This article appears in the February 2023 issue of The American Prospect magazine. Subscribe here.
Since the late 1970s, as the U.S. lost productive capacity in industry after industry, progressives have been calling for an industrial policy. This was mostly disdained by orthodox economists and rejected by the presidential wing of both parties in favor of global outsourcing.
The economy has paid dearly for this, with the loss of good jobs and industries that anchored entire regional economies. Democrats in turn have paid with the loss of working-class voters.
Now, under Joe Biden, we have a potentially transformational shift of ideology and policy. Stimulated by the COVID recession, the supply chain crisis, and the urgent need for renewable energy, Biden’s administration has sponsored an industrial policy, actually several industrial policies, intended to reclaim technological leadership and domestic manufacturing.
Jubilant liberals, who have long called for this, are now a little like the dog who caught the car. Coordinating these diffuse policies into a coherent whole and enabling them to succeed is a staggeringly complex enterprise.
One marquee piece of legislation, the CHIPS and Science Act, will spend $13 billion to subsidize semiconductor research and another $39 billion to build more production facilities (known as fabs) in the U.S., using grants, loans, and tax credits. Spending $52 billion (over five years) sounds like a lot, but a single semiconductor fab can cost $5 billion or more, and Intel says that their new Ohio research and manufacturing complex will cost between $60 billion and $120 billion over a decade. All told, chip manufacturers had planned to invest on the order of $200 billion in at least 23 new U.S. semiconductor factories, even before the new legislation passed. Government needs detailed performance standards for these subsidies for maximum public benefit.
The Inflation Reduction Act includes even more money for clean-energy security and climate change mitigation, $369 billion over a decade. Much of this is via tax credits to accelerate the shift from fossil fuels for heating and cooling to heat pumps and electricity generated by wind turbines and solar panels, as well some direct subsidies to promote domestic manufacture. There are also tax credits for the purchase of electric vehicles made in the USA.
And the bipartisan infrastructure law, with about $600 billion of new money beyond the usual appropriations for highways and public works, includes major outlays for green projects, including $73 billion to update the nation’s electricity grid to carry more renewable energy, $7.5 billion for electric-vehicle charging stations (on which accelerated EV sales depend), and $7.5 billion for clean buses and ferries. These outlays also promote domestic production and jobs.
In addition, the National Defense Authorization Act passed in December includes dozens of industrial-policy measures. This is on top of continuing outlays for the Department of Energy, the National Science Foundation, and the National Institutes of Health (NIH).
It’s hard enough to make industrial policy work in a single agency. The new enhanced industrial policies involve coordination across multiple federal agencies; several levels of government (federal, state, county, municipal); multiple technologies; and the intense involvement of the private sector.
America’s several industrial policies are intended to reclaim technological leadership and domestic manufacturing.
There is no single industrial-policy czar. Among top officials, John Podesta oversees outlays under the Inflation Reduction Act. Commerce Secretary Gina Raimondo is in charge of CHIPS and Science. Mitch Landrieu coordinates the bipartisan infrastructure law. Jake Sullivan deals with the foreign-policy cross-pressures of America’s new economic nationalism. Presumably, these people talk to each other, and to the leaders of dozens of other agencies with jurisdiction in these areas.
Among the challenges are:
- Making sure that different agencies and programs are not operating at cross-purposes and that it all adds up to a coherent whole;
- Engaging the private sector without producing windfall profits, gratuitous subsidies, or failed ventures that become grist for Republican we-told-you-so investigations (viz. Solyndra);
- Putting tough performance standards into these grants and loans to achieve other progressive goals, such as support for union labor and climate justice;
- Connecting industrial policy to workforce policy, so that there is a rendezvous between needed specialists at every level and newly created jobs;
- Streamlining permitting and environmental reviews, so planned facilities come to fruition without endless delays;
- Reconciling the bold climate goals in these several programs with the practical disruption of the environment caused by, say, solar farms and power lines; and
- Harmonizing our new industrial policy with foreign policy and trade policy, notably with our European allies, who see U.S. industrial subsidies as violating trade rules at their expense.
