October 9, 2024 – The United States urgently needs a coherent and comprehensive industrial policy, which is currently lacking. In contrast, countries like China have implemented robust industrial strategies that give them a competitive edge in manufacturing and trade. This issue extends beyond mere job creation and economic trade; it also touches on long-term strategic interests as the US, China, and other nations engage in great power competition.
Today, we are joined by Marc Fasteau and Ian Fletcher, authors of the new book Industrial Policy for the United States: Winning the Competition for Good Jobs and High-Value Industries. They will discuss three essential pillars of a revitalized US industrial policy, including methods for devaluing the dollar.
To visit their website or find out more about the authors, go to Industrial Policy for the United States: End Free Trade = More Manufacturing Jobs
Transcript
Cris Sheridan:
The US needs a coherent and comprehensive industrial policy and that is something that we are currently lacking. This is a problem, but there are specific steps that the US can take to effectively compete in today's global economy. That's what we're going to discuss today. Diving to a new book that's called Industrial Policy for the United States winning the competition for good jobs and high value industries. We are joined by the two authors of the book, Mark Fasteau and Ian Fletcher. Mark is a vice chairman of the board of the Coalition for Prosperous America and Ian is also their former senior economist. So let's start off with the first part of your book discussing where free trade fits into this conversation of industrial policy. In the US, we largely assume that free trade works best. The problem is that's not what the rest of the world thinks and this is being used against us.
Marc Fasteau:
That's exactly right. I just add one little coda to that is there is no such thing as free trade. The problem is that the US and the UK are the only two countries, maybe Australia, who really believe in it, and no other significant countries with significant economies believe in it. They all believe in industrial policy. And for them it's not like a sideshow. Oh yeah, we'll do industrial policy along with everything else. It's the core way they run their economies. So we're out there alone. And as we'll like to talk about a little bit more, if you're China and you have a big industrial policy, which means subsidizing exports of industries that you consider really important, either economically or strategically or in terms of military superiority, and we don't have one, that means our economy becomes the obverse of theirs and we basically are playing a role that China assigns to us in their industrial policy. So let's just. I may just back up a little bit and start to talk about what do we mean by industrial policy. There's a lot of talk about it, but basically it means selectively intervening, the government selectively intervening in the economy to support industries that are important. We call them advanced because it's not just high tech industries or advantageous industries, is what we call them. It includes the high tech industries, but it also includes any sizable industry that pays decent wages and generates a fair amount of income for the country. Not everybody can work for apple or make computer chips. And then under that broad rubric, there are three pillars of industrial policy, and I'm going to turn this over to Ian to extend further.
Ian Fletcher:
Right. Well, the first thing you need to know about free trade is that there is no such thing. And this has, in fact, been recognized even in the United States for centuries. But we forgot there's always a thumb on the scale when you're dealing with foreign countries. There are subsidies, there are hidden trade barriers. There are just so much that free trade is a chalkboard construct. And I don't care if it were the best thing. It just doesn't exist. Now, the second thing is, mark talked about advantageous industries, as we call them. And the first principle of industrial policy is that not all industries are created equal. Some are better to have than others. They give you more profits, they give you more wages. They have better synergies with pulling up other industries in the rest of your economy. And that, of course, is leaving aside all the concerns of national security, public health, environmental protection, some industries are better than others. It is not the case that, as one of George Bush's advisors once said, it doesn't matter if Americans make potato chips or computer chips, they're all just chips. Well, Michael J. Boskin denies ever having said that, but that's what we do not believe. Now, the second principle of industrial policy, government can help you get the better industries as opposed to the less advantageous ones. Because third principle, the market won't do it on its own. Free markets are great. We are not socialists. We believe that any policy that we're in favor of has to be designed in market conforming ways. But markets on their own are not enough to get you the best industries. You have to have your government deal with the fact that given that free trade is not going to happen, you have to have a rational tariff policy. For example, Joe Biden just imposed 100% tariff to keep Chinese electric cars out of the United States. That was correct. Because if you don't do that, there's not going to be an electric car industry in the US. It's just not going to happen. It's all going to get killed off by cheap Chinese imports. And you know what? We need to have that industry. We need to have industries like it, because if you want to have good wages for your workers, that's going to be limited by the value they add. So if you have people working in a McDonald's where they're adding maybe $12 an hour of value, you can't pay them more than, say, eight or $9 an hour and have the business function be profitable. But if you have people working in an automobile plant where they're adding $50 an hour of value, you can pay auto workers $30 an hour, and it still functions as a business. The other thing you need to do is you need to understand that technology is not something you can just say, private sector, go get it. And have the