Responding to Senator Rubio on Industrial Policy

By Colin Grabow of Cato.

"Lincicome and I, meanwhile, authored a recent op‐​ed that called for reforming the Jones Act to allow the use of vessels from allied shipyards. Enabling US‐​flag carriers to purchase ships at dramatically lower prices than those of US shipyards would promote fleet modernization and reduce the carriers’ need to repair and upgrade their aging vessels in Chinese state‐​owned shipyards.

If Sen. Rubio wants Americans to do less business with China, he should advocate for measures that make it easier to trade with US friends and allies. Instead of taking away options from Americans, why not first strive to present them with better ones?

More fundamentally, discrete problems such as the reliance on China for particular sensitive products demand targeted, discrete solutions—not vastly expanded government meddling in the US economy."

"According to one of the most oft‐​quoted papers on this topic, 2016’s “The China Shock” authored by economists David H. Autor, David Dorn, and Gordon H. Hanson, US job losses due to increased imports from China between 1999 (China was not admitted as a World Trade Organization [WTO] member until December 2001) and 2011 were a maximum of 2.4 million and most likely about half that number. 

At least a couple of things should be kept in mind when evaluating these numbers. First, in the context of a US economy that sees tens of millions of jobs lost (and gained!) annually, they are quite modest. In February of this year alone, for example, over 5 million Americans were separated from their jobs.

Second, the loss of jobs due to Chinese imports was accompanied by job gains elsewhere in the economy. That’s almost certainly not a coincidence. Savings from the purchase of Chinese products provided Americans with more money with which to spend or invest in the US economy. In addition, the dollars used to purchase those Chinese imports later returned to the United States due to Chinese purchases of US goods (goods exports to China rose from $13.1 billion in 1999 to $104.1 billion in 2011) or investments ranging from the purchase of US stocks and treasury bonds to greenfield investments.

This helps explain some findings that Cato’s Scott Lincicome recently highlighted in his weekly newsletter:

First there’s the question of what Chinese imports did to other US jobs in other places (i.e., not the jobs and communities hurt by the shock). Nicholas Bloom and colleagues, for example, concur with ADH that the China Shock caused US manufacturing job losses, especially for those without college degrees, but they add that the losses were fully offset by gains in service jobs in other regions. Several other studies (see this Lorenzo Caliendo and Fernando Parro paper for a review of the academic literature) have similarly found that a decline in US manufacturing jobs during the China Shock period was accompanied by increases in American service‐​sector jobs—and often well‐​paying ones at the same manufacturing companies. The results from another group of economists were even more positive: After accounting for the effects of Chinese imports throughout the supply chain, specific jobs were indeed lost, but overall US employment and wages increased, even in regions that experienced large manufacturing employment declines (contra ADH).

Finally, one should not be left with the impression that the surge in Chinese imports during the early part of this century was solely—or even mostly—due to China’s WTO membership. Much of the increase reflects the increased competitiveness of Chinese firms as China liberalized its economy and became more market‐​oriented. The story is as much, if not more, about China getting out of its own way as US reductions in barriers to Chinese imports."

"While output has indeed stagnated over the past 15 years, it has done so at near‐​record levels. That performance is pretty good, particularly considering a) the increasingly services‐​oriented nature of the US economy as consumers spend greater portions of their paychecks on things like vacations and dining out than more stuff (how many washing machines, ovens, irons, etc. does one need?); b) the propensity of manufacturers to produce for their domestic market; and c) dematerialization that has seen fewer materials used to produce goods and even the disappearance of numerous items as they are supplanted by smaller multipurpose products (e.g., alarm clocks replaced by smartphones) or slip into the digital ether (DVDs, compact discs, newspapers, books, etc.).

Talk of declining manufacturing employment, meanwhile, is at odds with data showing the number of such jobs as having risen by over 900,000 since April 2009. While the increase has correlated with the decline in productivity that Sen. Rubio highlights, this further supports the notion the decline in manufacturing jobs since 1979 is more a story about productivity (e.g., automation) than trade. Sen. Rubio can express concern over declines in manufacturing productivity, and he can bemoan declines in manufacturing employment, but he can’t credibly do both given the clear tension that exists between them."

"the US share of the world market as an indicator of manufacturing vitality is a deeply flawed metric. As other countries become more developed—as we should wish for them to—they will account for a greater share of global production. Consider, for example, that even if US manufacturing value‐​added doubled over a certain period while international manufacturing value‐​added tripled, the US share would decline. Rising global prosperity is to be celebrated, and we shouldn’t be led astray by statistics that paint this trend as a cause for worry."

"Neither the moon landing nor NASA (cited in Sen. Rubio’s Washington Post op‐​ed), meanwhile, are the industrial policy trump cards that Sen. Rubio imagines them to be. In fact, they aren’t even examples of industrial policy, which is typically understood as government efforts to develop selected commercial industries in service of national economic goals in market‐​beating ways. The primary purpose of winning the space race was besting the Soviet Union in a high‐​stakes competition for global prestige, with any benefits to US industry a secondary concern."

"if “nationless corporations” are regarded by Sen. Rubio with such deep suspicion, why does he seek to empower them via industrial policy that their lobbyists will inevitably help shape? It’s worth noting, for example, that the primary beneficiaries of the Creating Helpful Incentives to Produce Semiconductors Act—Intel, Micron, TSMC, and Samsung—are all multinationals, the latter two of which are headquartered abroad. If these corporations are a malady, then providing them with government resources seems an odd cure indeed."