In principle, it all adds up to reclaiming industrial and tech leadership, accelerating the post-carbon shift, and creating good domestic jobs. In practice, it’s potential chaos.
The Old Industrial Policy, and How We Lost It
Industrial policy in the U.S. dates to Alexander Hamilton’s 1791 Report on the Subject of Manufactures, Henry Clay’s American System of public improvements and high tariffs, and Lincoln’s support for public investments to enhance agriculture and manufacturing. In World War I, the government organized several industries needed for the war effort, including radio and aircraft research and production. World War II was one massive industrial policy, creating new weapons systems, synthetic substitutes for supplies that the war had cut off, and the technologies to make them work.
After WWII, government continued to invest in science and technology, via the National Science Foundation, the National Institutes of Health, and the Cold War–era Defense Department. The Pentagon created the Advanced Research Projects Agency (later renamed DARPA) to fund “beyond the horizon” technologies, operating like a government venture capitalist. Specialized military procurement subsidized new processes and products, many with civilian spin-offs, from aircraft to computers. The U.S. also had the national laboratories and the great research universities, heavily underwritten by government, which incubated new technologies and entire new industries. It was taken for granted that production would stay at home.
This was America’s national innovation system, and it worked. Despite protestations that we believed in free trade, it added up to a tacit form of economic nationalism.
But by the 1970s, while government-sponsored R&D continued, there was an increasing disconnect between U.S. technological leadership and domestic production. This was the era when the U.S. began losing industry, and good-paying unionized workforces.
The U.S. cemented the loyalty of Cold War allies by opening our borders to their exports without demanding reciprocity. The extreme disdain among economists for the survival of industry, much less industrial policy, was captured in a famous remark by Michael Boskin, chair of the Council of Economic Advisers under Bush I: “Potato chips, computer chips—what’s the difference? They’re all chips.” (Boskin has since denied saying this.)
By the early 1980s, for example, Japan was leading the U.S. in most categories of semiconductors. Japan’s targeted industrial policy and protectionism, its bank-industry interlocks and cartels, all orchestrated by the Ministry of Trade and Industry (MITI), became the model for the subsequent national innovation systems in China and elsewhere in Asia. Today, the U.S. share of global semiconductor production has fallen from 37 percent in 1990 to 12 percent, with heavy dependency on Taiwan and South Korea.
In the ’80s, the U.S. also lost most of its machine tool industry to Japan and Germany, autos and steel to multiple foreign competitors, and the entire consumer electronics industry, which domestic manufacturers had previously dominated. When the U.S. did regain some innovative leadership in microelectronics, via Apple computers and iPhones (using technologies partly developed thanks to DARPA), production was outsourced to Asia. The rupture between technical innovation and domestic manufacturing was complete.
Throughout this period, the U.S. did have several tacit mini-industrial policies. The 1980 Bayh-Dole Act allowed industry to exploit government-funded R&D. In 1984, Congress created a blanket antitrust exemption for private companies to engage in collaborative research. There were modest tech subsidy programs housed at NSF and the Commerce Department. NIH sponsored the Human Genome Project, which was a tacit industrial policy for biotech.
In 1987, the top 14 semiconductor makers persuaded Reagan’s administration to back a home-based consortium known as Sematech, with $100 million in DARPA funding matched by the industry. Robert Noyce, who had co-invented the integrated circuit and co-founded Intel, was the industry leader of Sematech. Noyce was charismatic, widely admired, and well connected in both parties. “Semiconductors were sexy, machine tools were old economy,” says Clyde Prestowitz, one of the architects of Reagan’s trade policy with Japan.
But these policies lacked adequate scale, ideological approval, or an explicit national commitment to connect them to domestic manufacturing. The dominant ideological premise was that the location of production is the proper business of the market, not the government.
Industrial Policy for Corporate America
There was a logic and a discipline to wartime industrial planning because government was the customer. So government could dictate specifications as well as target applied research to focused goals, and build or requisition factories as necessary.
