains, this is easier said than done.

Criticisms of industrial policy are usually posed against an outdated straw man conception of industrial policy as some version of static centralized planning. However, far from being centralized, modern industrial policy involves open collaboration between the government and industry. Moreover, modern industrial policy involves deploying a mix of regulations and investments in a dynamic, experimental way. Setting up a good learning process is crucial to success.

That process starts with specific objectives and clear strategies for building critical industries and supply chains. Those strategies have to be based on a realistic analysis of what is possible for a country to achieve in competitive global supply chains. Both strategy and implementation must be developed as part of a constructive collaboration between government and industry. Involving and empowering independent expertise is critical to success. States will need to invest in the analytical and regulatory capacity to develop effective industrial strategies. However, these very investments have been discouraged over the last three decades of neoliberalism. Reinvestment must begin now.

Each of these questions surrounding the new vision requires intellectual and diplomatic work. But in many cases, they cannot yet be answered in the abstract. Instead, they must be worked out through brave sectoral experiments that show creative ways to forge global coalitions for the green transition, global public health, and more.

Bentley Allan is a nonresident scholar in the Sustainability, Climate, and Geopolitics Program at the Carnegie Endowment for International Peace.

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Taking as an example one category of activity that the IRA seeks to catalyze – manufacturing of solar energy equipment – what are those key lessons and how are EU policymakers missing them?

Industrial policy lesson: help with operating expenses, not just capital expenses, is essential.

Capital formation is not the main barrier to growing solar manufacturing in Europe and North America. The “cost penalty” associated with manufacturing in the United States versus manufacturing in Asia is large enough that, prior to the IRA’s enactment, an investor awarded a “free” U.S. solar cell or module factory could have expected to operate that factory at a continuous loss as far as the eye could see. This is why the U.S. policy mix, post-IRA, now includes per-unit-of-output benefits properly sized to close the ongoing gap. Cap-ex help may be necessary, but it is nowhere near sufficient. This applies in the EU as well.

The EU discussion, sadly, has been almost exclusively about cap-ex incentives. This was apparent from arguments about how much EU-level money was available, whether various unused amounts of structural funds could be repurposed, whether new borrowing by the EU itself could occur, etc. Rather than looking for a specific number of euros to award for factory-building, the EU and its Member States could have made space (by amending state aid rules) for new factories to operate for ten or more years free of corporate income taxation. This step alone would cover a good portion of the ongoing cost disadvantage of manufacturing in Europe versus manufacturing in Asia.

Political economy lesson #1: the easiest-to-use fiscal tactic is tax expenditures that don’t forgo much actual revenue.

The $369 billion number assigned to the IRA’s renewable energy title is not real. It reflects scorers’ guesses about private companies’ likely behavior (increasing activity in response to incentives), about corporate profits that theoretically would result, and about the “revenue loss” associated with not taxing (or lightly taxing) those profits over a 10-year period. In the case of solar manufacturing, the calculations mostly involve new factories that, absent the IRA, would never be built. So the tax revenue the US government is “foregoing” through, for example, the new Section 45X credit (a subset of the $369 billion) is not revenue that it could, in a counter-factual scenario, hope to collect. Congressional scoring doesn’t use this kind of rigorous counter-factual analysis, but legislators understand that the actual revenue cost is essentially zero.

Dollars like these are the politically-easiest ones to “spend” on industrial policy. When the government promises not to collect money it could never collect anyway, no one else’s taxes have to rise. Democrats passed the IRA on their own, but Republicans’ motivation to sabotage it will be muted.

Deficit hawks understand that the “foregone” tax revenues were never really accessible anyway. And small-government conservatives might not hate the concept of new industrial facilities being born inside a brand new low-corporate-income-tax bubble within the US economy.

EU policy discussions show no sign of heeding this lesson. Instead of alleviating corporate taxes imposed at the Member State level, policymakers focused on identifying EU-level resources which quickly proved to be a morass. Delivering incentives through the tax system works differently in EU Member States than in the United States, but it is not impossible.

Political economy lesson #2: address deployment incentives and manufacturing incentives in tandem.

