The re-industrialization of the US raises many questions

Suddenly, Americans were building factories again. In May, manufacturing labor spending rose 77% from a year earlier, to US$194 million. Only one of the 40 categories of construction spending in the government report showed a year-over-year increase of even a third in size.

Credit Uncle Sam for igniting this boom. Two laws passed last year, the Chips Act and the Inflation Reduction Act, offer substantial federal subsidies for domestic manufacturing of semiconductors and electric vehicles. The latest statistics on construction spending indicate that these “industry policy” forays are having the desired effect.

For a country that has been deindustrializing for years, the boom is good news. Deindustrialization gave consumers lower prices for many goods but it had significant downsides. It has pushed former middle-class workers into poverty, turned vibrant communities into rust buckets and denied the labor force essential skills.

It also leaves the country dependent on supply chains that can prove unreliable in a crisis, as they did for medical supplies in the pandemic. A deindustrialized US arms industry could not keep up with the needs of the Pentagon, Taiwanese and Ukraine.

Building new factories, then, seems like a step in the right direction. But this is only one step, and there are many questions about it that need answers, certainly before we take further steps.

Will the new factories succeed?

It’s one thing to build a factory, another to run it profitably. If jobs were the measure of success, the high-tech factories encouraged by the government would not be as productive as the metal-bending factories that fled abroad.

What about other products?

Semiconductor and electric car factories are great, but they are a small part of the economy. California Democratic Congressman Ro Khanna said Americans “need to bring back production of auto parts, of textiles, of steel, of aluminum” among others. But it is questionable how much support there is in Congress for the kind of broad industrial policy Khanna is advocating.

The rusting steel stacks of Bethlehem Steel in Bethlehem, Pennsylvania, one of the largest steel producers in the world for most of the 20th century. In 1982, however, Bethlehem Steel suspended most of its manufacturing. The company filed for bankruptcy in 2001 and was dissolved in 2003. Image: Wikipedia

How industrialized do we need to be?

It’s not like the US is currently doing nothing; deindustrialization only partially. According to the National Institutes of Science and Technology, the US is the second largest manufacturing power in the world, behind China, and leads in seven manufacturing categories and second in six others. NIST does not list agricultural equipment as a separate sector but most of that is still made in the US.

A related question: Assuming there is more industrial policy in the future, what will the goal be?

A few decades ago, the US did almost everything. Some may want to return to that, but recreate it is almost impossible. For which products, then, should the country have domestic supply chains? Is it mostly related to national security?

Can rebuilding obstacles be overcome?

The US is a high-wage country; can we really bring back low-wage, labor-intensive manufacturing like textiles? New high-wage, high-tech factories will compete for a limited pool of skilled workers. It may take decades to rebuild domestic supplier networks dismantled during deindustrialization.

What are the implications for trade policy?

Government subsidies may be enough to build factories, but if the factories’ foreign competitors have labor cost advantages, Washington may need to raise tariffs to keep the factories running. Retaliatory tariffs against American products may follow. For a US export sector like agriculture, a more protectionist world would be problematic.

Ben Kern’s farm near Norwalk in Warren County, central Iowa.. Agriculture has long benefited from US industrial policy and much of the world’s farm machinery is made in the USA. Photo: Wikipedia / Lynn Betts

Are subsidies and tariffs the best industrial policy tools?

Some of the biggest successes in government industrial policy in the past have been achieved through research funding. In one of Uncle Sam’s longest running industrial policies – for agriculture – the creation and dissemination of knowledge has always played a major role.

Does economic logic justify industrial policy?

Economists differ on this. Critics argue that industrial policy runs counter to the law of comparative advantage, which says that everyone benefits when countries focus on what they are relatively good at rather than trying to do everything.

Supporters argue that, by supporting infant industries with subsidies and tariff walls, governments can create a comparative advantage. East Asian countries did that; their subsidies are one reason they can make semiconductors cheaper than the US can.

Many roll their eyes at the mention of bipartisan commissions — all they do is trash paper, the rap goes. But industrial policy is an issue that requires a commission. National security is at stake; we need a national consensus about whether to take the next steps in industrial policy and, if so, how.

So many questions. Let’s form a bipartisan group of smart minds from different worlds – manufacturing, labor, finance, academia, government and military – and get some answers.

Former longtime Wall Street Journal Asia correspondent and editor Urban Lehner is editor emeritus of DTN/The Progressive Farmer.

This article, originally published on July 21 by the latter news organization and now republished by Asia Times with permission, is © Copyright 2023 DTN/The Progressive Farmer. All rights reserved. follow Urban Lehner on Twitter: @urbanize

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