Are we all protectionists now?

0:05Pushkin. In just a few days, Americans will stare in dull horror at their television sets as Joe Biden and Donald Trump debate. One area where these two senior citizens mostly agree, however, is on protectionism. It's an amazing turnaround in our national attitude towards the government meddling around in business. Today on the show, the return of industrial policy. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I am Rob Armstrong, coming to you from Unhedged World headquarters in New York City. Joining me down the telephone line from the United Kingdom is Martin Wolf, the FT's chief economics commentator and noted podcast host.

1:01Martin, you have a new podcast yourself, don't you? Yes, it's my second series. They've both been on democracy, and this is called Democracy's Year of Peril. And that is to celebrate or to note the number of hugely important elections that are occurring in 2024. All right, Martin, let's talk about industrial policy. Looking back over the modern history of capitalism, say, 19th century and onwards, are there examples that stand out of really successful and or really disastrous industrial policy? Well, I suppose the most successful must start with the United States. Alexander Hamilton's view of the United States in the early 19th century created U.S.

1:51industrial policy. Germany in the late 19th century was definitively another example. And in the post-war period, I think we would look at the Japanese, the South Koreans, the Taiwanese. These are probably the great modern examples of success. I think of Hamilton as a kind of financial innovator, building a banking system in the United States or laying the groundwork for one rather than being an industrial policy figure. Am I misremembering and revealing my ignorance there? He was very interested, and the people at that time were very interested, in building infrastructure, in using protection, tariff protection, sounds familiar, to get industries to move and to develop in the United States after moving from the United Kingdom, which was then the leader.

2:46And he was actually quite interested in getting know-how into the US too. So Alexander Hamilton is regarded with a very famous German economist, Friedrich List, as one of the intellectual fathers of the idea of infant industry protection. And in the story of the growth of heavy industry in places like Japan, South Korea, China, that has been a government-led phenomenon, or at least that is how I perceive it. I think it's fair to say that it's been government led and influenced in a number of respects. And China indeed is a very important recent example with a combination of guided finance and protection at the border.

3:37A combination of those two things promoted investment in and development of heavy industry, which included not just steel, chemicals, things like that, but also the automobile industry and other examples of that kind. Martin, you are shocking me. You are talking like a proponent of tariffs and protection. And you are meant to be the great exponent of the power and beauty of globalized trade. This is an appalling performance so far. The lesson I learned when I was at the World Bank, which is when I really started looking at this, that most cases are disasters. So I worked on India. I looked very closely at countries like Argentina, Brazil, but slightly more successful, both of which were all these examples.

4:33They tried very hard to create competitive, modern industries through protection. And the list of such failures is very, very, very long. But there are some examples of success. And I think the United States is one of them, but it didn't have so far to get to the frontier. Germany is certainly a success. Industrial development was remarkable. And I think the East Asian stories that we've been discussing are also a success. So you have to sort of work out, well, when is it going to work and when isn't it? Exactly. That's the very nub. That's the question. Do we have even a vague sense of what the defining characteristics of the successes versus the failures are?

5:13There's an enormous literature on this. And of course, with all such literatures, there's no real agreement. But I will put forward what I think the essential things are. First, they have to be things that are plausibly within your long-term comparative advantage. That sort of people you have in your society, the sort of skills they have, the sort of resources you have, the cost of capital, things like that. You can plausibly get competitive in this industry over a reasonable period, 10, 20 years. Second, you have to use subsidies that don't amount to permanent feather bedding of uncompetitive industry.

6:01And you do that by making it quite clear that they will be forced to be competitive. Now, there are a number of different ways you can do it. In the US, I think the crucial thing was the domestic economy became so big that a lot of competitors emerged very, very quickly. So you had very fierce internal competition. That's been very important for China to sheer scale matters from that point of view. And the other countries achieved the same thing by very carefully, though it wasn't simple, ensuring that they had to compete in export markets and that they could compete in export markets before giving them open-ended subsidies.

6:43So these were different ways of ensuring that what you were doing did fit in with what you could do well and making damn sure the resulting industries weren't featherbed it forever. We did an interview in the newsletter with the Harvard economist Danny Roderick, who is an authority in this area. And he made the point that one of the fatal components, you were talking about competitive and making sure not to featherbed. One of the key components is not to pick winners. You might support an industry, but who lives and who dies as a corporation within that industry, the government has to stay out of it.

7:19Yes, I think that's broadly right. So if we took the Korean example, there were a number of firms, obviously Korea was a relatively small economy, so there couldn't be a vast number. But in the electronics industry, they had a number of players, two or three significant players. They were all given roughly the same help. They were encouraged to innovate, get new markets. And it became pretty clear by now that there's a winner, Samsung Electronics. Yes. And the others sort of have faded away. And in the US, as I've said, the market became so huge that there was ferocious competition within the protected industry.

8:00And by the late 19th century, of course, the US was the front runner in most of these industries. So by definition, the government didn't need to protect them against foreigners. The protection was largely redundant. and the competition was inevitable because they were all new. Which brings us to the current day in the United States, where both of the candidates for the presidency seem to be interested in slightly different ways and to slightly different degrees in protecting and encouraging domestic industry. And given what we have just learned from history, do the policies of a Biden or a Trump have a shot at achieving what they're setting out to do?