Green power generation and green manufacturing are linked politically. Significant government incentives are still needed to increase renewables’ share of a developed country energy mix. These deployment incentives, while justified, are expensive. Political support for them is difficult to sustain when the equipment being connected principally comes from – and the related manufacturing jobs primarily exist in – another country. The IRA political strategy recognized this linkage and credibly set out a vision of new solar installations full of made-in-America equipment. The EU’s latest commitments on solar deployment were made independently of any strategy or vision for related manufacturing.

Political economy lesson #3: Worrying too much about where investments will locate is a recipe for getting nothing done.

The IRA passed with exclusively Democratic support, even though it was apparent that much of the new manufacturing investment would land in America’s “red” states. In the EU, some of the most promising early threads of public conversation on a robust industrial policy response seem to have fallen victim to infighting: there was no way to guarantee that incentivized manufacturing investments would spread evenly across poorer and richer Member States.

There are understandable reasons, especially after Brexit, for EU policymakers to take “unity” into account in everything they do. The US has a milder version of this “unity” problem and is accordingly better-situated for deploying industrial policy at a continental level. Challenges notwithstanding, the EU needs to find a way forward. A successful energy transition seems imperative, and it will need expensive government incentives, and public support for those will be difficult to achieve (much less sustain) if all the new renewable energy installations are full of equipment made outside Europe.

If the EU draws the right lessons from America’s experience with the IRA, and applies those lessons strategically in its own industrial policy formation, success is not out of reach. Circumstances are more challenging in some respects but easier in others, given that carbon pricing is already present in the EU.

A re-set and reinvigoration of the EU policy discussion is in order.

John Magnus, President, TradeWins LLC. 

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Glen Hodgson is CEO of Free Trade Europa, a free-market think tank committed to trade, liberalization, and the rule of law across Europe. Brooke Medina is Vice President of Communications at the John Locke Foundation, a free-market state-based think tank in Raleigh, North Carolina.

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EU and US: increasingly protectionist, pro-subsidy, and anti-trade

There is never a right way to do a wrong thing, and this is particularly true when it comes to governments picking business winners and losers, drowning politically favored companies in taxpayers’ money and claiming they are turbo-charging progress. The US’ Inflation Reduction Act (IRA) – doling out $369 billion to subsidize electric vehicles, turbines, and battery projects – and the EU Recovery and Resilience Facility (RRF) – an instrument for providing grants and loans to support reforms and investments in the EU Member States totaling over €700 billion – are the latest examples of this self-destructive tendency.

Both the European and American political appetite for dirigiste industrial policies is rooted in a wrong-headed desire to beat China at its own self-destructive game, buying into the notion that the government has reliable foresight in which technologies and materials to invest in. History has shown that state aid invariably becomes a vehicle to support uncompetitive companies and pour money into politically favored initiatives, rather than support innovation and cutting-edge technologies. Do America and Europe really want to let China shape their economic strategies?

Excessive interventionism is bad for business, consumers, and the economy, as it gives bureaucrats the authority to redirect resources to projects and businesses based on political considerations, rather than economic ones. This creates a lack of competition, which often leads to higher prices, fewer choices, and poorer product quality.

Exacerbating trade conflicts

Even beyond the high economic importance of keeping global markets competitive, decision makers must remember that subsidies and tariffs distort markets and often lead to conflict in international trade relations. This is an especially critical point during a time when international instability is on the rise, whether it’s the Russian war on Ukraine or the worrisome prospect of China invading Taiwan. Ensuring strong relations with our allies, both economically and military, is crucial. Unfortunately, the US and EU have indulged in a number of internecine trade wars over recent decades, covering everything from aircraft and aluminum to steel and poultry. The results have led to needless trade tensions with international partners and comparative advantage losses in a variety of industries and sectors.

Similarly, we see an increase in Environmental, Social, and Governance (ESG)-linked criteria used as a barrier to trade. A perfect example of this is the EU’s Carbon Border Adjustment Mechanism (CBAM) which is a tariff on carbon intensive products, such as cement and some electricity, imported into the European Union. This was enacted as part of the European Green Deal and takes effect in 2026, with reporting starting this year.