government only support pure science. Because if you look at the most important, the most successful technologies that have developed since World War two, things like aviation, things like the Internet, and now solar power and so forth, those technologies all had long gestation periods, and there were years, if not decades, in the course of that development where what was going on could not be sold at a profit in the private sector, because the time horizons are too long, the risks are too great, the technologies are too uncertain. So you get the best results when Uncle Sam steps in and pays for not just doing the pure science, but actually developing technologies. For example, the airliners we know and love came out of the military. Basically, all the underlying technologies came out of the military. The first giant aluminum aircraft was the B 29, built in World War two. The jet engine was funded for military purposes, not for civilian purposes. It was adapted later. Or consider the Internet. The Internet. Although billions of dollars of profits have been made with websites and businesses that operate on the Internet, the Internet itself was not created in somebody's garage with the dream of making it big financially. It was created by government scientists to share data. If you look at the solar industry today, making solar cells, installing them, which is now cost competitive with coal plants, natural gas plants, etcetera, which was just a dream when I was young. That is a product of research like the Sunshot initiative at the Department of Energy to get the cost down. So that's what the government needs to be doing, and it needs to be doing it on a much bigger scale than it already is. And above all, it needs to be doing it with the purely economic objective of making this a more prosperous country, rather than doing what we do now, which is we only do these things for national security, for public health, or for environmental protection.
Cris Sheridan:
So you made some really good points there. The Internet, semiconductors, even GPS or solar technology, these were things that were funded, the R&D for them, by the US government for various purposes. Clearly the semiconductor for the space race against the Soviet Union. The Internet, as a way of achieving communication between different facilities. In the case of a nuclear attack, to withstand one key node being taken out, the Internet would be able to ensure that. And you go down the line. A number of these things are all part of government R&D. So the myth that free trade or the market itself comes up with all these things is clearly just that, a myth. When you look at all of these powerful industries that are shaping the world today and providing jobs for millions and millions of people, not just here in the US, but all around the world. So that’s a very key part of this. And I think the main pushback that people will have is, yeah, but we can’t do away with the free market. We need to still have the free market operate. Just to be clear, you’re not saying that we need to do away with free market principles. You’re just saying that we need to have a cohesive and comprehensive industrial policy.
Marc Fasteau:
That’s exactly right. All of these industrial policy measures, and there’s a whole list of them, most straightforward one is a direct subsidy. There are tax credits. They’re using the power of procurement to create a market for new products and new uses and so on. But where that effort should stop and where it has stopped pretty much in this country is when the project develops to the point where the private sector, the private market can pick it up and run with it, which means that there's always risk when you take a new product and you bring it to market. But venture capital firms and existing companies in similar industries all have risk horizons and time horizons. There's only so much risk they're willing to take, or they can take, and there's only a limited amount of time they can allot to getting from where they are to something that's actually selling and making a profit in the market. So all the work that we were talking about, that Ian talked about not just inventing it, but helping in commercializing it. In the VC world, that's called crossing the valley of death to a viable commercial product. That's the government’s role. As soon as that's done and in the latter stages of it, the private sector has to be deeply involved in structuring the work that's being done and the prototypes, that’s when it goes to the private sector market. And that’s absolutely critical. I mean, that’s the engine from that point forward. One famous VC talked about early days in the chip business. The government creates the platform on which the VCs dance, and I think that’s a pretty good way of talking about it. In fact, this is what is, this is kind of the history of what's happened. I mean, having a commercial airline industry, not just the airplane's capacity to build them, but actually aircraft companies that can fly you across the country in 5 hours and so on, that was really recognized as something the country should have by Herbert Hoover back in the twenties. He didn't probably say to himself, what kind of industrial policy do we need. But he did the right thing. He decided that the airlines wouldn't have developed without demand from the government. So how did he create demand from the government? He started airmail, airmail service. So there was demand for airplanes, demand for pilots and roots began to develop. And he was smart enough to pick that, because that’s something the government can pay for. Its also easier as a first step than flying people around, because its not good, obviously, if a plane carrying airmail crashes. But its not the same disaster as if a plane full of 50 people goes down and it doesn’t have to be as comfortable, and so on and so on. So that was the beginning, and that was a very smart industrial policy. And then to make the point that allowed for airlines to develop and for a bigger demand, a big enough demand for aircraft engines and guidance systems and all the rest of it. And in fact, the government helped with all those things as well, again, to the point where they were basically handed off or taken up by the private sector.