Today’s industrial policy is far more diffuse. It’s more about developing new technologies and bringing production home, but without the discipline of government as customer, except in the case of some military hardware. It will require nothing less than a transformation in the logic of our entire economic system, making government’s role far more explicit and coherent.
The lead agency for CHIPS and Science is the Commerce Department, which has neither the experience nor the personnel to manage a government-wide industrial policy. The one part of Commerce with some related expertise is the National Institute of Standards and Technology (NIST), a billion-dollar agency that has sponsored small industrial-policy initiatives in the past. But under previous administrations when NIST tried to play a government-wide coordinating role, “the big players, the Pentagon and the Department of Energy, basically told NIST to get lost,” says one former Commerce official.
Commerce simply doesn’t have enough people to process the various CHIPS subsidy proposals that will come flooding in from corporations, universities, and other research centers after detailed criteria are published by the department in February. The bigger challenge is devising the terms of the Commerce Department’s contractual agreements with the semiconductor companies that will get its largesse. What kinds of chips will they commit to make, at what volume, and with what public input and public benefits, including for organized labor?
Commerce Secretary Gina Raimondo, who meets regularly with top executives, is among the most corporate of Biden’s appointees. And in many ways, that’s the point. Progressive enthusiasts of industrial policy need to reckon with the awkward fact that industrial policy, not surprisingly, is mostly carried out by industry.
The long-sought arrival of industrial policy comes at a time when the left is properly excoriating corporate America for everything from hyperconcentration and stock buybacks to grotesque pay gaps and union busting. Big Tech companies in particular are improbable partners because of the serial abuses of tech platform monopolies and the extreme outsourcing by the likes of Apple.
And yet, unless we are proposing industrial policy via socialized public enterprises, private corporations must be the instruments. The key question for progressives is: What does government (and the ideal of a just society) get in return, beyond returning more production and technical leadership to the U.S.?
Biden has done well in targeting new clean-energy outlays to poor and underserved communities, as well as rural areas and tribal reservations. His Justice40 Initiative commits to delivering 40 percent of the overall benefits of climate, clean-energy, and related federal investments to diverse low-income communities that are overburdened by pollution and underserved by infrastructure. He wins praise from advocates of climate justice.
But for the most part, Biden has chosen not to use these extensive industry subsidies and tax breaks as leverage to get corporate America to clean up its act in other respects. The CHIPS and Science Act does prohibit corporate beneficiaries from using government funds for stock buybacks. But as Sen. Elizabeth Warren has pointed out, since money is fungible there is nothing to prevent corporations from taking CHIPS money and using other money on buybacks.
That would be consistent with past practice. Five large U.S. semiconductor firms (Intel, IBM, Qualcomm, Texas Instruments, and Broadcom) spent $250 billion on buybacks from 2011 to 2020. That’s a whopping 70 percent of their net profits, and also more than five times the public funds spent in the CHIPS Act.
Raimondo has said she opposes buybacks. At a September 29 hearing, Sen. Warren called on Raimondo to set up tougher rules, like requiring companies to attest on the application form that they won’t engage in buybacks, and clawing back funds from companies that go back on their word. Raimondo took no further action.
Domestic Jobs, or Union Jobs?
Pre-existing Buy America requirements and the 1931 Davis-Bacon Act in effect require construction and transportation projects built with federal funds to use union labor, though labor still has to fight to make sure these commitments are honored, especially in right-to-work states. These new industrial policies will still likely be bonanzas for the building trades, and several tax-credit provisions in the IRA do give extra credit to projects that pay prevailing wages. But the Biden administration has not used its potential leverage to require companies accepting federal subsidies to refrain from resisting union organizing drives for production jobs.
A White House 182-page Guidebook, released in December, detailing all the clean-energy subsidies and conditions of the Inflation Reduction Act, declares that “the Inflation Reduction Act is designed to ensure that these transformative investments create good-paying union jobs.” But as the Prospect has documented, that claim is grossly exaggerated. Neutrality requirements for companies receiving benefits under both the IRA and the bipartisan infrastructure law were stripped from the final legislation.