"The Founders’ use of tariffs did not reflect a belief in industrial policy but rather a need to raise revenue. As economist Douglas Irwin wrote in his detailed history of US trade policy Clashing over Commerce:

During this period, the term free trade did not mean zero tariffs and the absence of any government restrictions on trade. It was generally understood that governments would need to tax trade for revenue purposes. Instead, free trade meant the freedom of a country’s merchants to trade anywhere they wanted without encountering discriminatory prohibitions or colonial preferences as long as they paid the required duties. Free trade could be more accurately characterized as open trade in which countries could impose import duties and regulate shipping but did so in a nondiscriminatory manner.

Economic historian Phil Magness, meanwhile, notes that decisions over which items to place tariffs on produced testy exchanges among legislators. Rather than considering the country’s economic welfare as a whole, these politicians—as they are wont to do—instead took a more narrow perspective focused on their constituents:

The new nation’s first foray into tariff policy began innocently enough on April 9, 1789, when Madison introduced a bill to the House of Representatives proposing specific duties on alcohol and applying a tax “on all other articles ___ per cent. on their value at the time and place of import.” Most expected a short debate, as indicated by Rep. Elias Boudinot of New Jersey, who followed Madison in suggesting “that the blanks be filled up in the manner they were recommended to be charged by Congress in 1783.” Rep. Thomas Fitzsimmons of Pennsylvania derailed the plan with a hastily drawn amendment to “encourage the productions of our country, and protect our infant manufactures.”

The proposal caught Madison, and most of Congress, off guard. “If the duties should be raised too high,” Madison warned in a letter, “the error will proceed as much from the popular ardor to throw the burden of revenue on trade as from the premature policy of stimulating manufactures.” And yet the allure of specialized rates swept through Congress, prompting requests from a succession of amendments seeking differentiated rates for favored goods from their home district or state. In his first major congressional action, Madison had unwittingly awakened the very same brand of factional politics he so eloquently diagnosed in The Federalist Papers. Except for slavery, tariffs became the most contentious federal policy issue of the 19th century and remained a source of continuous discord until the Great Depression.

Such dynamics should surprise only the grossly naïve. Furthermore, what reason is there to think that the same parochial interests that helped set tariff policy would not also influence the direction of Sen. Rubio’s envisioned industrial policy? Perhaps more fundamentally, why does Sen. Rubio think that trade policies adopted in the late 1700s offer useful lessons for economic policy in the 21st century?

Policies adopted by President Ronald Reagan are at least within living memory, but here Sen. Rubio succumbs to factual and logical errors. Reagan did not increase tariffs but instead implemented a voluntary export restraint (VER) that limited imports of Japanese vehicles. And it’s certainly nothing to emulate. As Scott Lincicome detailed in a 2022 blog post, the VER cost US consumers billions of dollars, much of which was funneled money into the pockets of Japanese automakers (who could raise their prices due to the VER’s constraint on supply). Rather than using the import restraint as an opportunity to retool and raise its game, meanwhile, the US auto industry frittered away the increased profits generated by the VER on items such as aircraft and bonuses for company executives.

The larger context is also worth bearing in mind. While tactically ceding free trade ground through adoption of the VER (eventually scrapped in 1994), Reagan also used his time in office to sign a free trade agreement with Canada—the foundation of the North American Free Trade Agreement—and helped launch the Uruguay Round of trade talks that eventually culminated in the establishment of the WTO. Reagan’s trade legacy is far more rooted in expanded liberalization than the kind of industrial policy Sen. Rubio now champions."

"Talk of alleged “deindustrialization” in a country that accounts for the second‐​largest share of global manufacturing output is odd if not outright false while claims of reduced resilience and cultural corruption are so nebulous and unspecific that they are difficult to respond to. Again, the inability to articulate the nature of the problem that Sen. Rubio demands the government be given fresh reserves of power and money to confront is a disturbingly recurrent theme.

That said, if Sen. Rubio is concerned about resilience it is unclear why he believes the answer lies in industrial policy. Far from undermining economic resilience, trade openness provides needed redundancies and alternative sourcing arrangements that help mitigate the impact of shocks such as the recent COVID-19 pandemic. Trade can also assist in the recovery process once these shocks subside. As a 2021 World Trade Organization report stated in its conclusion:

Trade can also better equip countries to deal with shocks. As a source of economic growth and productivity, it gives countries the technical, institutional and financial means to prepare for shocks. It also can help to ensure that critical services, such as weather forecasting, insurance, telecommunications, transportation, logistics and health services, as well as critical goods, are available in a timely manner before and after a shock hits. It can also enable countries to switch from domestic to external suppliers in case of domestic shortages, thereby making it possible to import essential goods quickly and more easily cope with shocks. In addition, trade contributes to economic recovery from shocks by improving allocative efficiency and unlocking scale effects, enabling the creation of export‐​related jobs and the importation of affordable necessary inputs, ultimately leading to better incomes and increased productivity and innovation.

A perfect example of the value of global supply chains—and the risk of overreliance on domestic ones—was seen during the 2022 baby formula crisis. During this crisis, recalls of formula as well as the shutdown of a US plant that produced formula over contamination concerns led to widespread shortages. These, however, were only the shortage’s proximate cause. Their persistence was due to US import barriers, consisting of both tariffs as well as strict nutritional, labeling, and other standards imposed by the Food and Drug Administration, that enabled US producers to control over 98 percent of the baby formula market. Had these barriers been lower, or removed entirely, foreign‐​produced supplies could have quickly eliminated the shortages.

The episode is a classic case of how severing Americans from global supply chains makes them more vulnerable and less resilient. The forced use of domestic production may seem like a wise exercise in self‐​reliance, but the reality is more akin to placing all of one’s eggs in a single basket."

"what should be made of Sen. Rubio’s support for sugar protectionism that has encouraged US candy manufacturers to shift their production overseas? Is Sen. Rubio not complicit in fostering the very ills that he decries? If manufacturing is so vital, why does Sen. Rubio back policies that drive it away?"