Ian Fletcher:
You can trace in American history all the way back to the founding fathers, the understanding we used to have in this country about all these things. Now, it starts with Alexander Hamilton. Of all the founding fathers, he was the one who was an economist, and he was conversant with the most advanced economic thinking of his day, which was what you would call today, developmentalist, which is a term only really often used in regard to East Asia governments like China, Japan, Korea, which have deliberately pushed forward their own economic development. But it used to be something that was understood in all the advanced countries that the market is great, but you need to push industrialization forward, because the US, when it started out, was close to being an 18th century banana republic. It was political, chaotic. It had a weak central government, and it was almost entirely agriculture and raw materials. So there was no guarantee that the US would become an industrial superpower. Other new world societies of size and natural resource endowments comparable to ours, Brazil, Argentina, Mexico, they did not industrialize. The US industrialized because it took very deliberate steps to make this happen. The most obvious is having a tariff protected economy, which is something that developed in the first half of the 19th century with a big push after the war of 1812, where Americans realized that if you don't have a tariff protected economy here, we're just going to be buying manufactured goods from the Europe, above all from Great Britain, which was the industrial superpower of the time, rather than making them here in the US, which is why the US became a tariff protected economy. And that's how we went from being an agricultural backwater to being the largest economy in the world by about 1870. And thereafter, we're not only the largest economy, we're also the most technologically advanced economy. The US only became a power in pure science after World War two, but we were a power in engineering even before that, thanks to policies like the land grant colleges, which were set up during the civil war at the instigation of Senator Morrill of Vermont, who is also the author of the Morrill tariff. Because all these pieces fit together, where you have a tariff protected economy, so that you manufacture in the US, and then you have, the different states have colleges, above all, engineering schools, so that you have the people to staff them, so that you can have the most advanced economy. And there are all sorts of quirks to this, where the hand of government is revealed as essential. For example, the transcontinental railroad. The routes were largely surveyed by military engineers because the military was the first institution in this country that trained engineers. You have the fact that mass production with interchangeable parts, which we take for granted today. But at the time of the American Revolution, every gun was a handcrafted masterwork made by a gunsmith with parts that were just a little bit different from every other gun. So you couldn't have firearms without having these craftsmen. If it breaks, you have to take it back to a craftsman. So they're very expensive, high tech items. In the 1830s and 1840s, the us military started working on interchangeable parts, initially at the federal armory in Springfield, Massachusetts, which is still there. And it was called the American system of manufacturing by the Brits because it was so distinctively an American way of doing things. It was very different from how things were done at the time, and that came out of the military. Now, the point here is not any kind of military industrial complex should rule type idea, but it's the fact that these things don't just come from the private sector acting on its own. They don't historically, that's just not the way things work. And what we need in this country, we need to be pushing technology for purely economic reasons, for the sake of prosperity, because that's the missing piece. That's what we don't do right now.