The tech industry is notoriously anti-union. It would be a huge breakthrough if production workers at semiconductor fabs and other tech companies were unionized. Generally speaking, these companies pay decent wages but fiercely resist unions. Biden does have the power to change that by directing the Commerce Department to make union-friendliness an express criterion in the applications for subsidy that Commerce reviews.
The CHIPS and Science Act allocates $10 billion to develop “regional technology hubs.” The law mandates worker participation, but Republicans who supported the bill expect their share of the regional money, and several of these hubs will be in right-to-work states.
Government lawyers generally take the position that requiring companies taking subsidies to explicitly commit to “neutrality” in union organizing drives would invite lawsuits. The preferred language would have federal performance requirements refer to job quality and strategies such as community benefits agreements, which in turn involve unions and pave the way for organizing with de facto neutrality.
There is an inevitable tension between participatory democracy and large-scale industrial policy.
The CHIPS and Science Act gave all the power and most of the money to the Commerce Department. The National Science Foundation was given $200 million to promote training of tech workers through regional partnerships between educational institutes and employers. The Labor Department, the agency closest to the labor movement and traditionally its advocate, got nothing, not even money for apprenticeship. A $200 million grant for tech worker training through regional partnerships was instead routed through the National Science Foundation.
The New Republic, in a scathing article last September on Labor Secretary Marty Walsh’s policy disengagement, quoted congressional sources describing Walsh as absent from the legislative process when the CHIPS legislation was going through Congress, and getting outplayed by Raimondo. Labor later had to negotiate a memorandum of understanding with Commerce on its consultative role.
Commerce has no experience in workforce development. The Big Tech companies would like the government’s help in training production workers without the complication of a registered tech apprentice program on the model of the building trades, which might be union-friendly. Mike Russo, a onetime leader of a Steelworkers affiliate and a respected expert on workforce development, has contracts with both the NSF and the Labor Department to develop one-stop models of training and apprenticeship for tech workers. Whether these are paths to union production jobs will depend on the rules written by other agencies.
In November, in response to a request for comment, the AFL-CIO sent Raimondo a 41-page memo on exactly how they would like to see the CHIPS process structured, to carry out the administration’s general commitment to good jobs, and ideally to unionized jobs. Among the key demands: “The Commerce Department must require CHIPS incentives applicants to submit a job quality and worker protection plan.” The federation also called on the Commerce Department to prioritize CHIPS incentives, grants, loans, and loan guarantees to applicants that affirmatively allow workers to join a union “without fear of intimidation or retaliation throughout the semiconductor industry and supply chain.”
Raimondo is extremely unlikely to agree to this de facto neutrality condition unless personally directed to do so by President Biden. One concern is that Commerce will be friendly to collective-bargaining agreements in blue states where strong unions do the heavy lifting, but do nothing to advance union successes in right-to-work states where a lot of federal money will subsidize fab construction, such as Arizona.
The Department of Energy has done somewhat better than Commerce. DOE’s recent notice of funding availability for $3 billion in battery subsidies provides a 20 percent credit for manufacturers who commit to good jobs throughout the workforce (not just construction) and community benefits agreements. DOE still needs to draft strong, enforceable language for the actual contracts.
At the other extreme, the Environmental Protection Agency, which got $5 billion under the bipartisan infrastructure law to subsidize school districts to acquire electric buses, just shoveled out the first $1 billion to districts, with no labor standards of any kind. Of the four electric-bus manufacturers in the U.S., two are organized by the UAW. One other, Lion Electric, is currently the object of an intense campaign by Jobs to Move America and its union and community allies to accept a community benefits agreement, the precursor to unionization. EPA labor standards could have helped, and still could.
When the Community Benefits
More progress has been made at the state and local level. Since 2011, Jobs to Move America and its union and community allies have extracted community benefits agreements (CBAs), which they call a U.S. Employment Plan, from bus and railcar manufacturers in several states. The CBA commits employers to hire union workers as well as more minority and disadvantaged workers, using the leverage of local government procurement and pressure from organized labor, especially in areas with a strong union presence.
