Industrial Policy Synergies: Industrial Policy + Trade Policy

As the Biden administration tells it, the country was facing not just a pandemic but four additional crises in January 2021: The first was a long-running erosion in the US’s productive capacity (often termed secular stagnation), punctuated by near-term supply chain and pandemic-related inflation pressures. Second, US democracy was on its heels, due partly to decades of sharpening inequality, as well as a fraying of the basic economic bargain on which democracy depends. Third, our country faced a geopolitical and economic rivalry with China that lacked historical precedent (Cold War-era comparisons to the Soviet Union fall short, since the Soviets were never an economic match for the US). Finally, the climate crisis was worsening, and we had lost four years of progress during the Trump administration (and frankly, several years prior) on climate strategies that were neither economically nor politically sound.

In its first two years, the administration found a single answer to all four problems:

The project of the next 10 years must be to rebuild the energy, physical, and technology infrastructure of the US economy through targeted public investments that crowd in private capital to deliver good jobs.

This is the shortest, surest path to resurrecting a middle class (the country’s first genuinely multiracial one); to growing political will for further climate action; to shoring up US competitiveness and securing critical supply chains vis-à-vis China; and, through all of the above, to restoring faith in democracy itself.

The administration delivered the load-bearing elements of this strategy in its three landmark laws—the Bipartisan Infrastructure Law, the CHIPS and Science Act, and the Inflation Reduction Act. The White House then followed up with a user’s manual for how this vision will work in practice—what then-National Economic Council Director Brian Deese coined a “modern American industrial strategy” across a triplet of speeches.¹

One underappreciated but essential feature of this blueprint is its genuine integration of foreign and domestic policy. However, making good on this integration in practice will take both foreign and domestic policymakers out of their comfort zone.

Other essays in this collection speak more directly to the needed shifts in domestic policy. In these, I would underscore the need to stoke the promising, if still fragile, trans-partisan² support underlying the country’s industrial policy reembrace. To sharpen the point to progressive audiences, one can debate fiercely with, for example, Oren Cass³ or Sen. Todd Young (R-IN)⁴ on whether new US semiconductor fabricators should come with built-in childcare as a means of expanding the talent pool of workers, and still appreciate how such a debate is far preferable to arguing with conservatives over entitlement cuts or deficits. The growing stir around permitting reform will likely be the next testing ground for trans-partisan solutions, and it is vitally important that progressives in particular stay at the table until new solutions are reached.

How will foreign policy need to change for this return to industrial policy to succeed?

One telling starting point is the backlash, from foreign and domestic corners alike, to President Biden’s commitment to putting Americans first in line for the public investments and manufacturing jobs their tax dollars are creating—commitments demonstrated in measures to enforce and tighten existing public procurement laws and the domestic content requirements of the IRA.

Such thinking turns 40-plus years of foreign economic policy on its head. In particular, it ends decades of unquestioning deference to trade rules that, even still, have not contended with either the realities of climate change or the crush of nonmarket practices from China—and opts instead to craft a policy that deals with both squarely on their own terms.

For a foreign policy apparatus unaccustomed to defending such choices, crafting a response has been challenging. It will need to come in two parts. First, there are powerful rejoinders to be had, and while the administration has mounted them reasonably well in private to foreign counterparts, more public-facing work could help, even simply as a means of educating its own foreign policy establishment. The rejoinder goes something like this:

First, offering limited domestic preferences in a few areas hardly makes these investments zero sum. Quite the opposite: The investments of the IRA alone, for example, will sharply lower clean technology cost curves for the entire world, much as Germany’s early investments in solar in the 1990s proved to be game-changing for solar cost competitiveness and deployment globally. By some estimates, the IRA could lower the cost of clean energy technologies across the board by around 15 percent.⁵

Second, in many cases, these measures are simply bringing the US in line with its peers: The IRA’s clean energy investments add up to just half of Europe’s clean energy subsidies, even prior to the EU’s newest clean energy measures unveiled in early 2023. Likewise, even after the steps the administration has taken to tighten and enforce existing government procurement laws, the portion of US procurement open to trading partners vastly outstrips that of our closest trading partners.⁶

Third, “more is more”—because the world is nowhere near the saturation point for needed public investment in either semiconductors or decarbonization technologies, partner countries should follow suit with IRA-like investments of their own. And, subject to basic guardrails to prevent dumping of products (i.e., selling below production cost to grow market share), ensure transparency, etc., the US should be cheering them on. And indeed, the White House has welcomed announcements from Brussels on an EU clean energy package billed as responding to the IRA.⁷

Taken together, these three points defang much of the criticism from the US’s partners around the administration’s green industrial policy efforts. But the kernel of truth running throughout these criticisms is a warranted anxiety that the US is breaking ranks with the old, without clearly outlining what should follow. US policymakers must be more ambitious and forthright in laying out a new set of rules that benefit both the US and its partners, and that are purpose-built to advance decarbonization, a technology ecosystem of trust, and more resilient supply chains.

To deliver on such a vision, there is plenty the US foreign policy apparatus will need to do differently, and plenty of tensions it will need to manage on a near-daily basis. Here are three:

1. We Need to Talk about Europe

While many Americans think of Europe as politically left of the US, “Europe” and the EU are quite different political animals. Notwithstanding growing pockets of interest among Europeans for America’s industrial policy re-embrace, one must distinguish between Europe and Brussels. The reality is that the EU began as a project of subjugating national borders and prerogatives to market liberalization and Washington Consensus-style economic ideas. Reasonable minds can differ over the extent to which these ideas were economically or geopolitically helpful in their day (I think they were helpful), and yet still agree that Brussels has clung to these neoliberal roots more fervently than most. Only now, with news of an EU clean energy package in response to the IRA, are there some greenshoots that EU leaders may be grudgingly coming around to the economic or political virtues of the green industrial policy revolution afoot in the United States.

