In my new paper for the Aspen Economic Strategy Group, I argue:
The protectionism, trade wars, and industrial policies of the Trump and Biden administrations have not succeeded at meeting their goals and likely will not succeed at meeting their goals. They have caused manufacturing employment to decline, not to increase. They have not reduced the overall trade deficit, and they have not led to a substantial or definitive decoupling of the US and Chinese economies. They will likely not pass a reasonable cost-benefit test with respect to semiconductor and clean-energy innovation and manufacturing. Moreover, the goals that have not been met are wrongheaded.
These policies have arisen from a combination of nostalgia for an imagined past, fundamentally unsound economic analysis, and legitimate concerns regarding the US’s strategic competition with China. Misplaced nostalgia and unsound economics are bad guides to economic policy. And spasms of protectionism do not make for a coherent approach to strategic competition.
Oddly, the conversation around that strategic competition often seems to assume that the United States is “lagging” China, and that the U.S. must “catch up” to Chinese manufacturing using protectionist measures. To take one example of many, check out this headline and subhead on a New York Times article from this spring: “How China Pulled So Far Ahead on Industrial Policy: The United States and Europe are trying to catch up to a rival skilled in using all the levers of government and banking to dominate global manufacturing.”
But why should the U.S. wish our economic policy to be more like China’s? From my AESG paper:
China’s central planning will not be remembered as a long-term success. It has led to overinvestment in many sectors, a deeply imbalanced economy with too little consumption spending, a growth model struggling to transition away from exports, massive overbuilding of real estate, and an inadequate safety net. State policies have led to demographic problems that will have enormous economic ramifications. Moreover, to the limited extent that China’s model is working, it only works because their economy is embedded in an authoritarian state with a compliant industrial sector.
Rather than uniting our allies, the protectionist policies of the Trump and Biden administrations have antagonized allies and called into question whether the US is a reliable partner. Rather than pursuing narrow and clear objectives, the US’s goals are broad, muddled, and in conflict with each other.
A better strategy would clearly acknowledge that China is a bad actor while taking a judicious approach; targeting a narrow set of practices, products, and technologies that clearly warrant intervention on economic security grounds; and pursuing that intervention in concert with as broad a coalition of allies as possible. It would not conflate economic security goals with domestic economic considerations, like trends in manufacturing employment.
It would also involve proceeding from a place of confidence in the free-enterprise system.
Over the past three decades, the real wages of typical workers have grown substantially, and after-tax real median household income has grown even more. The process of creative destruction has led to new opportunities in expanding middle-wage occupations. For well over a decade, broadly measured income inequality has stagnated. America remains an upwardly mobile society. Rising tides may not lift all boats at the same speed, but the hot economy of recent years shows that macroeconomic gains diffuse throughout the economy and are not captured by the elite.
The American dream is not dead. And globally, the free-enterprise system has delivered astonishing results.
Over the past three decades, hundreds of millions of people have been lifted out of abject poverty due to the spread of capitalism. Infant mortality has plunged. The world became more peaceful and secure.
I conclude my AESG paper:
The 2008 global financial crisis, Great Recession, and COVID-19 pandemic each led to great economic and human hardship. They led to and sustained the rise of populist politics. But as traumatic as those events were, they should inspire confidence in the American system of democratic capitalism. That system has created the remarkably resilient and innovative workforce, economy, and society that were able to meet these challenges—and to overcome them.
The populist focus on the working class has been a welcome development, and the right response to populism is to take seriously the need to increase economic opportunity and advance participation in economic life, including by focusing on overall economic growth. The wrong response is to advance policies that will hurt the working class and threaten long-term prosperity.