In Los Angeles, the Metro transit agency agreed to require that its new electric buses be manufactured with union labor. In Chicago, another strong union town, the local labor federation and JTMA, using a community benefits strategy, got the city to insist that the contractor, CSR, receiving a $1.3 billion contract for 846 railcars, will not only produce in Chicago but have a union contract.
In its extended memo to the Commerce Department, paralleling that of the AFL-CIO, JTMA called on Commerce to require all bidders to have a U.S. Employment Plan that enumerates how many domestic jobs will be created or supported, what the minimum wages will be, and how they will hire disadvantaged or underrepresented workers.
The JTMA strategy—CBAs leading to good union jobs—is the template for the leverage the labor movement wants the Biden administration to exert on the corporate beneficiaries of its trillions of dollars in industrial-policy spending. But even though the federal government is the ultimate source of much state and local transportation money, national Democratic administrations in Washington, despite friendly general commitments, have seldom been willing to get into the trenches on behalf of unions.
Until President Obama’s last year, when his Transportation Department issued a statement cautiously supporting CBAs, his administration was largely unhelpful to the JTMA strategy, raising legal concerns that they might be anti-competitive, and failing to use the leverage of federal funds to promote unionized production jobs except on traditional construction contracts.
It remains to be seen whether Biden’s administration will do any better. Biden does have the power to direct Cabinet secretaries to include explicit pro-labor language in their detailed performance standards. Biden could also direct his secretaries to convene meetings between corporate CEOs seeking discretionary funding and leaders of unions seeing to organize their production workers, to pursue areas of common ground and report back before any government financing commitments are made.
The senior trade union leaders I spoke with view Biden as the best friend of the labor movement since FDR, but say he needs to play more of a hands-on role when it comes to the details of policy. Ribbon-cutting photo ops, like the recent one in Covington, Kentucky, are great politics, but no substitute for presidential engagement in the policy implementation process.
NIMBY on Steroids
The U.S. requires large projects to run a more complex gauntlet of permitting and environmental review requirements than any other large industrial nation. In 2020, the White House Council on Environmental Quality compiled data on timelines for 1,276 environmental impact statements (EIS) filed between 2010 and 2018 and found that NEPA reviews averaged 4.5 years.
A detailed study done for the Center for Security and Emerging Technology, pointedly titled “No Permits, No Fabs,” looked at all the world’s semiconductor fabs built between 1990 and 2020. Not only did construction take longer in the U.S., but the delay increased over time, rising from an average of 665 days from 1990 to 2000 to 918 days between 2010 and 2020. The study contrasted the welcome mat rolled out for tech companies by Taiwan and Singapore with the serial obstacles facing them in the U.S.
In addition to legitimate environmental reviews, major new facilities sometimes attract local opposition from citizens and local governments that don’t want the additional traffic, noise, environmental risks, toll on water and sewer systems, or newcomers. This was not the case in the last mid-century, when environmental reviews didn’t exist and Ford or GM plants were seen only as sources of badly needed new jobs.
An emblematic case is the story of the obstacles thrown in the path of New York state’s ultimately successful efforts, under eight governors (from Republican Nelson Rockefeller to Democrat Andrew Cuomo), to turn the Capital Region around Albany into a world center for nanotechnology. The motivation was the severe decline in manufacturing jobs and the shrinkage of the region’s anchor tech employer, IBM.
This process was a surprising success of regional industrial policy for advanced tech. So far, it has created at least 10,000 direct production jobs and 50,000 secondary jobs, with more to come. But along the way, the effort was repeatedly stymied by small-town local governments.
In 1996, after extensive investment in area universities, the regional development authority began efforts to attract a major semiconductor fab. This was blocked when the first-choice location in North Greenbush (population at the time: around 10,000) was vetoed by the town council. Saratoga County, working with Advanced Micro Devices (AMD), then filed initial requests for approval of a new fab in the nearby towns of Malta and Stillwater in 2002.
Production finally began ten years later, in 2012. If this is the pace of approvals under Biden’s new industrial policies, we will all be wards of the Chinese by the time new fabs are actually built.