Another manifestation of this is the absolutist stance in Brussels to all things related to the World Trade Organization (WTO). This trans-Atlantic disconnect touches down around the ongoing negotiations between the US and EU for the Global Arrangement on Sustainable Steel and Aluminum—once finalized, it will be the first trade agreement to condition market access on emissions intensity. US negotiators have a compelling vision that will benefit both EU and US producers. This effort is central to what might be called the “Biden three-fer”: pursuing policies that simultaneously incentivize decarbonization, offer real answers to Chinese nonmarket practices, and support workers and good manufacturing jobs (not just for the US but for all members of the open-architecture club). Yet opposition in Brussels has been surprisingly stiff, much of it staked on alleged inconsistency with WTO rules.⁸

There are plenty of grounds on which to doubt Brussels’s contention. But let’s suppose the optimal outcome on the Global Arrangement was indeed incompatible with WTO rules.

What are multilateral institutions like the WTO, if not vessels to advance practical solutions to the problems of the day? If their rules hinder such solutions, it is the institutions that need to change, not the solutions.

The real problem here may be more in Washington than in Brussels or Geneva. There is often a double standard in US foreign policy: For the rough-and-tumble stuff of war or nuclear nonproliferation, the US spares no amount of diplomatic capital cajoling allies in our direction. But when it comes to an issue of economics or climate—the idea the US should spend the necessary energy and diplomatic leverage to bring its close friends aboard all too often remains an uphill sell.

The Biden administration beat the odds in uniting its allies, especially in Europe, into a coalition to defend Ukraine. The stakes surrounding a clean energy ecosystem that doesn’t rely on China are just as high; US foreign policy needs to commit its full focus and leverage to do the same here. The upsides of having Europe with us embracing the economic and political logic of green industrial policy are difficult to overstate—as such, it is a project that should involve not just the executive branch but all those championing green industrial policy, from Congress, to climate and economic advocacy organizations, to philanthropy and more.

2. Remake the Rest of Trade to Advance Green Industrial Policy

The Global Arrangement is a great example of retrofitting trade to the “Biden three-fer”—again, policies that simultaneously support US workers, decarbonize our economy, and address Chinese nonmarket practices—and there are other such examples to be pursued. First, take the domestic debate around a “border carbon adjustment.” There is growing bipartisan support in Congress for a border carbon adjustment that assigns tariffs based purely on the greenhouse gas content of a covered good. As opposed to other design schemes, this latest version has the virtue of rewarding further decarbonization progress by industry (since the size of the tariff would likely be a function of some industry average), while offering a buffer against Chinese goods (which skew high-greenhouse gas emitting) and other high-greenhouse gas content goods. The administration should work with Congress to pass a consensus measure—shaping it, for example, to ensure low-income country exceptions, and to ensure any sufficiently ambitious US-EU Global Arrangement deal is carved out.

The other example centers on critical minerals. Over the past two years, modest global supply shortages of lithium gave rise to 800 percent price increases—and these shortages pale in comparison to looming global supply deficits several-fold larger than those predicted by most analysts. The world needs some 60 new lithium mines globally within 10 years to avoid these supply crunches (for context, it currently has 11, only one of which is in the US).⁹ We can and are expanding domestic mining. But geologically, there is no plausible scenario whereby the totality of US demand is mined domestically. And given that average permitting timelines are 10-plus years virtually everywhere (not just the US), the urgency is real.

Current US efforts are focused on forging minerals-specific “trade agreements” with Europe and Japan so as to afford them eligibility under the IRA’s EV battery tax credit provisions. The problem is—neither Europe nor Japan are meaningful producers or exporters of battery relevant minerals.¹⁰ These bilateral deals could be helpful stepping stones to the sort of US-led clean energy supply chain ecosystem described above, but more inclusion of major mineral producers is needed.

3. The Institutions and Arsenal of Industrial Policy

Finally comes the pedestrian and vital work of creating new tools and institutions capable of stewarding both the domestic and international facing dimensions of US industrial policy. This topic warrants more space than what remains here, but I will make two key points.

First, the administration’s industrial policy approach requires building whole supply chains at once—one cannot break China’s stranglehold on minerals processing, for example, without considering offtakers for any new domestic minerals processing plant. This, in turn, places a premium on working with Congress to create a new suite of “market-shaping” tools¹¹—from more creative applications of advanced market commitments, to direct government purchasing options, to forms of price insurance, to more user-friendly authorities (especially around equity investments) for the Development Finance Corporation in particular.

Second, the US interagency is an advocacy-based system. And personnel is policy—the Biden administration’s historic strides on reviving industrial policy for the most part trace back to the president’s own positions, and those of a handful of key White House and inter-agency officials. Should these people move on, many of the institutions under them could well revert to their long-held allergies to industrial policy. The White House should lead in asking all relevant agencies to undergo a process of self-reflection and reform to enable swifter progress implementing the administration’s industrial policy vision.

At heart, the Biden administration’s “modern American industrial strategy” is about reclaiming the ability to shape the economy we want—a vindication of the idea that democracy is as much about economic agency as political agency. Add in the climate and planetary stakes, and it is easily an undertaking larger than a single party, or even country. That is why our foreign policy must not lose sight of its role—and all the changes it entails—in getting this right.