Marc Fasteau:
That's a central point that's worth emphasizing. The other way to think about it is that we've had very good industrial policy in some areas. We've both talked a little. Each of us talked a little bit about it, but we haven't called it that because industrial policy for years, many years, was a third rail word in American politics. If you said it. You were either a communist sympathizer or you just didn't understand history and you didn't understand the common, the few that's been peddled by many conventional economists and even a few economic historians that even though the Asian tigers, first Japan, then Korea and China and Singapore on a smaller scale have risen in the ranks of industrial powers and GDP per capita enormously quickly, they didn't do it. Their industrial policy didn't work. It's because their cultures are different or something or other. So this is worth talking about because there's still a lot of pushback and there will be more pushback. One of the things we're going to talk about is that when government supports just like the private sector, some looking into a really forward looking set of possible technologies, you have to do it on a portfolio basis. And some fail inevitably as that's the way the world is. As soon as that happens, all these people who lying a little bit low now because industrial policy is the term of the moment, we're doing it. Both presidents or at least President Biden's folks say that's exactly what we're doing, they'll push back. So we have to understand that there are going to be failures as well as successes and also that it can't just be mission driven, can't just be health. A lot of the spin offs that have already been talked from the defense sector have been identified, but also fabric manufacturing, steel manufacturing, the downstream industries that use steel, not all of them, but many of them pay quite good wages. And even if they're not high tech, if you want to be able to manufacture high tech items, you need them. And as we've learned, having a secure supply chain even of rather ordinary materials and items is critical. So when Ian says expand it, we need to expand to those things. Not everybody can, can work in the industries that everybody thinks of as high tech.
Cris Sheridan:
Both of you touched upon a number of different policy prescriptions or tools that would help for this industrial policy. And in your book, again, the title of the book is industrial policy for the United States: winning the competition for good jobs and high value industries. But you've talked about how we need tariffs. You've talked about government support for certain industries, for certain technologies. And there's another part of this conversation as part of your three pillars, if you wouldn't mind, would both of you or either of you quickly go through the three pillars of industrial policy that you believe the United States does need to implement today? So that our industrial policy is, of course, both cohesive and comprehensive in the way it's implemented.
Marc Fasteau:
So we've talked about the first two pillars. The first is supporting in a variety of ways, not just the invention, but the initial commercialization of what we're calling new technologies that are important either economically, strategically, or in terms of national security. The second part is providing protection against subsidized competition, notably from China. But not just China. Japan. Korea heavily subsidized their industries that they consider important, so that the money that we spent we put into the chip bucket doesn't just drain out a hole in the bottom because they can't sell the chips, because subsidized competition just drives them off the market. The third piece is having a competitive currency. Right now, the dollar is overvalued by about 16% against a trade weighted basket of other currencies, countries that we trade with. So why don't we have a dollar valued at a level today that balances trade? Well, there are two influences that cause the overvaluation. The first is currency manipulation by our trade partners. Virtually all of the major industrial trading partners that we have do it, except those in the EU can't do it directly. And what this means is when they get dollars, when we buy their stuff, we buy their exports. Instead of putting them back into the financial markets, they stash them away, they sterilize them, they buy us treasuries or other instruments and keep them off the market. So the readjustment I just described, it doesn’t take place. China manipulated very heavily for many years. Japan has done it, Korea does it, Taiwan does it, and for the EU, a lot of the European countries do it as well. So its a major issue. But it's not right now the strongest influence on our overvaluation. The other is a big net excess flow of capital by non us private sector investors into the United States. The US is the biggest, the most liquid, generally the most attractive financial markets in the world. The dollar is the reserve currency. So for all those reasons, more investors want to put more money into the US, invest more in the US than going out the other way. So if you want to invest in the US, you have to do it in dollars. So that creates more demand for dollars. And as we know, unlike in every other market, more demand means higher price, and that pushes up the dollar. Thats been going on for quite a long time, and the scale is really immense in the trillions of dollars. So that’s the problem. And before you get into how were going to fix it, its critical to say that the three pillars, which we’ve now identified as support for what we're calling advantageous industries domestically, protection of those industries from subsidized competition, and the third, which is getting our exchange rate down to the proper level, they all have to be coordinated. As with industrial policy generally, no single policy is going to do the job on its own. So the key thing for the US is not just to expand industrial policy, but to actually set up the institutions so that it's coordinated. And currency isn't over there in one silo, and the treasury and commerce is doing something else with tariffs, and other institutions are doling out money to aid certain sectors. So I'm going to stop there, but I'll ask Ian if he could describe are prescriptions for dealing with dollar overvaluation. I think that's the next logical piece of this discussion.
