An industrial arms race is under way. America welcomes it, saying the world needs green technologies and a diversified supply of chips. It is true that an ocean of public money is bound to accelerate the green transition and reshape supply chains in ways that should increase the security of democracies. Alas, the accompanying economic benefits being promised are an illusion. As we report this week, governments that subsidise and protect manufacturing are more likely to harm their economies than help them.
In ideal conditions, promoting manufacturing can add to innovation and growth. Towards the end of the 20th century South Korea and Taiwan caught up with the West thanks to the careful promotion of manufacturing exports. In industries like planemaking the enormous costs of entry and uncertain future demand can justify support for new firms, as when Europe backed Airbus in the 1970s. Likewise, targeted help can boost national security.
But today’s schemes are likely either to fail or to prove needlessly costly. Countries subsidising chips and batteries are not pursuing catch-up growth but fighting over cutting-edge technology. The market for electric vehicles and batteries is unlikely to become an Airbus-Boeing style duopoly. In the 1980s protectionists argued that Japan would dominate the strategically vital semiconductor industry, owing to its subsidised mastery of memory-chip making. It did not turn out that way.
Duplicating production reduces specialisation, raising costs and hitting economic growth. Some analysts expect the price of a chip produced in Texas to be 30% higher than one made in Taiwan. The Biden administration is belatedly seeking ways to open up its electric-vehicle subsidies to carmakers from friendly countries. But most of the “Buy American” requirements are written into laws that may be all but impossible to amend. And they are being copied. A decade ago about 9,000 protectionist measures were in place worldwide, reckons Global Trade Alert, a charity. Today there are around 35,000.
