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INDUSTRIAL POLICY WITHOUT NATIONALISM  
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J.W. Mason
October 2, 2024
Dissent
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_ Can we expand the state’s role in the economy while diminishing
its capacity for war? _

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In the first two years after Biden’s election, there was
considerable enthusiasm on the left for the administration’s embrace
of a larger, more active economic role for the federal government. I
was among those who saw both the ambitions of the Build Back Better
bill and the self-conscious embrace of industrial policy as an
unexpectedly sharp break with the economic policy consensus of the
past thirty years.

Biden squandered that early promise with his embrace of Israel’s
campaign of mass murder in Gaza. His legacy will be the piles of
shattered buildings and children’s corpses that he, with aides like
Antony Blinken, did so much to create.

The administration has also struck a Trumpian note on immigration,
promising to “shut down the border” to desperate asylum seekers.
And internationally, it is committed to a Manichean view of the world
where the United States is locked into a perpetual struggle for
dominance with rivals like Russia and China.

Can industrial policy be salvaged from this wreckage? I am not sure.

There are really two questions here. First, is there an inherent
connection between industrial policy and economic nationalism, because
support for one country’s industries must come at the cost of its
trade partners? And second, is it possible in practice to pursue
industrial policy without militarism? Or does it require the support
of the national security establishment, the only powerful constituency
that favors a bigger and more active government?

Much of the conversation around industrial policy assumes that one
country’s gain must be another’s loss. U.S. officials insist on
the need to outcompete China in key markets and constantly complain
about how “unfair” Chinese support for its manufacturers
disadvantages U.S. producers. European officials make similar
complaints about the United States.

This zero-sum view of trade policy is shared by an influential strand
of thought on the left, most associated with Robert Brenner and his
followers. In their view, the world economy faces a permanent
condition of overcapacity, in which industrial investment in one
country simply depresses production and profits elsewhere. In the
uncompromising words of Dylan Riley, “the present period does not
hold out even the _hope_ of growth,” allowing only for “a
politics of zero-sum redistribution.” Development, in this context,
simply means the displacement of manufacturing in the rich countries
by lower-cost competitors.

I don’t know if anyone in the Biden administration has read Brenner
or been influenced by him. But there is certainly a similarity in
language. The same complaints that Chinese investment is exacerbating
global overcapacity in manufacturing could come almost verbatim from
the State Department or the pages of _New Left Review_. More broadly,
there is a shared sense that China’s desire to industrialize is
fundamentally illegitimate. The problem, Brenner complains, is that
China and other developing countries have sought to “export goods
that were already being produced” instead of respecting the existing
“world division of labor along Smithian lines” and focusing on
exports complementary to what was already being produced in the North.

Fortunately, we can be fairly confident that this understanding of
world trade is wrong.

The zero-sum vision sees trade flows as driven by relative prices,
with lower-cost producers beating out higher-cost ones for a fixed
pool of demand. But as Keynesian economists have long understood, the
most important factor in trade flows is changes in incomes, not
prices. Far from being fixed, demand is the most dynamic element in
the system.

A country experiencing an economic boom—perhaps from an upsurge in
investment—will see a rapid rise in both production and demand. Some
of the additional spending will fall on imports; countries that grow
faster therefore tend to develop trade deficits while countries that
grow slowly tend to develop trade surpluses. (It is true that some
countries manage to combine rapid growth with trade surpluses, while
others must throttle back demand to avoid deficits. But as the British
economist A.P. Thirlwall argued, this is mainly a function of _what
kinds_ of goods they produce, rather than relative prices.)

We can see this dynamic clearly in the United States, where the trade
deficit consistently falls in recessions and widens when growth
resumes. It was even more stark, though less immediately obvious, in
Europe in the 2000s. During the first decade of the euro, Germany
developed large surpluses with other European countries, which were
widely attributed to superior competitiveness thanks to wage restraint
and faster productivity growth. But this was wrong. While German
surpluses with the rest of the European Union rose from 2 percent to 3
percent of German GDP during the 2000s, there was no change in the
fraction of income being spent in the rest of the bloc on German
exports. Meanwhile, the share of German income spent on EU imports
actually rose.

