More Tariffs, Less Whining

Biden's expansion of protection for U.S. green industry is a good thing. Whining about China's strengths, however, is an embarrassing waste of time.

The world needs to achieve a sweeping green transition as quickly as possible. This means replacing billions of machines and billions of tons of infrastructure. Every day that this transition isn't accomplished, the planet gets hotter. As I’ll explain in a post tomorrow, there’s reason to believe that global warming could be entering an exponential phase where temperatures may spiral out of control. If world leaders were behaving rationally, they would be committing their countries to extreme efforts to achieve this green transition. Doing so also just happens to be the only practical way to restore income growth for the world’s working classes and ensure lasting economic health and stability generally. (New Consensus's Mission for America outlines how this could be done in the U.S.)

We support the Biden administration's expansion of industrial tariffs announced today. These tariffs aim to give U.S. green industry a fighting chance to become efficient enough and large enough to thrive and help supply the world with everything it needs for the fastest green transition possible. This will be beneficial both for the U.S. and the world. The world needs every industrial country to scale up green manufacturing as quickly as possible. If U.S. investment in EVs, batteries, solar, and other green technologies were to die, it would both slow the global transition and degrade U.S. prosperity.

What we do not support is the Biden administration's whining about China’s efficiency and foresight — it’s just embarrassing! The other day, I received an email from a friend in China who asked if Janet Yellen, during her recent visit, had really asked China to stop competing so aggressively, or if that was just Chinese government propaganda. I had to admit that Yellen really did insist that China “slow down” and stop producing so much valuable stuff so cheaply.

My friend couldn’t believe that the U.S. had forgotten the fundamental rule of capitalism that it has been pushing on the world for over a century: Whoever makes the best stuff for the lowest price wins!

Yellen and the Biden administration complain that China is cheating. This is embarrassing on many levels. First, both political parties in the U.S. spent decades encouraging China to replace U.S. domestic industry with their own subsidized industries. Those industries were not only subsidized by the Chinese state but also by U.S. corporations transferring capital and know-how to China, and by U.S. trade and fiscal policies that bankrolled the rise of industrial China.

As strange as it sounds, it’s true. Why did we do that? The intellectual elites guiding both parties believed (erroneously) that it would be impossible to compete with low-wage Chinese industry, and that it wasn’t desirable to do so even if we could. They saw manufacturing as a relic of the 19th century — something that a modern country like the U.S. should leave behind, along with horses and steam engines. They also saw cheap Chinese goods as a way to appease U.S. voters whose wages were falling due to a lack of investment in domestic industries.

Only in recent years have those elites changed their minds about domestic industry. Confronted with the extreme consequences of their past policies — sometimes referred to as “China Shock” — they now understand that automation and advanced manufacturing methods count far more than wages in capital-intensive industries like batteries, autos, chips, and other high-value goods. They also realize that a country that doesn’t produce the things it needs to live and defend itself is by definition needy and defenseless.

Moreover, they finally understand that a nation as large as the U.S. cannot prosper without providing manufacturing jobs for a significant portion of its population. There isn’t enough value from service and knowledge jobs alone to go around. All large and medium-sized wealthy countries that provide a good living for their people have substantial manufacturing sectors. For example, while Switzerland is known for its banks, banking and financial services account for only 9% of its GDP compared to 18% from manufacturing. Advanced manufacturing delivers high wages to large segments of the population in virtually every wealthy nation: countries like Japan, South Korea, Singapore, Taiwan, and Germany, which are known for manufacturing, as well as Denmark, Sweden, Finland, and Holland, which are assumed by most to be knowledge economy utopias.

Our elites have come to fully embrace industrial policy (intentional, state-led investment in industry) over the past few years, spurred by factors such as Trump’s (empty) embrace of industrial policy, COVID shortages, and concerns about China’s industrial might against a weakened U.S. economy. Another factor was the new consensus among a rising generation of progressive economists on industrial policy and state-coordinated growth and innovation. (Our think tank’s name references this new consensus.)

Now that we’ve changed our minds, virtually overnight, about our previous “you make it, we buy it” deal with China, we expect China to overhaul its entire national economy equally as fast to suit this fickle geopolitical mood swing we’ve had. Not only is this impulse embarrassing, but it would also be disastrous for the global green transition if China complied.

Janet Yellen is complaining about China’s “overcapacity” in green manufacturing — for example, in EVs. The world needs to eliminate billions of gas-powered vehicles. There can be no such thing as overcapacity in EVs. If demand for EVs lags behind production, it’s due to failures in charging infrastructure, subsidies, and financing for consumer EV purchases. China is investing massively in global green infrastructure to create new markets for their products abroad — a very capitalist impulse. We used to do this all the time, converting the world from coal to oil in shipping and trains, and helping every nation on earth, for better or worse, become a car country.

We should be doing that again, alongside China. We should run programs in every country to make chargers ubiquitous and work to provide financing to enable them to buy the green technology they need from U.S. manufacturing facilities. China won’t whine or complain. It will compete.

For America to reach its full potential as a supplier in the global green transition, we need to protect our new and modernizing industries at least temporarily. Trump’s tariffs were largely performative and harmed U.S. industry and workers. Biden may have kept too many of Trump’s tariffs. But economies adapt quickly. Maybe we should trust Biden’s judgment that rolling back all of Trump’s tariffs would have been more disruptive than productive.

Biden’s new tariffs announced today are a bold vote of confidence and commitment to U.S. industrial ambitions. For example, the 100% tariff on Chinese EVs signals that the U.S. will not allow China’s efficient EV industry to kill U.S. efforts before they even get fully under way. This will keep investment flowing into the U.S. EV industry and allow it to grow, improve, and compete in the future.

This kind of protection is appropriate and is how capitalism has always worked. In the early 20th century, an upstart company called Toyota lost money and made terrible cars for decades but survived thanks to strict protectionism. When Toyota first exported cars, they were the laughingstock of the world. Japan almost gave up. Fortunately, Japan's elites persisted, and years later, a new generation of low-cost, high-quality cars began to dominate global markets.

Japan, China, and other industrial countries learned these tricks from the early industrializing U.S. Then we forgot the principles that guided our development. In global economics, when the student surpasses the master, the master must become a student again. Thanks to Biden’s aggressive industrial policy, we’re learning again. Now it’s just time to stop the whining.