If you are of a certain age you will remember the term “industrial policy”, a derisive description popularized 30 or 40 years ago to denote practices of nations, particularly Japan at the time, whose governments engaged in “picking winners” in economic competition in the private sector through subsidies or regulatory carve-outs for favored industries. It also smacks of mercantilism, or national economic policy designed to attain a favorable balance of trade by whatever means, such as China currently pursues. Both of these characterizations of national policy are anathema to free trade and, with a brief exception in the disastrous Smoot/Hawley tariff of the 1930s, have been rejected by American economic policy since the McKinley administration at the turn of the 20th century.
Until now. The most unfortunate policy development of the Trump administration to date has been the President’s relentless pursuit of protectionism for purposes of chasing the false promise of favorable international trade balances, whatever its cost in terms of higher prices for U. S. businesses and consumers, the disruption of critical supply chains in multilateral trade agreements, and destructive retaliation by our trading partners.
And now, not surprisingly, this has already led to an “aid package” for one of the major victims of the new tariffs in the amount of $12 billion in government purchases of surplus farm products through the old supposedly “temporary” programs of the Depression-era Commodity Credit Corporation. This is simply fixing an economic problem of the government’s own making by putting its victim on federal relief! And our Secretary of Agriculture says that this is a “short term solution” and even indicates that part of the justification for the new protective tariffs on critical agricultural products is “homeland security”. This is total nonsense and if it stands, we are headed for a situation in which every victim of these new tariffs and the retaliation that results produces a new appeal for an industry or company exemption, subsidy, or carve-out, a corporate lobbyist’s dream. And although not directly related to the tariff issue, this follows on the move directed by President Trump to use federal authority to require power grid operators to buy electricity from struggling coal and nuclear plants, again supposedly in the interest of national security, to keep these plants open. If all of this is not mercantilist industrial policy, what is it?
There is no doubt that there is much legitimate work to be done in response to China’s blatant violation of World Trade Organization rules that have damaged the U. S. and our allies. One important thing that Trump should pursue is to pull together the European Union along with Japan in presenting a united front against the violations of China’s practices and he could have begun such a process in his recent apparently otherwise successful meeting on trade and tariff issues in Washington with EU President Jean-Claude Juncker. But across the board tariff increases followed by bailouts, carve outs, and protection of favored victims of the retaliation are not the answer, particularly since we need all the help we can get from our allies and trading partners in confronting the real culprit.
One further critical point: The robust quarterly report of 4.1% GDP growth along with significant increases in wages and the personal savings rate send the distinct message that policies matter and that tax reform and deregulation are much to be preferred to politically directed credit and government spending, but also come with a warning that government-directed industrial policy in trade has the potential to foster uncertainty and further retaliation that could put a damper on the sustainability of this growth. Let’s hope that this message gets to the President before it’s too late.