Beyond opposition that is arguably legitimate due to concerns about traffic and the toll on local public infrastructure, some county governments controlled by Republicans either oppose federally funded projects per se, or don’t want Biden-sponsored initiatives to succeed.
Semiconductor production is also cyclical, subject to periodic gluts; we’re seeing that right now, as consumers pull back after high pandemic-era spending. Yet it is part of a much broader revived national innovation system that anchors other good jobs. In upstate New York, GlobalFoundries and Micron are laying off hundreds of workers this year. But both companies say these layoffs are temporary, and both are doubling down on new plans for more long-term investments. Forecasting a doubling of demand for semiconductors by 2030, Micron is investing up to $100 billion in a new fab projected to create up to 9,000 jobs. The CHIPS and Science Act reinforces this commitment.
There is also the tricky question of what is a domestic company. Until its IPO in 2020, GlobalFoundries, though based in upstate New York, was financed and 100 percent owned by Abu Dhabi’s sovereign wealth fund. And while GlobalFoundries has two major factories in the U.S., it also manufactures in Dresden, Germany, and Singapore; and has design centers in Beijing, Shanghai, Bangalore, and Sofia, Bulgaria, as well as Austin, Texas, and Santa Clara, California.
Environmental Ambivalence
Environmental activists are strong supporters of the shift to renewables. But many don’t care whether the chips and EVs are made in America as long as they are made using clean production processes and government policy accelerates the shift away from carbon.
Local environmentalists often resist the intrusion of fabs, solar farms, windmills, and power lines. Sometimes this is legitimate, as in concerns for offshore wind disrupting fisheries. In other cases it is aesthetic, as when solar farms or wind turbines are seen as spoiling pristine landscapes.
The irony is hard to miss. Much of the impetus for Biden’s industrial policies was environmental. Increased investment in renewable energy is needed to reduce carbon pollution and slow climate change. But many of these projects are either delayed by laws that were enacted in an earlier era to protect the environment, or because they entail tricky environmental trade-offs. Environmentalists will need to reconcile their desire to shift away from carbon as rapidly as possible with their wish for a pristine environment.
Another irony involves the double-edged role of Joe Manchin. Environmentalists have abhorred and blocked Manchin’s effort to use federal legislation to rescue the Mountain Valley Pipeline, which would carry natural gas from West Virginia to Virginia, by explicitly directing federal agencies “to issue all approval and permits.”
However, the rest of Manchin’s bill is far from crazy. It would set a two-year target for major projects that require environmental reviews, have government set a lead agency to reduce the fragmentation, require the president to identify and prioritize reviews for at least 25 strategically important energy and mineral projects, and allow federal overrides of state permitting requirements in some circumstances, particularly on electricity transmission. If the U.S. government is serious about targeted industrial policy, we need something like this legislation, stripped of its sweetheart provision for West Virginia.
In 2015, legislation called the FAST Act (for Fixing America’s Surface Transportation) included a provision known as FAST-41 for better coordination of environmental reviews at the federal level. However, project participation is voluntary. In principle, fast-track approvals could be accelerated without compromising core environmental goals. It’s another way government has to be retooled to make industrial goals a national priority.
Yet there is an inevitable tension between participatory democracy and large-scale industrial policy. We need to expedite these projects, but not to return to the days of New York’s Robert Moses and others in the urban renewal era who created special redevelopment districts with the power to bypass local democratically elected bodies.
And if we create super-approval powers for federally led industrial policies, it helps to remember that progressives are not always the government. The Prospect has written about the tension between blue cities and red states, which increasingly have written preemption laws to prevent the Austins and the Charlottes from enacting progressive local policies.
A national Republican administration could perform the same gutting of environmental (and labor) standards, if loopholes for fast-track permitting were added to the hard-won statutory mandates of the National Environmental Policy Act and the Clean Air Act. The dirty part of the Manchin bill is a reminder of the perils of too-easy overrides of environmental standards and reviews.
Industrial Policy as Foreign Policy
America’s new progressive economic nationalism has extensive and thorny foreign-policy implications. It was much easier when the U.S. pretended that the location of production didn’t matter, and free access to U.S. markets was part of the glue of the Cold War alliance.
