When it comes to protectionism, the restricted EU is better off than the US
Late last year, US president Joe Biden professed to have increased throughput in the clogged west coast ports, such as the Port of Los Angeles © Getty Images
The interruptions to supply chains during the Covid-19 pandemic have been bad for most, but an opening for some. Specifically, they’ve cleared a line of advance for politicians with latent longings for activist industrial policy to try to bring manufacturing home.In the EU, Japan and particularly President Joe Biden’s US, under various banners (“resilience”, “autonomy”, “national security”) some policymakers have gleefully opened up their tool kits of state subsidies, procurement budgets and domestic content requirements, focusing on products including semiconductors, batteries, rare earths and electric vehicles.With a couple of exceptions, such as some Asian governments subsidising semiconductor companies to set up shop in their country, this hasn’t produced much action as yet. Given the potential for clodhopping protectionist interventionism — creating gluts and inefficiency and reducing diversity of supply — this might be a blessing.While the inertia seems unlikely to last indefinitely, it will endure for longer in some places than others. The EU and Japan seem relatively well inoculated against the intervention bug; the US is more immunocompromised.Political space for state-led restructuring has recently been cleared by blitzes of media messaging. Biden more or less claimed to have saved Christmas, or at least the consumer durables part of it, through a flurry of official interventions late last year, unblocking ports and corralling retailers. Thierry Breton, the EU’s hyperactive internal market commissioner, last year took an exhortatory tour of Europe’s vaccine supply chain and intimated he had personally galvanised production.Some of these claims look a touch flimsy when examined closely. Biden professes to have increased throughput in the infamously clogged west coast ports, including by getting workers to run a 24-hour container-handling operation. In fact, the number of container ships waiting outside port continues to set record highs. Europe, which calls itself the world’s pharmacy, is perfectly capable of running highly efficient medical supply chains as long as governments run sensible procurement policies and don’t stuff them up with blocks on exports.Still, the narrative is now there. What of the action? The US government is already testing its ability to micromanage complex private-sector supply chains. Biden is implementing the domestic-content provisions for car production in the US-Mexico-Canada agreement inherited from the administration of Donald Trump, though that has swiftly run into trouble in the shape of a dispute settlement case brought by the deal’s two other members.Undeterred, the Biden administration also wants tax credits for electric vehicle manufacture conditional on production in the US, with an extra handout if the operation is unionised. The union bit may not survive Congress: there’s a non-union Toyota facility in West Virginia, home of the galactically powerful swing-vote senator Joe Manchin. But despite alarm in Mexico, Canada and Europe, the domestic production part has a good chance of getting through and seems unlikely to lead to optimal productivity. As Mary Lovely of the Peterson Institute think-tank puts it: “The question remains as to whether it can do anything other than just result in very high-priced North American vehicles that are sold only in North America.”Supporters of the Biden administration argue that favouring domestic production will encourage electric vehicle take-up. They may be right — last year’s peerless Super Bowl ad for General Motors starring Will Ferrell targeted exactly that sentiment — but even patriotic Americans won’t think money is no object when dropping more than $35,000 on an electric car.Cynical protectionist calculations may also fall apart in the longer run if the programme comes to be regarded as a costly special-interest handout. The use of ethanol as a green fuel a decade or two ago had similar green tech potential. But it’s unclear that its adoption in the US was really helped by becoming an expensive and environmentally suboptimal boondoggle for Iowa corn farmers.Despite the interventionist instincts of those like Breton, the EU is far less likely to succumb to the temptation of self-sufficiency. Its self-imposed limits are its strength. There’s hardly any centralised EU cash to subsidise reshoring: EU member states have so far scraped together only a few billion to subsidise semiconductor investment compared with $52bn proposed in the US.The state-aid regime constraining handouts has been relaxed for products like semiconductors, but it’s well short of the free-for-all in America. Tesla last year withdrew an application for €1.1bn in state aid from Germany, reportedly because of the restrictive rules attached. And the EU, while not faultless, has shown more respect for trade rules than the US under Trump and Biden. So far, its efforts have mainly been limited to modest public-private initiatives such as the Battery Alliance.Japan, meanwhile, created a catalytic fund for its corporations to examine bringing supply chains back from China, but the need to be invested in China to sell to the Chinese market has restrained Japanese companies from major restructuring.It’s a reasonable contention that the advanced economies need a dose of government intervention to encourage resilience, focused narrowly on excessive dependence on particular inputs. But at least such ideas should be run through institutional policy filters to screen out misguided projects. The EU has such mechanisms, not entirely by design; the US less so. It’s very possible that Europe’s protectionists will be saved from [email protected] More