In the US, supporters of the IRA made lofty claims about its benefits bodog sportsbook review to the environment. One congresswoman said the act, “represents the most significant investment to combat climate change in U.S. history.” Analysis and time have shown these claims to be illusory. The Hoover Institution found that the protectionist policies baked into the IRA would do virtually nothing to curb global warming, stating, “At best…the Inflation Reduction Act would cause the world’s temperature in 2100 to be 0.028 degrees Fahrenheit cooler; at worst, only 0.0009 degrees Fahrenheit cooler.” The electric vehicle element of the IRA is another congressional conceit, and has prompted much outcry from the US’ European counterparts. The “buy American” mandates embedded into it have caused so much European pushback that Secretary Janet Yellen has delayed final rules on the incentives until March, looking for ways to appease vocal opponents.

Time to change the focus

Instead of heading down the precarious path of government-led industrial policy, America and Europe should focus on expansionist policies which remove red tape and facilitate trade. An emphasis on entrepreneurship and innovation, rather than propping up ailing companies, would give businesses a fair shot at competing in the global marketplace, shoring up the most efficient supply chains, and tapping into individual country’s comparative advantages.

By way of an example, the proposed EU Critical Raw Materials Act – which should be published in March – is projected to make it easier and faster for companies to attain the necessary licenses and permits to mine the resources required by businesses and society. Waiting 10 to 15 years before the first spade is even allowed to break ground, as is currently the case, is unacceptable.

Likewise strengthening and completing the EU Single Market would work wonders for Europe. The Single Market is Europe’s greatest asset, and should be expanded to include finance/banking, services and standards. Estimates suggest a more integrated and better functioning Single Market would add an additional €183 to €269 billion annually for manufactured goods, and an additional €338 billion annually for services. In total this represents a rise in EU GDP of approximately 12%.

In the US, uncertainty surrounding Congress’ ability to pass legislation abounds, now that the Republican control of the House of Representatives can serve as a foil to President Biden’s agenda. This could lead to some improvement in US-EU trade relations, as the pro-market voices in Congress apply necessary pushback against their protectionist colleagues.

The magic power of free trade

The wave of government aid swelling on both sides of the Atlantic will inevitably stoke animosity and drive an unnecessary wedge between transatlantic allies during a time of increasing global instability and economic uncertainty. It’s time to turn the tide.

Despite rising internal and external nationalistic pressure, leaders on both sides of the Atlantic should remember that in a time of increasing hostilities from bad actors, like China and Russia, retaliatory protectionism toward our allies will do nothing but ensure mutual decline. Like Professor Dumbledore, our leaders possess the power to combat dark, damaging forces. The choice is theirs. They can either choose closed borders, tariffs, and quotas, further harming the US and European economies over the long term, or they can open the door to prosperity and mutual benefit by securing global supply chains. Citizens deserve reliable and affordable access to the materials and markets they need to thrive, whether it’s baby formula, mineral fuels for aerospace products, or a foaming tankard of butterbeer.

Glen Hodgson is CEO of Free Trade Europa, a free-market think tank committed to trade, liberalization, and the rule of law across Europe. Brooke Medina is Vice President of Communications at the John Locke Foundation, a free-market state-based think tank in Raleigh, North Carolina.

Originally published on api.realclear.com, part of the BLOX Digital Content Exchange.

See original post on RealClear Policy: Free Trade: the Strongest Spell Against Economic Decline | RealClearPolicy

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The lack of financial and human capacity has been a key impediment to Namibia’s industrial development, in particular for small and medium-sized enterprises.

Skills gaps and skills mismatches are recurrent in Namibia, in part because institutions are not providing enough skilled human resources to meet the market demands.

Implementing flexible industrial and trade policies to promote competitiveness and facilitate long-run growth should continue to be a strategic policy focus area. Manufacturing is an engine of economic growth as industrial goods have a higher income elasticity of demand, especially in world markets. A successful industrial and trade policy should be focused, flexible and premised on the notion of embedded autonomy. Focused industrial and trade policy requires the prioritisation and rationalisation of interventions, and flexibility comes from learning from experience.

