Industrial Policy’s Global Return

INDUSTRIAL POLICY HAS long been a strong pillar of China’s economic agenda but a pariah in the Anglo-Saxon economies of the West.

It made a return there last August when the UK’s new Prime Minister Theresa May outlined her vision of a post-Brexit state-boosted industrial renaissance some three decades after the UK’s previous female prime minister, Margaret Thatcher, had killed it off.

Now, in the United States, President-elect Donald Trump is picking up the torch with the creation of a White House National Trade Council to facilitate industrial policy. Peter Navarro, a University of California economist who is a sceptic of trade with China, is its proposed head.

This suggests that a more populist approach to trade and manufacturing is in the offing from the Trump administration. US trade policy will more likely be used to promote domestic production and job creation, particularly in infrastructure and defence, two areas where ‘Buy American, Hire American” is easiest to implement.

That would represent a significant change from international trade as a foreign policy tool that it was under the Obama, Bush and Clinton administrations.

It remains to be seen what this means in practice, and more importantly, where the new council fits into a Washington power structure that has to accommodate on economic matters the National Economic Council, the National Security Council, the Treasury, the U.S. trade representative and the commerce department.

Beijing, already sideswiped by Trump’s election win, will take its time to pick that apart.  Trump’s proposed commerce secretary, Wilbur Ross, the soon to be octogenarian investor who made his billions from corporate restructuring of distressed companies, is this Bystander’s pick to emerge as the key figure among that group. But Navarro’s appointment will not offer Beijing much cheer.

Navarro is also an advocate of the theory, controversial among economists, that trade deficits are a drag on growth. The United States ran a $366 billion merchandise trade deficit with China last year.

This Bystander will be watching carefully for signs of the Trump administration seeking to implement a ‘border tax’. This is taxation regime within corporate tax that Navarro and Ross have argued is needed to offset what they say is the hurt other countries’ domestic tax systems impose on US exports, say through the imposition of value-added-taxes that have no equivalent in the United States.

In short, they argued that a 20% border tax could eliminate the overall US trade deficit (if not all of the one with China). Imports would become 20% more expensive to cover the new corporate tax liability while exports, which would be exempt, would be roughly 12% cheaper because of the tax savings exporters would get.

The net effect of what in effect would be an across the board import tariff of 20% and an export subsidy of 12% would be equivalent to a 15% change in the value of the dollar.

Given that the United States was a $482 billion export market for China last year, that would give a very different hue to the China-US trade relationship. Not surprisingly, talk of a coming China-US trade war is in the air in both countries.

That may be of less import to China than once might have been the case now that it is rebalancing its economy away from cheap-export-led growth and towards domestic consumption, and that trade in services is becoming as important as trade in goods.

Nonetheless, this is probably not a moment to be sanguine about the prospects and the negative impact on China’s growth of a border tax could be material, and felt far wider than in China alone.

However, the new battle lines between Beijing and Washington may be drawn up over national champions as both countries seek to dominate the new industries that will shape the coming global economy. And that will come down to which nation will be better at picking winners — the perennial Achilles Heel of industrial policy.

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Filed under China-U.S., Economy, Trade

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