The key player who bridges the new industrial policy with America’s several foreign-policy challenges is Jake Sullivan, Biden’s national-security adviser. The shift in Sullivan’s own thinking, from a traditionalist on trade and foreign-policy issues into more of an economic nationalist, has been key in reinforcing Biden’s own strategic priorities.
In a 2020 report for the Carnegie Endowment titled “Making Foreign Policy Work Better for the Middle Class,” Sullivan and his several co-authors wrote that “the prime directive of everyone in the foreign policy community—not just those responsible for international economics and trade—should include developing and advancing a wide range of policies abroad that contribute to economic and societal renewal at home.” This was a revolutionary shift in thinking.
For those who see industrial policy as key to regaining manufacturing and technological leadership as well as good middle-class jobs, there are several foreign-policy complications. “There is a risk,” says one senior participant in these debates, “that the foreign-policy goals will crowd out the industrial-policy goals.”
The top foreign-policy priorities for Sullivan and Biden today are holding together the U.S.-led coalition on two key fronts: supporting Ukraine, and containing China’s geo-economic and military ambitions. Both goals require Western unity, which is to say close collaboration with the European Union.
The EU is mightily aggrieved at Biden’s several industrial policies. To some extent, Europe did this to itself. Europe once had extensive industrial policies. But the EU’s founding document, the Maastricht Treaty of 1992, expresses a neoliberal view of how economies are supposed to work. It either bans or strongly discourages state subsidies at the national level and doesn’t replace them with pan-European targeting policies.
The U.S. and Europe will need to reach a grand bargain that allows both parties to subsidize innovation and production.
With its embrace of national economic planning, and Europe’s substantial abandonment of it, the U.S. and the EU have switched roles. In his summit meeting with Biden in December, French President Emmanuel Macron expressed Europe’s frustration that Biden had changed the rules, and complained the U.S. efforts to capture domestic production with explicit subsidies would come at Europe’s expense. In response, Biden spontaneously promised to “tweak” industrial policies to make them more Europe-friendly.
None of this had been staffed out, but it soon led to one tweak that could seriously undermine domestic EV production. The Inflation Reduction Act provides a $7,500 federal subsidy for purchasers of an EV, as long as the battery and its component materials are made in North America. But a separate provision on leased or commercial vehicles refers, ambiguously, not to “North America” but to either the U.S. or countries with which the U.S. has a “free trade agreement,” i.e., Canada and Mexico.
Senior White House and Treasury officials, looking for a large bone to throw Macron and the Europeans, creatively defined this provision to include Europe, based on various trade deals to which the U.S. and the EU are parties. Thus if you lease an EV, or buy one as a commercial purchaser, you get the full subsidy for vehicles made in Europe as well as the USA.
“Treasury is simply following the tax laws and the IRA as written,” Kristin Lynch, a Treasury spokesperson, said, somewhat disingenuously, in a press statement. In fact, the whole deal was cooked up by Sullivan’s office.
The Treasury interpretation, released as “guidance,” will be finalized in March. How seriously this undermines the intended purpose of the EV tax credit depends on whether it is temporary or long-term. Domestic EV and battery producers do not have the current capacity to meet anticipated demand. If this is a temporary benefit to Europe, while the U.S. and the EU work out a broader industrial-policy entente, it actually serves U.S. interests of getting more EVs on U.S. roads while domestic production gears up. But if it is permanent, auto purchasers could just lease rather than buy, and the entire intent of the subsidy will be gutted.
One of the most emphatic critics of this invented loophole, of all people, is Joe Manchin. In the past, he has argued that if U.S. policy is promoting use of EVs, it should also be promoting domestic supply chains and production. In December, he wrote Treasury, “If these [leased European] vehicles are deemed eligible, I can guarantee that companies will focus their attention away from trying to invest in North America.” Manchin is planning to introduce legislation that would tighten the language of the credits.
EVs are just one of many areas where foreign-policy concerns—in this case, keeping the EU’s support for broader national-security goals—could easily water down industrial policy. There will be more such tweaks.