Ian Fletcher:
Yeah. Just to recap, one way to think about how all the pieces fit together is if you want good industries, you need the technology to build them, and then you want to keep that industry, you need a tariff, so you don't want the foreign country to take it. So you put in a 15% tariff. But if the dollar is 16% overvalued, well, that wipes out your tariff. So how do you deal with the dollar? Okay. The price of the dollar is a function of supply and demand, like any other price in the economy. And the reason that the dollar is overvalued with respect to trade is that dollars are demanded by foreigners, not just to buy things that are sold for dollars, like Boeing aircraft, Chevrolet cars, American coal, American soybeans, what have you. They are also demanded by foreigners to buy investment assets. Shares of Microsoft, part of a shopping center in San Diego, what have you. And that’s where the problem lies, is that the dollar is puffed up by this demand for American investments. And Wall street doesn't care because they're happy to sell investments and take their cut. But it's terrible for the real economy because we're selling off our existing wealth, pieces of it, over time, rather than selling foreigners things we produce today, which is how you produce jobs in the US and how you keep our industrial base healthy. So what we would propose is to deliberately knock a little bit of the shine off of American investments from the point of view of foreigners. So you impose a small tax on foreign purchases of American assets. This was proposed in a bill in the Senate in 2019 by senators Baldwin and Hawley. That was a bill that we at coalition for a prosperous America helped to write, and it creates something called a market access charge, which is just a couple of percents tax when some Japanese bank or some Austrian pension funds wants to buy US treasury bills or shares of Microsoft or part of a shopping center in Orange County, California. And when you do that, you're going to reduce the foreign demand for American assets because there's a tax in the way. So it's no longer such a good deal, which means there's less demand for dollars, which means the price of the dollar, the exchange rate of the dollar with respect to other currencies goes down. Which means two things happen that we want to happen. Number one is foreign imports become more expensive in the US. So people are going to buy less consumer electronics from Japan and Korea. They're going to buy less consumer knickknacks from China. They're going to buy less luxury cars from Germany because they're going to be slightly more expensive. And American exports become more competitive. American beef is more competitive in Europe. American computer chips are more competitive in Japan. American aircraft are more competitive when we're competing for Air India's business. And because you're putting a thumb on both sides of the scale, that is by far the least traumatic, least complicated way to zero out the us trade deficit, which is horrendous. It's like six, seven, $800 billion a year, which is destroying jobs and deindustrializing our country and driving us deeper into debt to foreign nations.
Marc Fasteau:
Just to put some numbers on that, worth a little detour, I think that the goods trade deficit, basically manufactured goods, was about a trillion dollars in 2023. What that means is that we are consuming a trillion dollars more of manufactured goods than we produce. And another way to put that is that we have lost 3.5 million manufacturing jobs. Now, I will say, I think it's worth saying, responding to what traditional economists, a lot of them have said, and certainly a lot of pundits, is, yes, but look, we get all those goods for much lower prices. It's, the stuff at Walmart is cheaper and that more than makes up for the, the manufacturing jobs. And manufacturing jobs don't pay as much more than other service jobs as they used to. Well, the former president of the American Economic association, it's about the pinnacle of establishment economics, wrote a book with a co author a number of years ago using the same kind of economic mathematical economic modeling that traditional economists love and show that if you take sizable industry that pays decently and you move it to another country, the cheaper goods you get because the cost of labor is lower in that country and they send over cheaper goods does not make up for the lost income from losing the industry. It's not an even trade. You'll hear that despite the evidence you hear over and over again that it's worth it. So the fact is, this deficit has cost us an awful lot of real income. The estimates our GDP would be about 20% higher than it is today. That's a huge number. And all this just, I think, underscores the importance of getting this stuff right.
Cris Sheridan:
One of the really interesting things about your book is that this is not a partisan issue and that we see even under the current administration, the Biden Harris administration, but also under the prior administration, with Trump, elements of the three pillars that you advocate being implemented. So we saw tariffs being launched with the US China trade wars in 2016. And under his administration, we have seen Biden continue a number of those tariffs and even expand them. So we do see that one pillar that you discuss. We also see under the current Biden administration, clearly a huge push and a lot of money being invested towards the semiconductor supply chain, towards as well, renewable energy. So we do see government support, targeted government support. And I think that there's a lot of bipartisan support for a number of the things that you are advocating. The one element that seems to be missing is, like you said, making sure that all of the various branches or pieces of this are all communicating effectively and working in a concerted manner. And also when it comes to the dollar being overvalued, like you said, 16% among a trade weighted basket of currencies. So perhaps more focus on the dollar and then a little bit more of a communication and working together between these various policies as you see them. And perhaps we could see a successful industrial policy moving forward.
