Rebuilding industry is a mistake. The West should focus on economic alliances instead

Joe Biden’s Inflation Reduction Act is laudable, but decades of decline cannot be reversed in a single presidential term.

By Wolfgang Münchau

U.S. President Joe Biden (C) signs The Inflation Reduction Act. Photo by Drew Angerer/Getty Images

There is an old saying in the world of manufacturing: once an industry leaves, it won’t come back. It’s the Humpty Dumpty of economics. This is why the Germans, who know a thing or two about industry, have been fighting deindustrialisation so hard. The US and the UK gave up on industry decades ago, but the Biden administration wants it to return. The instrument of choice is last year’s Inflation Reduction Act, with its $370bn programme of green subsidies. I fear the US underestimates the scale of the task.

The intellectual force behind that strategy is Jake Sullivan, Joe Biden’s national security adviser. It is a sign of the times that foreign policy dictates the most important strategic economic policy shift in decades. Sullivan has cited the hollowing out of the US’s industrial base as one of the reasons behind the strategy. The other, of course, is China.

The White House says the goal of the Inflation Reduction Act is to make “the nation more resilient to growing threats… and driving critical economic investments to historically underserved communities”. This describes the melange of foreign and domestic policy goals quite well. It is rare in politics that one policy instrument achieves two policy goals. More often than not, it achieves neither.

The scale of the problem is illustrated by the diminished role of industry. In the UK and the US, industry accounts for 17-18 per cent of the value added in the economy, according to the World Bank. In Germany and Japan, it is 27-29 per cent. In China it is almost 40 per cent.

Sullivan’s take on industry is that of an urban policy wonk – very remote from industrial reality. I first received a dose of this type of thinking when I came to the UK as a young student from Germany in the early 1980s. The Thatcher government’s transition to a services-based economy was well under way, and I recall how shocked I was when a well-known economist explained to me that long-term planning and research and development were of little value. Long-termism was just an excuse for low profits, he said. Finance was the future.

This could not be further from the world of industry. Like Martin Luther, it stands, and can do no other. It takes years for an industrial company to build a production line and supply chains. This is why China is so good at it. Industry time-horizons correspond more closely to five-year plans than quarterly profit targets. Herein lies the first obstacle. The term of a US president, and their national security adviser, is short. Would an industrial firm be so reckless as to place a strategic bet on Donald Trump not getting back into office? Or that, if he did, he would continue Biden’s industrial policies? Or that even a future Democratic administration would?

Industry needs infrastructure and policy support to succeed. It needs immigration if it faces staff shortages. It needs universities that churn out trained engineers. It needs a financial context that’s different to the City of London or Wall Street. An example is that peculiar German institution, KfW – the Credit Institute for Reconstruction, a state-owned bank that specialises in industrial investments. Germany also has networks of research institutes that focus on industry.

Industry comes with a paraphernalia of bodies such as these, which disappeared a long time ago in modern service economies.

Sullivan is, of course, right in his diagnosis: the US industrial base has been hollowed out. It was a reckless act. Governments have been blind to the social, as well as economic, costs of deindustrialisation. I have argued before that industrial decline is at the root of populism’s success in recent years – even more so than immigration. Trump’s core support stems from the rust belt of the Midwest. It was northern industrial towns in England that swung the Brexit vote in 2016. Had the UK and the US maintained respect for industry, like Germany and Japan have, politics in Britain and America might have turned out differently.

Re-industrialisation may be a laudable goal, but Sullivan’s strategy would require a political brain transplant. It would be a very long-term programme. The way to start would be to build a bipartisan consensus. A subsidy programme is not enough. And it should not be the start.

I also fail to see how the US will achieve the second stated goal of the Inflation Reduction Act – to become more resilient and independent from China. China’s near monopoly in some rare earths and other raw materials remains. All the new US investment will do is reshuffle the higher nodes or points in the supply chains.

A smarter policy response for the US would be to build strategic supply-chain and industrial partnerships in Africa and Latin America. This is what China has done, for example by taking a strategic stake in a Chilean lithium mine. Chile is the world’s second largest producer of lithium – a critical raw material in the production of electric batteries. China is also now Chile’s largest trading partner. As the US lost interest in Latin America, Chile has become increasingly dependent on China. The Europeans, too, are only just starting to discover the role Latin America and Africa play in their supply-chain security.

China is also diplomatically more active in Africa than the Europeans and the Americans. In building new strategic relationships for the benefit of Western economies, this is where I would start.

What Sullivan’s comments tell me is that the US has lost more than just industry. It has lost its instinct for understanding what industry is all about.