This article is a part of the Perspectives on Industrial Policy symposium.
From a broad perspective, could you provide us with an overview of the current global trend toward the implementation of industrial policy? In your opinion, what are the primary drivers behind the shift?
Industrial policy has long been present in various forms, often manifesting as ad-hoc interventions and subsidies that affect market processes. What we’re seeing now is an attempt to systematize these interventions under coherent policy frameworks, such as green-energy initiatives or regional development programs.
These policies often reflect targeted efforts aimed at specific goals or interests. For instance, the push for sustainability and environmental, social, and governance (ESG) initiatives can be seen as part of a broader political movement to reshape the private sector. Some observers have characterized this as an attempt to constrain market institutions.
The 2008-2009 financial crisis, which many scholars attribute to flawed government policies, significantly damaged the reputation of financial institutions. This erosion of trust in market processes has made it easier for special interests to argue for increased government intervention. This is unfortunate, since various scholars credibly point out that government interventions themselves helped to precipitate and worsen the crisis.
It’s important to note that government subsidies and market interventions are not new phenomena. What’s different now is the attempt to justify these interventions under specific categories, which may undermine the relatively free exercise of markets. This trend represents a shift away from reliance on normal market processes toward a model where government intervention is seen as necessary to address perceived market imperfections.
If we could take a historical perspective for a moment, in 1983, there were calls for industrial policy when it looked like Ronald Reagan might not be reelected. How does that compare with what we’re seeing now?
The calls for industrial policy in 1983 were markedly different from what we’re seeing today. In the early 1980s, before the advent of ESG and other modern cultural norms, the push for industrial policy was primarily driven by economic concerns, particularly high unemployment rates from 1980 to 1982.
The Democratic Party argued that Reagan’s economic policies had failed, advocating for increased government spending and targeted interventions to address unemployment, especially in the Rust Belt areas. There were proposals to create regional development banks that would provide subsidies and credit lines to struggling industries, including steel and others.
As 1983 progressed, however, unemployment rates began to decline significantly. By 1984, many of the industries previously deemed to be in crisis showed improvement, leading Reagan to declare it was “morning in America again.” Consequently, the political momentum for industrial-policy legislation waned.
In contrast, today’s push for industrial policy seems more deeply rooted and potentially longer-lasting. It’s tied to various causes with multinational support, such as environmental initiatives and ESG concerns. These issues aren’t likely to disappear simply due to changes in employment statistics.
Moreover, there’s a growing narrative from some agencies that venture capital and private capital are sources of economic problems, although this is difficult to prove definitively. Unlike the situation in the 1980s, today’s unemployment rates are relatively low, though this may be partially masked by decreased workforce participation.
In essence, the current trend toward industrial policy is more complex and multifaceted, driven by a range of social and environmental factors beyond simple economic indicators. This makes it a more persistent phenomenon that’s unlikely to dissipate in the short term.
The shift in focus is particularly evident when we look at areas like antitrust regulation. Historically, antitrust policy was primarily concerned with economic issues, such as market concentration and the protection of small businesses. In recent years, however, we’ve seen attempts to broaden the scope of antitrust to include a wide range of social considerations.
For instance, there’s been increasing discussion about using antitrust policy to address issues like income redistribution, sustainability, environmental protection, and racial discrimination. The idea is that these societal concerns can be addressed by manipulating markets through antitrust measures.
But this approach presents significant challenges. Attempting to optimize antitrust policy across multiple variables—economic, social, and environmental—is problematic when there’s no clear way to weigh these different considerations against each other. It’s not clear who would make these decisions or how they would be made.
This marks a significant departure from traditional antitrust concerns. While there were debates about the dangers of business size in the 1960s and 1970s, and concerns about small businesses persist today, the current trend goes well beyond these issues. The Federal Trade Commission (FTC), in particular, seems to be embracing this broader interpretation of antitrust’s role.
In essence, we’re seeing a shift from purely economic considerations to a more complex, multifaceted approach that attempts to use industrial policy, including antitrust, as a tool for broader social engineering. This represents a fundamental change in how we think about the role of these policies in shaping our economy and society.
Relatedly, what is prompting countries to reconsider the value of liberal free trade and move toward industrial policy, even when it may be economically disadvantageous for many of them?
The shift away from liberal free-trade policies can be traced back to the post-World War II era. In the late 1940s, with the establishment of the Bretton Woods system, the World Bank, and the International Monetary Fund, the United States, which was responsible for about 40% of world GDP by 1950, saw promoting free trade as a means to ensure political stability and resist communism.
Initially, this approach was successful. As Mancur Olson noted, the world wars had disrupted interest groups that typically lobbied against free trade. By the early 1990s, tariffs had been dramatically lowered. But as industries recovered and entrenched interests re-established themselves, new challenges emerged.