Marc Fasteau:
Well, the politics longer term of getting this right, I am actually pretty hopeful about, because as you mentioned, there is usual divisions, Republican taking one point of view, Democrats taking an opposing one, don't really apply. The divisions are kind of horizontal instead of vertical. There are people in both parties that support industrial policy. So that makes me hopeful, because for industrial policy to stick to be institutionally solid, to eventually develop the specialized staffing in different parts of the government, that focus on this in a coordinated way, it has to be bipartisan. Otherwise it becomes a political football off again on again, pieces cut out by one party and restored by the other, and back and forth and getting it coordinated and long term, which, of course, is critical, becomes impossible. I mean, the UK is a prime example of where it's become a political football, and it's failed for a number of reasons, but one of them is that lack of inconsistency and off again and on again with respect to the politics.
Ian Fletcher:
When I sat down to write my first book, which is called Free Trade doesn't work, in 2007, there were only about half a dozen intelligent people in the English speaking world I could even talk to about the subject. Free trade was such a dogma. Now, opposition to free trade is the national consensus in both parties. I would point out, however, that the economics profession has not really come along. They are not going to be the origin of forward thinking policy in this country. There are some great economists who have done great work, like Ralph Gomory, who is on CPAs advisory board, did real path breaking work on free trade. But even when the US was a protectionist economy, the professoriate in this country was stuck on the opposite. So this is something that is going to be developed by political figures who are facing real world challenges and the pressure is going to come from the private sector. One fascinating thing that I like to point out to economists is that opposition to free trade theory, that is to say, people who, when they hear the conclusions of the theory, say, no, it's not how the world works. You don't only get that from ordinary lunch bucket Americans whom one can of course, easily dismiss as not being intellectually sophisticated. You also get opposition from sophisticated international business people with private jets. If you talk to them, they'll say no. Of course, free open market is always the best thing. That's not true, of course. Some industries are better than others. Of course other countries have hidden trade barriers. My business bangs its head against them every day. So that's where the solution is going to come from. It's going to be a bottom up thing. It's not going to be something that comes from great theoretical discoveries, the way physicists figure something out and then 20 years later you have a new solar cell exploiting some new physical phenomenon.
Marc Fasteau:
Let me add a little historical background that supports what Ian just said at the end of the war. War we were so dominant economically, we could not only make things better, often we were the only country making certain things. So free trade was great for us. As a practical matter, the more open markets, the more our businesses could sell. But also Roosevelt had a secretary of state who strongly believed that free trade more freer, that would conduce more to peace and less to war. War. And he convinced Roosevelt to start us down that path where we ceded the government told a number of our industrial leaders to actively cede the markets to not only our allies to help them recover in Europe, but also to our former enemies, the Japanese and the Germans. And so that's the point where it shifted and it didn't really matter because we're so dominant still until about the mid 1970s or early 1970s when Europe had recovered and Japan had begun its significant part of its recovery and so on. But by that time, it's in that period when the free trade, we'll call it a dogma because we think it's not good theory, had been entrenched and it began to be. If you wanted a PhD in international economics internationally at an Ivy League university, you had to believe in it. And if you weren't, there's something wrong with you. And so on and so on. So you know how these paradigms die. Usually they die with their supporters. So there are still plenty of people actively pushing back today. I just read of a couple of pushbacks, that all this industrial policy stuff was a bunch of nonsense, but that's how we got to the ideological situation that were just beginning to break out of today. On the question of free trade or industrial policy.