Focus and flexibility must be underpinned by embedded autonomy, which demands that the government elicits useful information from the private sector, which has the best knowledge of industrial and trade opportunities.

The government should urgently implement a reform that can boost Namibia’s export market in the short-term, while also creating the conditions for higher long-term sustainable growth. These growth reforms should promote economic transformation, support labour-intensive growth, and create a globally competitive economy. The current state of the Namibian economy is unsustainable. Low economic growth entrenches poverty and inequality. High-income inequality aggravates social fragmentation, and poses a risk to economic growth. Inequality contributes to extremely divergent views, which make compromises difficult. The resulting stalemate and policy uncertainty can contribute to economic weakness. A growth-oriented policy agenda must be accompanied by interventions that change how the benefits of growth are distributed, and fundamentally transform the systems and patterns of ownership.

Initiatives that transform the economy must meet the dual tests of sustainability and intergenerational equity. In other words, economic transformation must be implemented in a manner that does not compromise long-term ability. This means that at the heart of our economic policy must be a concurrent emphasis on economic transformation, inclusive growth and competitiveness as this offers the most sensible strategy to address the challenges of unemployment, poverty and inequality.

Namibia’s industrial ambition is articulated in Vision 2030, which stipulates that the country should be an industrialised nation with a high income by the year 2030.

To achieve V2030, factors that hinder greater participation by new firms in the economy, such as the existent regulations and policies that support incumbents or are ineffective in assisting rivals and new firms; competition legislation that favours large firms and incumbents; and access to finance challenges, need to be addressed.

Change in economic relations must be the creation of opportunities for all Namibians to live productive, prosperous and dignified lives.

Current trade and industrial policies have made some progress towards attaining economic and structural transformation, and contributing to inclusive growth. Namibia’s industrial policy is on the right track, but some important adjustments could significantly improve its effectiveness.

Furthermore, accessing credit through formal financial institutions is a challenge for entrepreneurs who have little collateral or no proven creditworthiness and, therefore, a higher risk profile. The post-funding support that is necessary to ensure the successful growth of the business is often lacking, as either the mentors have little experience in running small businesses, or have little experience in the sector in which it operates. A failure to support early-stage entrepreneurs disadvantages those who do not have capital and collateral. This policy failure, in turn, inhibits the ability of the government to promote economic transformation, and the resultant gap presents an opportunity where public funds can be deployed more effectively.

Namibia suffers from stubbornly high levels of unemployment that are compounded by inefficient spatial patterns which make participation in the formal and informal economy costly and difficult for individuals.

Agriculture makes it important in the pursuit of inclusive, labour-intensive economic growth, its rural linkages, ability to absorb less-skilled labour, large multipliers due to extensive links with the rest of the economy, competitive labour productivity, and the importance of export-led growth. A growing agricultural sector can, therefore, help address our challenges of unemployment and low growth, while countering rural poverty.

Our agricultural sector receives less government support than those of our peers, and it seems that we have not taken up all the potential policy space that exists to support the sector. Because the agriculture sector plays an important economic and social role, given its extensive links with the rest of the economy and the importance of food security, business continuity in the sector is critical.

Many agricultural producers in Namibia are not insured against the negative impacts resulting from natural disasters, such as drought, mainly due to the high costs associated with agricultural insurance.

Tourism is one of the key sectors that can deliver inclusive growth through its labour absorption potential. Tourism is characterised by low barriers to entry, as most tourism businesses are small, providing services such as accommodation, tour guiding, day tours and taxi services.

An important aspect of its contribution to inclusive growth and economic transformation is the fact that unlike mining, manufacturing and financial services, tourism is not clustered in specific development nodes.

In conclusion, industrial and trade policy interventions cannot effectively achieve their desired outcomes if they are not complemented by an overall supportive business environment.

For this reason, Namibia needs to shift its focus towards increasingly attractive regional growth opportunities which hold significant potential to increase intra-regional exports and foster growth and economic development in the region.

Therefore, the Namibia Investment Promotion and Development Board (NIPDB) should advise investors on procedures for entering the Namibian market, and establishing a business.

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