Is Biden’s industrial policy renewing or undoing the rules-based order?

The Biden administration thinks it has broken the code on how to ramp up a reindustrialized American economy and fragmented world order for the 21st century. 

Will its strategy work? A growing chorus in the business community and think tanks are skeptical of its effort to scrap an economic order and fashion a new approach.  

Its agents of change are mostly the White House’s ambitious industrial policy — embodied in the $52 billion CHIPS and Science Act and the misnamed $390 billion Inflation Reduction Act (IRA) — aimed at reindustrializing a more inclusive U.S. economy and renewing a disjointed international economic order.  

In an important April 27 speech, White House National Security Adviser Jake Sullivan presented thoughtful and comprehensive remarks articulating the administration’s vision for “a modern industrial policy.” He acknowledges that the post-WWII international order based on relatively open markets and free trade lifted millions out of poverty and generated 60 years of unprecedented prosperity. But, he added, “the past few decades have revealed cracks in that foundation.” 

There’s no question, as he argues, that the 2008 financial crisis and Great Recession “shook the middle class,” or that a pandemic revealed vulnerable supply chains and climate change threatens our planet. So, Sullivan says, we have a “new Washington consensus” that “will build a fairer, more durable global economic order, for the benefit of ourselves and for people everywhere.”  

He, in effect, declared the death of neoliberalism, an economic policy of globalized free capital markets, free trade, deregulation and privatization that the U.S. has followed for the past four decades.  

Sullivan has a point. As he argues, unbridled free markets led to the 2008 financial crisis and Great Recession, global supply chains hollowed out the U.S. industrial base and globalization created much wealth — including cheap goods for millions of Americans, but inter-dependency didn’t make China more open or liberal and displaced several millions of U.S. jobs. Instead, we have seen inter-dependence weaponized by Chinese coercion with bans on imports of Philippines bananas, Australian wine and Taiwan pineapples in response to criticism of Beijing’s policies on the one hand, and U.S. sanctions and tariffs on the other.  

But is the formula of major subsidies for the semiconductor, electric vehicle (EVs), battery and renewable energy industries likely to pan out? Is such economic nationalism and protectionism compatible with a free and open international economic order or will it trigger the law of unintended consequences?   

The new industrial policy has already spurred more than $200 billion in new U.S. and foreign investments in U.S. chip and clean tech factories, though nervous European and Asian allies fear U.S. subsidies are hollowing out their industries and could spark a “subsidies war,” and China rants about U.S. efforts to constrain its growth. 

But the administration may be throwing out the baby with the bath water. Sullivan decried “trade liberalization as an end in itself,” and portrayed trade policy mainly as “reducing tariffs.” No one has liberalized trade for the hell of it. This view is 40 years out of date.  

Trade policy in recent decades has been about not just tariffs, but intellectual property, rules for services, e-commerce, farm and fishing subsidies, labor and environment, and not least, creating a dispute settlement mechanism in the World Trade Organization. Former Assistant U.S. Trade Representative Ed Gresser wrote a cutting analysis of Sullivan’s caricature of free trade policies. There appears to be little sense of urgency in Biden’s efforts to reform the WTO. 

Instead of new trade agreements that could expand market access for U.S. firms and deepen U.S. economic integration in the Asia-Pacific to compete with China, Team Biden is instead negotiating an “Indo-Pacific Economic Framework.” This approach seeks to enhance cooperation on a number of useful things: digital standards, supply chain security, clean energy and anti-corruption and taxation. There is no new market access or tariff reductions, and it is unclear if agreements will be binding, or be submitted to Congress for ratification.    

Rarely have I seen such a rebuff of a U.S. trade deal from the business community than that of an April open letter sent by the U.S. Chamber of Commerce, to the White House, secretary of Commerce, and USTR, signed also by the Business Roundtable and dozens of industry and agricultural associations. 

More in sorrow than anger, the Chamber expressed growing concern that “the content and direction of the administration’s proposals for the [IPEF] talks risk not only failing to deliver meaningful strategic and commercial outcomes but also endangering U.S. trade and economic interests in the Indo-Pacific region and beyond.” 

Fears of the U.S. marginalizing itself as Asia-Pacific nations deepen economic integration through a host of trade agreements with the U.S. is one of the possible unintended consequences looming.  

Moreover, basic economic realities suggest that realizing the green transition portion of IRA industrial policies will be problematic absent cooperation with China, at best. Why? 

For starters, some 80 percent of critical minerals (lithium, cobalt, nickel, zinc manganese, graphite, chromium, Molybdenum, etc.) essential for EV batteries and their processing are dominated by China or other foreign nations. Yet, under the IRA, the made in the U.S. requirements demand 40 percent of battery components be local and 80 percent by 2027) and 50 percent (100 percent by 2029). Miracles would need to happen to meet that timeframe. 

It would take unprecedented new mining and production of all the EV components to meet that goal of 67 percent of total vehicles being EVs, up from 6 percent in 2022. There are additional questions about labor shortages. The McKinsey consultancy has  projected a shortfall of about 300,000 engineers and 90,000 skilled technicians in the United States by 2030. 

Beyond these obstacles and potential outcomes, as the U.S. Chamber of Commerce letter suggests, there is less of a “new Washington consensus” than Sullivan’s remarks asserted. A GOP president following Biden might like to roll back its industrial policies. Team Biden’s vision may be the right one. But the risks of unintended consequences for the U.S. and an unsettled and fragmenting world order should be a cautionary note. 

Robert A. Manning is a distinguished fellow at the Stimson Center. He previously served as senior counselor to the undersecretary of State for global affairs, as a member of the U.S. secretary of state’s policy planning staff and on the National Intelligence Council Strategic Futures Group. Follow him on Twitter @Rmanning4.