From an Finance and Development (June) article, by Douglas Irwin (Dartmouth), author of Clashing over Commerce: A History of U.S. Trade Policy (University of Chicago Press, 2017), Free Trade under Fire (Princeton), and currently President of the Economic History Association.
The debate over industrial policy has long been locked in a stalemate. Some see it as essential to productivity growth and structural transformation, while others see it as abetting corruption and fostering inefficiency. Some point to Argentina’s costly attempt to promote the assembly of electronics in Tierra del Fuego, while others point to gleaming high-tech factories in China and Korea. The effects are easy to exaggerate. Quantitative models suggest that the gains from even optimally designed industrial policies are small and unlikely to be transformative (Bartelme and others 2021).
What is new is that the United States has joined China in an explicit embrace of industrial policies. China has been in the game at least since President Xi Jinping reasserted state control over the economy, moving away from the outward-oriented policies of Deng Xiaoping and his successors. The Made in China 2025 initiative, consisting of large subsidies to targeted industries, has given way to the idea of “dual circulation,” focused on reducing external dependence by strengthening domestic sourcing by local firms, and the drive for self-sufficiency in key technologies. The United States began protecting the steel and aluminum industries, ostensibly on national security grounds, during the Trump administration. With the CHIPS Act and the Inflation Reduction Act, the US introduced subsidies to “reshore” production of semiconductors and adopted restrictive national content regulations for electric vehicles to ensure domestic production. And the European Union has always had industrial policies, announcing in 2020 an industrial strategy to enhance its “open strategic autonomy” in the transition to a green and digital economy.
Here’s a cautionary tale, from China’s experience:
China illustrates how industrial subsidies can be an inefficient way of spending scarce resources. In 2006, China identified shipbuilding as a “strategic industry” and began massive production and investment subsidies, mainly through cheap loans. Evidence suggests that these policies did not produce large benefits but were wasteful (due to excess capacity) and distorted markets (forcing more efficient countries to adjust by reducing their output). China’s global market share grew at the expense of low-cost producers in Japan, South Korea, and Europe but without generating significant profits for domestic producers (Barwick, Panle Jia, Myrto Kalouptsidi, and Nahim Bin Zahur. 2019). The subsidies were dissipated through the entry and expansion of less efficient producers, which created excess capacity and led to increased industry fragmentation. The loans were political in the sense that state-owned enterprises rather than more efficient private producers received the bulk of the support. The shipbuilding industry did not generate significant spillovers to the rest of the economy, and there was no evidence of industry-wide learning by doing.
https://www.aljazeera.com/economy/2020/7/20/decoupling-from-china-japan-to-pay-its-firms-to-invest-at-home
I’m not very certain that because China manages to clusterF— 90% of what they do, doesn’t mean other nations can’t do the same, with large success.
https://tradingeconomics.com/germany/subsidies-and-other-transfers-percent-of-expense-wb-data.html
https://tradingeconomics.com/japan/subsidies-and-other-transfers-percent-of-expense-wb-data.html
Personally, I think it’s a better way of doing things, (NOT “across the board” but in targeted industries). Rather than waiting for the next bat to fly over a blue truck going north from Kunming to Chongqing and shit on the pigs in the truck, and then the guy unloading the truck touches the pig that got crapped on and then picks his nose. I’ll “take a pass” on that one. Nevermind Xi Jinping getting male PMS next time Putin doesn’t answer the phone for his late night love chats, and then decides to destroy microchip and semiconductor producers in Taiwan. I’d rather not depend on mentally unbalanced people surrounded by lackeys for my supply chain needs. You know, but that’s just me, I don’t have an opportunity cost graph or a PPF graph handy to know when the next nutjob leader is going to ream the USA up the heinie.
Maybe Professor irwin or Professor Hamilton etc. has a PPF graph or a opportunity cost graph that can designate the exact time one of our global neighbors decides to take a crap on our supply chain needs?? I been looking for that graph and I’ll be damned if I can find it. I think Barkley Rosser had that graph, but it had a glitch in it when his independent variable for the starting time of (or actually just the occurrence of) the Ukraine war was bombed in a Ukrainian grain silo.
“While the METI statement doesn’t explicitly state the money is to move production out of China, Prime Minister Shinzo Abe said in March that Japan needed to bring production back home or diversify output to Asean nations and elsewhere to cut reliance on any one country such as China.”
When I was in graduate school the expression was METI = Industrial Policy R Us.
I have mixed feelings about the topic, but I don’t see any moves made by Biden on subsidies lately that strike me as “dumb” or “wasteful”. I didn’t read the Congressional bill from cover to cover though. Willing to listen if someone caught some subsidy that was especially bozo. And I highlighted that article obviously, because the Japan move strikes me as smart~~in the current context of a trading partner that doesn’t want an effective vaccine (oh!!!! hold your nose!!!! effective vaccines come from foreigners!!!!) and prefers throwing their own citizens into crematories, to the point it stinks up half of cities X, Y, and Z.