Cris Sheridan:
Yeah, and I think in your book you established very well that if you look, historically speaking, the US has had a series of very successful industrial policies like we discussed intervening or supporting various industries that are massive multi trillion industries today, whether or not that is commercial airlines, the computer industry, with the development of semiconductors, solar power, GPS, almost every piece that goes into your cell phone, the Internet, all of this can go back to early days, either DARPA or government R&D as part of its efforts. So that is clear. The historical record is clear. I think one area, and this is something that we do touch upon our show pretty regularly, at least in terms of how industrial policy is currently being implemented, where its working at cross purposes with our long term interests is when it comes to the green energy transition. I’d love to get your thoughts on this because we see lots of money from the government moving into renewable energy technologies. And in particular if we were to think about wind and solar, which require a large number of critical raw materials, of which China has a near monopoly on the processing and mining of these things, by doing this, by rushing aggressively into renewable energy technologies, what we've inadvertently done is made ourselves more dependent upon China's supply chain for these very things. And that is a problem because of course, well, if they're using coal for generating a lot of the materials for these things or the refining and processing of them, well then that's working at cross purposes with our goals of lowering carbon emissions. But then on the other side, in terms of trade, if we're investing a lot of money in this direction and yet it's making us more dependent on China, that's also a problem for our longer term national interests and strategic interests. How would you, from your, with writing the book on industrial policy, what would you say needs to be changed on how we're going about this? Because this is currently one of the largest industrial policies that we're currently implementing.
Ian Fletcher:
The problem you're talking about is exactly the kind of problem that our way of thinking is designed to solve. When the US has an environmental need to transition the economy to green power sources, which results in huge subsidies for or wind and solar, you have a supply chain there, and the supply chain needs more protective tariffs and quotas so that we don't just end up sucking in photovoltaic cells that are made in China. We need protections for things like production and refining of rare earths, of polysilicon and so forth. So this is right up our alley. This is an argument in favor of what we stand for, not an argument against it.
Marc Fasteau:
Well, I think that's true. But you put your finger on a fact of really any complex set of policies, but certainly industrial policies. There are trade offs. There are short term versus long term trade offs here. If you think about it, framing the one you just raised. What if we didn't? We said, okay, we don't have enough rare earths, so we'll only produce a very small number of EV's because we don't want to become more dependent on China. Well, we've lost the EV business completely. That's just gone. Because it's not only subsidization, it's the learning curve. It's getting to scale on an industry with all the economies of scale that develop when you, as you get bigger, it's a big learning curve. So yes, it would certainly be nicer and cleaner if we could just quietly start building EV's at the rate at which we can supply enough rare earths so that we're not dependent on China. The world is just messier than that. The government is pushing as hard as it can to develop, even to the point of subsidizing and heavily financing the development of rare earth sources and processing plants in other parts of the world to reduce our dependence on China. So the point you make is obvious, is an obvious one, I think, to people in the government who are working on this and will motivate them to get these alternative sources in place sooner. But will we run into a squeeze on it? No doubt. And we could end up, I mean, to take it to the extreme, we could have now chassis of EV's made in the US sitting on lots waiting for the batteries because we don't yet have enough materials to make them, or we can't even import them from Japan because Japan hasn't gotten enough materials. That's going to happen. Those kind of things do happen, but it doesn't invalidate, at least in our view, the strategy overall.
Cris Sheridan:
I absolutely agree. Again, I guess what I’m getting at is you framed the three pillars of industrial policy in your book, again, trade policy, which would include tariffs, government support for certain industries and technologies. Weve seen that in the past. It has been successful historically speaking. And then thirdly, being on the exchange rate side, particularly when it comes to controlling international capital flows. Like you went into some depth, Ian, and the overvaluation of the us dollar to make us more competitive on the global stage. One perhaps fourth pillar that I think could also be improved or included in this discussion when it comes to the problem that I just listed with green energy policies is the fact that if you look from discovery to production, it takes about ten to 15 years on average to open a mine in the US, whereas if you look globally it takes about half the time, five to ten years. And that includes western nations as well. If you look at Canada, Australia, because as you pointed out, they do have industrial policies and that's because they see that the mining industry is very important for them to compete on the global stage so they don't have the level of regulation and red tape. It seems that in order to move forward in some of these industrial policies that were currently pursuing, it's going to have to be met with some pretty significant deregulation.