If Germans were buying more from the rest of the European Union, and
non-German Europeans were buying the same amount from Germany, how
could it be that the German trade surplus with Europe increased? The
answer is that total expenditure was rising much faster in the rest of
Europe. German surpluses were the result of austerity and stagnation
within the country, not competitiveness. If Germany had adopted a
program to boost green investment during the 2000s, its trade
surpluses would have been smaller, not larger. The same thing happened
in reverse after the crisis: the countries of Southern Europe rapidly
closed their large trade deficits without any improvement in export
performance, as deep falls in income and expenditure squeezed their
imports.

Europe’s trade imbalances of a decade ago might seem far afield from
current debates over industrial policy. But they illustrate a critical
point. When a country adopts policies to boost investment spending,
that creates new demand in its economy. And the additional imports
drawn in by this demand are likely to outweigh whatever advantages it
gains in the particular sector where investment is subsidized.
Measures like the Inflation Reduction Act (IRA) or CHIPS and Science
Act may eventually boost U.S. net exports in the specific sectors they
target. But they also raise demand for everything else. This is why a
zero-sum view of industrial policy is wrong. If the United States
successfully boosts investment in, say, wind turbine production, it
will probably boost net exports of turbines. But it will also raise
imports of other things—not just inputs for turbines, but all the
goods purchased by everyone whose income is raised by the new
spending. For most U.S. trade partners, the rise in overall demand
will matter much more than greater U.S. competitiveness in a few
targeted sectors.

China might look like an exception to this pattern. It has combined an
investment boom with persistent trade surpluses, thanks to the very
rapid _qualitative_ upgrading of its manufacturing base. For most
lower- and middle-income countries, rapid income growth leads to a
disproportionate rise in demand for more advanced manufactures they
can’t make themselves. This has been much less true of China. As
economists like Dani Rodrik have shown, what is exceptional about
China is the range and sophistication of the goods it produces
relative to its income level. This is why it’s been able to maintain
trade surpluses while growing rapidly.

While Biden administration officials and their allies like to
attribute China’s success to wage repression, the reality is close
to the opposite. As scholars of inequality like Branko Milanovic and
Thomas Piketty have documented, what stands out about China’s growth
is how widely the gains have been shared. Twenty-first-century China,
unlike the United States or Western Europe, has seen substantial
income growth even for those at the bottom of the income distribution.

More important for the present argument, China has not just added an
enormous amount of manufacturing capacity; it has also been an
enormous source of demand. This is the critical point missed by those
who see a zero-sum competition for markets. Consider automobiles.
Already by 2010 China was the world’s largest manufacturer,
producing nearly twice as many vehicles as the United States, a
position it has held ever since. Yet this surge in auto production was
accompanied by an even larger surge in auto _consumption_, so that
China remained a net importer of automobiles until 2022. The
tremendous growth of China’s auto industry did not come at the
expense of production elsewhere; there were simply more cars being
made and sold.

All this applies even more for the green industries that are the focus
of today’s industrial policy debate. There has been a huge rise in
production—especially but not only in China—but there has been an
equally huge growth in expenditure. Globally, solar power generation
increased by a factor of 100 over the past fifteen years, wind power
by a factor of ten. And there is no sign of this growth slowing. To
speak of excess capacity in this sector is bizarre. In a recent
speech, Treasury Under Secretary Jay Shambaugh complained that China
plans to produce more lithium-ion batteries and solar modules than are
required to hit net-zero emissions targets. But if the necessary
technologies come online fast enough, there’s no reason we can’t
do better. Is Shambaugh worried the world will decarbonize too fast?

Even in narrow economic terms, there are positive spillovers from
China’s big push into green technology. China may gain a larger
share of the market for batteries or solar panels—though again,
it’s important to stress that this market is anything but fixed in
size—but the investment spending in that sector will create demand
elsewhere, to the benefit of countries that export to China.
Technological improvements are also likely to spread rapidly. One
recent National Bureau of Economic Research study of industrial policy
in semiconductors found that when governments adopt policies to
support their own industry, they are able to significantly raise
productivity—but thanks to the international character of chip
production, the gains are almost as large for the countries they trade
with. Ironically, as Tim Sahay and Kate Mackenzie observe, the United
States stands to lose out on exactly these benefits thanks to the
Biden administration’s hostility to investment by Chinese firms.

None of this is to say that other countries face no disruptions or
challenges from China’s growth, or from policies to support
particular industries in the United States or elsewhere. The point is
that these disruptions can be managed. Lost demand in one sector can
be offset by increased demand somewhere else. Subsidies in one country
can be matched by subsidies in another. Indeed, in the absence of any
global authority to coordinate green investment, a subsidy race may be
the best way to hasten decarbonization.