I’m not very certain that because China manages to clusterF— 90% of what they do, doesn’t mean other nations can’t do the same, with large success….
Rather than waiting for the next bat to fly over a blue truck going north from Kunming to Chongqing and shit on the pigs in the truck, and then the guy unloading the truck touches the pig that got crapped on and then picks his nose. I’ll “take a pass” on that one. Nevermind Xi Jinping getting male PMS next time Putin doesn’t answer the phone for his late night love chats, and then decides to destroy microchip and semiconductor producers in Taiwan. I’d rather not depend on mentally unbalanced people surrounded by lackeys for my supply chain needs. You know, but that’s just me, I don’t have an opportunity cost graph or a PPF graph handy to know when the next nutjob leader is going to ream the USA up the heinie.
[ Notice the horror in the language. Notice the need to destroy an entire people. Such is the driving horror of racism. ]
Douglas Irwin is a first rate international trade economist. Thanks for his latest.
Of course we know our Xi fan boys will tell us China’s industrial policy is transformative but Biden’s is inefficient socialism. So I guess these two know it alls will skip this excellent discussion.
“China identified shipbuilding as a “strategic industry” and began massive production and investment subsidies, mainly through cheap loans. Evidence suggests that these policies did not produce large benefits but were wasteful (due to excess capacity) and distorted markets (forcing more efficient countries to adjust by reducing their output). China’s global market share grew at the expense of low-cost producers in Japan, South Korea, and Europe but without generating significant profits for domestic producers (Barwick, Panle Jia, Myrto Kalouptsidi, and Nahim Bin Zahur. 2019). The subsidies were dissipated through the entry and expansion of less efficient producers, which created excess capacity and led to increased industry fragmentation.”
We do know that back in 2006 the commodity boom had led to temporarily high shipping prices but these prices fell to incredible lows for over a decade with most shipping companies going from large profits to huge and sustained losses.
On a related topic, more Mongolia –
The question has come up. – How would Mingolia ship mineral resources to the U.S.? (The question takes for granted hegemonic behavior from Russia and China.)
The answer, for now, is “We’re working on it”:
https://www.scmp.com/news/world/united-states-canada/article/3230069/us-discusses-creative-ways-help-mongolia-export-rare-earths
On Friday, he met US Secretary of State Antony Blinken and signed an “Open Skies” civil aviation agreement, and both sides pledged further economic cooperation. A US State Department official briefing reporters said the national carrier MIAT Mongolian Airlines would be able to fly direct to an as-yet-undecided US airport by next year.
Another story suggested we use drones!
That the US wants to use planes in lieu of ships got me thinking about the transfer pricing implications. Most shipping multinationals are headquartered in tax havens to avoid international taxation. Now it seems that the government of Singapore are telling airline multinationals tax rates of only 8% which has encouraged a lot of planes being formally owned by Singapore affiliates.
If you Google Singapore Sling some hits tell you how to make an interesting cocktail but some tell you about Singapore marketing affiliates of mining multinationals. Enjoy!
Irwin notes this paper:
https://www.nber.org/system/files/working_papers/w26075/w26075.pdf
CHINA’S INDUSTRIAL POLICY: AN EMPIRICAL EVALUATION
Panle Jia Barwick, Myrto Kalouptsidi, and Nahim Bin Zahur
Irwin closes with:
Sacrificing trade gains
Likewise, a turn to trade restrictions risks sacrificing some of the gains developing economies have reaped from participating in world markets. Many countries have made economic progress in recent decades by engaging with the global economy rather than closing markets in the hope of spurring indigenous innovation. China did not get rich through industrial policy but by improving productivity in agriculture, allowing foreign investment in manufacturing, and unleashing the private sector. India’s 1991 reforms to dismantle the “License Raj” of red tape that stifled private enterprise and open the economy continues to propel growth, although more reforms are needed. Bangladesh has also reaped benefits from opening up to foreign investment, which brings in capital and technology, so much so that the country now has a higher per capita income than India. Other countries, too, from Ethiopia to Vietnam, have achieved more from economic engagement than from economic isolation, because they benefit from technology and investment from the rest of the world.
While it has become fashionable to disparage the neoliberal economic policies of the Washington Consensus, the openness of that reform period saw convergence—not the divergence that had been the historical norm—between the rich and poor countries around the world. Starting around 1990, developing economies began to grow more rapidly and catch up to the higher income levels enjoyed by advanced economies (Patel, Sandefur, and Subramanian 2021).
The recent debate about whether globalization is dead or not is sterile. Developing economies would be ill-advised to turn their backs on the global economy and give up the idea of supporting exports and acquiring technology from beyond their borders. They still have much to gain from the rest of the world and a lot to lose by returning to the closed-door policies of the past.