A Western Economic Alliance?
Going forward, the U.S. and Europe need some sort of grand bargain that allows both parties to subsidize innovation and production, but with a rough balance of benefits. This would take both the U.S. and the EU back to the pre-WTO and pre-Maastricht era, when managed capitalist economies were not prohibited from promoting domestic industries. Capitalism, tinged with social democracy, was far more equitable back then.
At a minimum, both the U.S. and the EU need to resist the temptation to haul each other before the WTO, which has become mercifully irrelevant. The U.S. has decided that it is going to subsidize innovation and production, and the WTO be damned.
One vehicle for this sort of high-level bargaining is the new U.S.-EU Trade and Technology Council, announced at the June 2021 U.S.-EU Summit meeting. For the United States, the TTC is co-chaired by U.S. Trade Representative Katherine Tai, Secretary of State Antony Blinken, and Raimondo. For the EU, the co-chairs are European Commission Executive Vice Presidents Valdis Dombrovskis and Margrethe Vestager.
There are ten TTC working groups, on a host of tech, trade, supply chain, and security policies. It is at this level that the U.S. and Europe will work toward common policies.
There is also awareness on both sides that the U.S. and the EU need to collaborate on the next generation of advanced technology and related production, and that the common adversary is China. In the case of 5G technology, Europe-based Nokia and Ericsson are key players. The U.S. and Europe need a common Western telephony network. Europe and the U.S. also have a common need to take back pharmaceutical supply chains from China, including the active pharmaceutical ingredients (APIs).
The Green Steel Deal of November 2021 gives a common tariff preference to steel and aluminum made with low-carbon production processes, deliberately including the U.S. and Europe and excluding Russia and China. That deal, branded as the Global Arrangement, is a template for other such agreements.
The U.S., however, has moved more aggressively than the EU in using an export control regime to deny Chinese companies access to semiconductors either made in the U.S. or made elsewhere using U.S. technology. The Biden administration keeps expanding its entities list, banning Chinese companies with links to the Chinese military.
On December 15, Alan Estevez, the undersecretary of commerce for industry and security, built off the original October announcement by restricting trade of high-tech equipment with 36 additional Chinese companies. Among those added to the list is Yangtze Memory Technologies Corporation, a company that was said to be in talks with Apple to potentially supply components for the iPhone 14.
The EU does have some security restrictions on trade with China, but the U.S. regime is far more explicit and aggressive. In principle, there is recognition on both sides of the Atlantic that Western nations that share a commitment to the rule of law and transparency in economic arrangements need a common strategy to contain China. But while the U.S. is deliberately raising barriers to work in or with China, Germany continues developing commercial relationships with Beijing. In November, German Chancellor Olaf Scholz led a delegation to Beijing with executives of Germany’s leading companies, frankly looking for new business partnerships.
This is another area where national-security concerns could trump industrial-policy goals. It will be tempting for Sullivan and Biden to offer Europe more loopholes in U.S. industrial policies in exchange for a tougher common China policy. In the bargaining process, there will be plenty of skirmishes. But both sides seem committed to prevent them from escalating into an open breach.
DESPITE THE PRACTICAL CHALLENGES OF FUSING the several industrial and tech policies of the Biden presidency into a coherent national economic strategy, the achievement is formidable as a fundamental change of ideology and national purpose. Along the way, there will be failed ventures and technological bets that don’t pan out, just as there are in the private sector.
Given the centrality of private industry in these new efforts, at a time when corporate America wields immense political power, it is too easy for Biden’s administration, especially the Commerce Department, just to give industry whatever it wants. That makes it all the more imperative for the labor movement and its allies to push Biden hard to do more for unions as well as for workers.
Histories of industrial policy during World War II show a process that was often messy and wasteful. Yet it produced towering American progress in new technologies and weapons systems that not only won the war but anchored domestic industrial leadership for a quarter-century afterward.
What’s impressive is that the several Biden initiatives, most of which originated in cross-party deals in a polarized Congress, do add up to a potential strategy for restoring American industrial and tech leadership. Making it all live up to its promise will be no mean feat.