As a matter of economics, then, there is no reason that industrial
policy has to involve us-against-them nationalism or heightened
conflict between the United States and China. As a matter of politics,
unfortunately, the link may be tighter.

They are certainly linked in the rhetoric of the Biden administration.
Virtually every initiative, it now seems, is justified by the need to
meet the threat of foreign rivals. A central goal of the CHIPS Act is
to not only reduce U.S. reliance on Chinese imports but to cut China
off from technologies where the United States still has the lead.
Meanwhile arms deliveries to Ukraine are sold as a form of stimulus.
This bellicose posture is deeply written in the DNA of Bidenomics:
before becoming Biden’s national security advisor, Jake Sullivan ran
a think tank whose vision of “foreign policy for the middle class”
was “Russia, Russia, Russia and China, China, China.” Thea
Riofrancos calls this mindset the “security-sustainability nexus.”
Is its current dominance in U.S. politics a contingent outcome—the
result, perhaps, of the particular people who ended up in top
positions in the Biden administration? And if so, can we imagine a
U.S. industrial policy where the China hawks are not in the driver’s
seat?

In a recent paper, Benjamin Braun and Daniela Gabor argue that it is
“the salience of geopolitical competition” with China that has
allowed the United States to go as far with industrial policy as it
has. In the absence of much more popular pressure and a broader
political realignment, they suggest, the only way that “green
planners” can overcome the deep-seated resistance to bigger
government is through an alliance with the “geopolitical hawks.”

Many of us have pointed to the economic mobilization of the Second
World War as a model for a quick decarbonization of the U.S. economy
through public investment. It’s an appealing example, since it
combines both the most rapid expansion and redirection of economic
activity in U.S. history and the closest the country has ever come to
a planned economy. But given the already dangerous entanglement of
industrial policy with war and empire, it’s a model we may not want
to invoke.

On the other hand, the climate crisis is urgent. And the arguments
that it calls for a more direct public role in steering investment are
as strong as ever. It’s safe to say that neither the historic boom
in new factory construction nor the rapid growth in solar energy
(which accounts for the majority of new electrical generating capacity
added in 2024) would have happened without the IRA. It’s easy to see
how climate advocates could be tempted to strike a Faustian bargain
with the national security state, if that’s the only way to get
these measures passed.

Personally, I would like to avoid this particular deal with the devil.
I believe we should oppose any policy aimed at strengthening the
United States vis-à-vis China and reject the idea that U.S. military
supremacy is in the interest of humanity. An all-out war between the
United States and China (or Russia) would be perhaps the one outcome
worse for humanity than uncontrolled climate change. Even if the new
Cold War can be kept to a simmer—and that’s not something to take
for granted—the green side of industrial policy is likely to lose
ground whenever it conflicts with national security goals, as we’ve
recently seen with Biden’s tariffs on Chinese solar cells,
batteries, and electric vehicles. The Democratic pollster David Shor
recently tweeted that he “would much rather live in a world where we
see a 4 degree rise in temperature than live in a world where China is
a global hegemon.” Administration officials would not, presumably,
spell it out so baldly, but it’s safe to say that many of them feel
the same way.

Adam Tooze has observed that historically socialists often favored
balanced budgets—because they expected, not without reason, that the
main beneficiary of laxer fiscal rules would be the military. The big
question about industrial policy today is whether that logic still
applies, or whether an expansion of the state’s role in the economic
realm can be combined with a diminution of its capacity for war.

_J.W. MASON is associate professor of economics at John Jay College,
CUNY, and a senior fellow at the Roosevelt Institute. His book Money
and Things, with Arjun Jayadev, is forthcoming from the University of
Chicago Press._

_Dissent is a magazine of politics and ideas published in print three
times a year. Founded by Irving Howe and Lewis Coser in 1954, it
quickly established itself as one of America’s leading intellectual
journals and a mainstay of the democratic left. Dissent has
published articles by Hannah Arendt, Richard Wright, Norman Mailer, A.
Philip Randolph, Michael Harrington, Dorothy Day, Bayard Rustin,
Czesław Miłosz, Barbara Ehrenreich, Aleksandr Solzhenitsyn, Chinua
Achebe, Ellen Willis, Octavio Paz, Martha Nussbaum, Roxane Gay, and
many others._

* Industrial policy
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* Militarism
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* Economic Nationalism
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