Irwin has always been very good with respect to economic history:
Misreading history
Part of the reason for turning inward was a particular interpretation of history. The belief that richer countries were successful because they protected manufacturing gave respectability to industrial policy. That turned out to be a misreading of history. Despite high tariffs, the United States developed as an open economy—open to immigration, capital, and technology—and one with an exceptionally large domestic market that was fiercely competitive. Furthermore, the high-tariff United States overtook free-trade Britain in per capita income in the late 19th century by increasing labor productivity in the service sector, not by raising productivity in the manufacturing sector (Broadberry 1998). In Western Europe, growth was related to the shifting of resources out of agriculture and into industry and services. Trade policies designed to protect agriculture from low prices likely slowed this transition in countries such as Germany.
“Fiscally strapped developing economies cannot afford lavish subsidies for domestic producers when fiscal balances are precarious and the payoffs uncertain. Scarce public funds may be more effectively spent on improving health and education and helping poor people rather than being directed to domestic industries.”
The implication being that fiscally strapped advanced economies CAN afford lavish subsidies for domestic producers when fiscal balances are precarious and the payoffs uncertain? Is the implication that in the US scarce public funds would NOT be more effectively spent on improving health and education and helping poor people rather than being directed to domestic industries, such as banksters and merchants of death? Isn’t it obvious that the US is the only industrialized nation to not offer health insurance to all? And shouldn’t more be spent on education and on the poor?
After all “The United States isn’t investing as much in human capital as other developed countries and its comparative advantage is falling behind as a result. U.S. students’ math skills have remained stagnant for decades. The country is falling behind many others which have greatly improved, such as Japan, Poland, and Ireland. U.S. test scores are below the global average. ” https://www.thebalancemoney.com/the-u-s-is-losing-its-competitive-advantage-3306225
I see you did not bother to read this discussion either.
“The United States isn’t investing as much in human capital as other developed countries and its comparative advantage is falling behind as a result. U.S. students’ math skills have remained stagnant for decades. The country is falling behind many others which have greatly improved, such as Japan, Poland, and Ireland. U.S. test scores are below the global average.”
A question for Putin’s pet poodle. Where does Russia or China rank in terms of health care or education?
pgl asked: “Where does Russia or China rank in terms of health care or education?” Should I cite our propaganda or theirs?
You don’t know how to do actual research? Oh wait – we are talking about the most incompetent and dishonest troll ever. Never mind.
It took me 3 seconds to find this:
https://borgenproject.org/healthcare-in-the-russian-federation/
Knock yourself moron. Yea universal health care but the spending per capita or share of GDP is pathetic. And it is getting worse.
I fully expect Jonny boy to cherry pick and lie – that’s what he do. So here’s the closing paragraph:
While some are addressing the problems regarding healthcare in Russia, it is impossible to eradicate poor healthcare all at once because of corruption and lack of funds. As of June 2020, the quality of healthcare in the Russian Federation remains low. With anticipated health expenditure budget cuts and consequences of COVID-19, experts do not expect the situation to improve in the near future. However, because the nation’s citizens are staying united and helping one another through various associations and nonprofits, there is hope at the end of a very long tunnel.
Please try not be intimidated; I am deeply saddened at the attempts at intimidation. Actually, though, the ceaseless attempts at intimidation are instructive:
https://www.nytimes.com/2021/02/23/business/economy/economics-women-gender-bias.html
February 23, 2021
For Women in Economics, the Hostility Is Out in the Open
Studies have found that the field is plagued by a singular problem of gender bias. The latest evidence comes from the types of questions posed at seminars.
By Ben Casselman
A question for Putin’s pet poodle….
A question for Putin’s pet poodle….
A question for Putin’s pet poodle….
[ Notice the repeated need to destroy a person. Notice the resort to extreme McCarthyism. ]
I guess you are jealous that the Kremlin feeds Jonny boy more than they feed you.
https://fred.stlouisfed.org/graph/?g=14GnT
January 15, 2018
Life Expectancy at Birth for United States, Canada, France, Germany, Italy, Japan and United Kingdom, 2007-2021
https://fred.stlouisfed.org/graph/?g=10Wte
January 30, 2018
Infant Mortality Rate for United States, Canada, France, Germany, Italy, Japan and United Kingdom, 2007-2021
If there were a worldwide Pigouvian carbon tax, goods trade would be limited to more hogh-value-added items. Ocean trade in general and tanker trade specifically would be far smaller than is currently the case. China’s period of export-driven growth would have looked very different. Oh, and the ice caps wouldn’t be melting so fast.
Interesting. If we did do carbon taxes, how much would that increase shipping costs? I haven’t seen any discussion of this issue so whatever you may have would be appreciated.
The key error I see is the need to link driving Korea et al out of the ship-building business and a desire to generate domestic profits in China.
The latter may very well not have on China’s list of priorities.
Common miscalculation when dealing with China: assuming rational, profit-oriented behavior.
Tax policy is also industrial policy of a kind. We have had that for decades. Did I miss something?
The slime balls who are international tax nerds have beegan all giddy since the 2017 tax cut for rich people included FDII (foreign derived intangible income). It is a contrived mess but the Europeans are right to say this is an illegal export subsidy. The WTO will one day rule against this Trumpian trash.