Marc Fasteau:
Yes, that's true. The worst example of what you're talking about is trying to modernize the electric grid. It's too difficult, and it's too difficult to build big bridges and it's too difficult to build mines. Now, we don't really want to go back to the wild west where you could do anything you want and then just leave a big mess and leave not worry about the health risks you're creating and so on. So there's a balance that has to be struck and it's a trade off. And we clearly need to move in the direction of being able to make these decisions faster and not let absolutely every minor stakeholder hold up projects for years with litigation. And we clearly do too much of that. On the other hand. To remain competitive without making a wasteland out of our country, we need tariffs to protect not only against direct subsidization of imports, but also against lower environmental standards, which reduce the costs of our competitors as compared to what it costs to produce the same product in the United States because we regulate emissions more closely. Again, these are trade offs, but we need to improve the process, speed the processes along here. But we also need to protect our producers, who are following our rules against competition from companies in countries where environmental protections are much lesser, non existent.
Cris Sheridan:
What is one of the main things that you think our listeners need to understand when it does come to our relationship with China?
Ian Fletcher:
They are a great power competitor in the classic historic sense. That is to say, because they have the ability to assert power in rivalry with us for dominance of the global arena. They will. And they're actually more dangerous than the Soviet Union because the Soviet Union conveniently handicapped itself by agreeing to run their economy according to the scribblings of a bankrupt German Jewish refugee writing in the library of the British Museum. You know, his name was Karl Marx. That was an incredibly stupid move on their part, because the communist economy does not work. The 100% public sector model for an economy which the Soviets really believed in, unlike some other, quote unquote communist countries like, say, Yugoslavia, where they figured out pretty quickly this wasn't working and they backed away from it. So the Soviets lost because they couldn't keep up with the US economically, technologically, and eventually they were forced to confront the fact that they were never going to be able to take over the world. China, on the other hand, is ideologically pragmatic precisely because its rulers are interested in so little else than power. If doing things on a public sector basis will drive their economy and their technological capabilities and their military capabilities forward, they’ll do it that way. If letting 1000 flowers bloom in the private sector and having a lot of private companies engaged in very loosely regulated capitalism will drive the economy forward and give them the wealth and the technology that they want, they'll do it that way too. So their very pragmatism makes them dangerous. They're more pragmatic, I think, than the US. The other thing is that the US has a horrendous level of Beijing influence in Washington. But it mostly does not come from lobbyists explicitly hired by the Chinese government and registered under the Foreign Agents Registration act as explicitly lobbying for their interests on Capitol Hill. It does not come from the personnel of the Chinese embassy in Washington lobbying for Chinese interests or even handing out satchels of $100 bills to bad people who sell out this country. It has mainly come from the us multinational corporate sector that is making money manufacturing in China and selling to China, doing Beijing's bidding on Capitol Hill and in the White House and in the regulatory agencies without leaving Beijing's fingerprints on it. And you can see how insidious that is. You can see how much blame Americans bear for serving foreign interests because it was profitable.
Marc Fasteau:
Yeah, there are lots of examples of that. China gets angry. They say, well, no, we'll kick you out. That will motivate the people on Wall street to lobby against whatever it is that China doesn't want the US to do. It can be as direct as that. So, as Ian says, this is more than just a purely economic rivalry. It really does matter who has the most advanced weapons, who has the best AI. The institute ITIF has just come up with a good report on the high technologies where China is ahead of the US and others in which it appears poised to become ahead of the US. So this is really all fronts fight that is critical in the long run. So we got to get this right, and it's not going to be easy.
Cris Sheridan:
Yeah, I think one of the key points that I came away with in reading your book when it comes to industrial policy is that China clearly has that. They have a very powerful industrial policy in place. They're thinking decades and decades ahead, and they have a goal of becoming the leader across numerous industries. But they're not doing that through free market principles. Of course. They're doing this through very large subsidization of critical industries, through dumping and lowering the prices of the things that they can produce to a price where it effectively makes us uncompetitive on the global stage, and also through a very large stealing of intellectual property rights, which is done either covertly or through some type of exchange that will let you into our market and give you access to Chinese markets if you're willing to share your technology, which of course, is very shrewd and clever. But these are, again, this is not a free market manner of trade and economics, of becoming a dominant player on the global stage. This is done through, like you said, a very pragmatic and government interventionist style. We're not going to be able to compete against that unless we are also implementing on our end these three pillars that both of you discuss in your book. But these need to be done comprehensively, cohesively, and we can't be working at cross purposes with one another. So lots of very interesting, stimulating, thought provoking work that you provided in your book. Again, I want to give the title one more time. It's industrial policy for the United States: winning the competition for good jobs and high value industries.