Agriculture became a particularly sensitive issue, with rentseekers in both Europe and the United States seeking to protect their agricultural institutions. This led to a shift from visible tariffs to less obvious nontariff barriers, and increased regulation. Casey Mulligan and other scholars have documented this trend over the past 20-30 years.
While the benefits of lower tariffs were clear by the 1990s, there was a behind-the-scenes retrenchment. Public-choice theory can explain part of this: institutions rebuilt themselves and lobbied for special subsidies and restrictions on foreign competition. As economic growth in G7 countries slowed after the late 1990s, it became easy to blame free trade for economic challenges, even though other factors were at-play, including re-regulation and the fact that trade was never truly “free.”
Currently, economists like Shanker Singham are working on developing metrics to measure market distortions caused by factors such as entry restrictions and labor-mobility constraints. If successful, these efforts could provide better support for negotiations aimed at addressing these issues.
It’s worth noting that countries like China have engaged in activities that could be analyzed through such metrics, potentially revealing the true economic impact of their trade practices.
In essence, the move away from liberal free trade is driven by a complex interplay of historical factors, entrenched interests, and changing global dynamics, rather than purely economic considerations.
As we look to the future of industrial policy, how do you foresee the evolution of global trade? Are industrial policies going to become increasingly the norm? Is there a chance of a return to a more liberal free-trade policy?
The future of global trade and industrial policy is difficult to predict with certainty, but several factors could influence its evolution. There’s a possibility that efforts by social-interest groups pushing for ESG policies may face political pushback. For instance, in Argentina, President Javier Milei is attempting to significantly reduce government intervention, combat hyperinflation, and challenge entrenched union interests. Early results show a rapid decrease in inflation, which could serve as a compelling example for other countries.
Countries that successfully roll back excessive government intervention could create political momentum for similar policies elsewhere. If one or two nations demonstrate success in this approach, it might encourage others to follow suit. This aligns with economist Hernando de Soto’s argument that economic freedom particularly benefits developing nations. World Bank studies have shown how regulatory restrictions, especially in agriculture, have significantly reduced per-capita GDP in many sub-Saharan African countries.
In India, studies by Shankar Singham and colleagues have revealed how rentseeking behavior by local politicians has created regulatory barriers that prevent the country from achieving its full economic potential. This underscores the importance of addressing internal regulatory issues to enhance competitiveness in the global market.
It’s also crucial to highlight instances where industrial policy has failed. For example, recent studies suggest that electric vehicles may have a larger negative environmental and carbon footprint than traditional internal-combustion engines when considering the full lifecycle of production and use. Such examples can help create political momentum for policy reconsideration.
Regarding China, instead of broad-based tariffs, there’s potential for more nuanced, targeted measures that address specific anticompetitive activities in markets. This approach could prove more effective in addressing trade imbalances, while minimizing collateral economic damage.
The path forward isn’t clearcut. But if examples of successful deregulation and free-market policies emerge, it could create momentum for a return to more liberal trade policies.
When considering how countries are experimenting with industrial policy, we must acknowledge that even properly enacted liberal trade policies have shortcomings and costs. Are there any weaknesses in liberal trade policy that we should be conscious of, even as we advocate for it?
Liberal trade policies, while generally beneficial, do come with certain challenges that we must acknowledge and address. A prime example is the impact on specific industries and their workers when protectionist measures are removed.
Consider the case of the U.S. textile industry. Historically, this sector was shielded by tight production quotas that protected domestic jobs. When these quotas were eliminated as part of trade liberalization, it led to job losses in the industry. It’s crucial to note, however, that protecting these jobs through quotas or subsidies came at a significant cost. Studies by the International Trade Commission (ITC) from 10-20 years ago suggested that each job saved through the old system of multifiber agreement quotas cost over $300,000 per-worker annually.
This highlights a key weakness of protectionist policies: while they may preserve jobs in specific sectors, they often do so at an unsustainable economic cost. The challenge, then, is how to address the genuine hardships faced by workers in industries affected by trade liberalization.
One approach is through transfer payments or direct assistance to displaced workers. While this represents a cost to the government, it is generally far less expensive and economically distorting than artificially protecting entire industries. From a basic price-theory perspective, direct transfers are more efficient than maintaining trade barriers.
It’s important to recognize, however, that worker-retraining programs, often proposed as a solution, have their limitations. These programs assume the existence of industries for workers to transition into, which isn’t always the case. Moreover, issues of labor mobility and rapidly changing technology (as we’re seeing with AI) further complicate retraining efforts.
In the short term, transfer payments may be necessary to support displaced workers. While this approach has its costs, it’s generally preferable to the economic distortions caused by protectionist policies.
The primary challenge in implementing this solution is political will. In the current political climate, garnering support for such measures can be difficult. Nevertheless, as advocates for liberal trade policies, we must be prepared to address these issues head-on, acknowledging the real costs of trade liberalization, while emphasizing its overall economic benefits and proposing viable solutions for those negatively impacted.