8:49Build a green energy industry, rebuild manufacturing in the United States, and so forth? Well, I have to say that on this, at least, I am at the very least skeptical. The U.S., interestingly, has two quite big disadvantages. And one of the most important is it doesn't have the overwhelmingly dominant market size. So let's consider the two examples that are most obvious. First, chips, highly advanced semiconductors. The market dominant firm here is the Taiwanese firm, TSMC. And TSMC has the not small advantage, at least as things are at the moment, of having the whole world market. So the US market compared to the whole world market is actually relatively small.

9:44Having a producer in the US where the workers will not have the same skills and experience of TSMC, which are extraordinary. They are an absolutely astonishing firm in terms of the quality of their labor force. The experience, this is a learning by doing industry, big time. The US doesn't have any of that. It's constantly innovating. And all the really sophisticated machinery also doesn't come from the U.S., comes from the Netherlands. So I think people are very skeptical that the U.S. chips fab will be really competitive. In the case of chips, it almost seems like an unsolvable contradiction.

10:24Any measure in terms of protection or support of domestic industry threatens to cut you off from the world market you need for the industry to succeed. The point is, if you go back to an era or a product where the cost of transport is very high and your market is very big, think automobiles, for example. If you're producing automobiles for the U.S. market until the Chinese came along relatively recently, this was far and away the biggest market in the world, you could be perfectly competitive and completely profitable just by dominating the U.S. market. And US producers also went abroad and invested there.

11:09But the problem they have in the electric vehicle market, which is another one, is that the Chinese market is three or four times as big as the American market. Now, here, transport costs are significant. So it may turn out that we will end up with a fragmented global market in electric vehicles. And though the US will be technologically quite possibly behind, it won't really matter. The domestic producers will have a degree of natural protection and they won't need permanently high tariff walls to survive. But of course, with a chip, which weighs nothing, that advantage doesn't exist at all. So in both cases, I think it's very doubtful that they're going to produce genuinely globally dominant new businesses.

12:01But in the case of the electric vehicle batteries and so forth, it might work. But the US is way behind in these industries. The Chinese have been investing massively for years. China has far more capital to invest than America, which is a low savings country. One of my favorite statistics is China saves and invests about as much as Europe and America together. So for the first time, and it's a crucial point, sheer scale is not a decisive advantage for the US. And with it, it loses the enormous advantages of economies of scale it has always had in the last 150 years. It's a pretty bleak picture that you're painting.

12:44Are there, as it were, rays of light, areas where you see industrial policy working better for the United States? We do have certain advantages that don't seem to be going away. Not just the large internal market, but research and development, education, the productivity of our workforce. Those and other advantages surely can be pointed at some area profitably, as it were. Just look what's happening in AI. The US has world-leading firms and world-leading technology in a lot of areas. The whole digital economy, the life sciences, pharmaceuticals and all the rest of it, the U.S. highly research intensive, technology intensive industrial sector is without a doubt the world's dominant one.

13:34And it's also true in finance. Equally, there are no competitors here. So the U.S. is not without huge advantages. But where it has huge advantages, yes, of course, the government has to continue to support research and development. It has to continue to support fundamental science. It has to continue to allow really brilliant scientists to come into America and not worry about where they come from. That's a pretty big deal. But it seems to me in the U.S. case, the idea that the government will genuinely push the U.S. into areas which it has never been in before and immediately find world leaders doesn't seem very plausible compared with simply building on its already colossal advantages in crucial sectors.

14:23Well, let's talk about costs then. Will the effort possibly or probably futile to support industries that, as you put it, we don't already have some comparative advantage in, will that have exogenous costs that outweigh whatever benefits will be generated? First of all, it's worth stressing that there are security reasons why you might want to do it. I mean, you know, defense matters. And to take the CHIPS case, well, obviously, Taiwan might be involved in a war. And if Taiwan is involved in a war, you will be cut off from this stuff. So it's perfectly reasonable to create backup capacity in your country or very close to it to guard against that.

15:11And bearing that cost has always been a part of security policy, defense policy, security policy for every country. So I think that's completely reasonable. If you just say we have to have the capacity to build ships, for example, even though we're not going to be a competitive builder of ships, and certainly our naval ships, again, we have to be able to do that. So I think that's a perfectly reasonable thing to do. And it may be that by pouring lots of money into new science, new technologies, and so forth, building on the great success of DARPA as an innovator and your extraordinary university system, that you will find new opportunities which are important.

15:54Though I expect your venture capital industry, which is far and away the most sophisticated in the world, to pick up most of those opportunities without needing much government help. I guess what I was getting at is the idea that in the process of supporting certain favored industries in the face of global competition, we infuriate our trade partners to such a degree that the world market we've depended on where we are successful becomes fragmented in a way that we shoot ourselves in the foot in some sense yes this is clearly a risk there are well first of all the u.s is on the verge of certainly mr trump is elected president starting a world trade war and how that will end up nobody knows but if you leave that aside and look at the Biden program, what they've done has certainly created friction with close allies.

16:49But I think that can be worked out. I can imagine that if we think of this as a program to avoid complete reliance on China, which is seen as an enemy, and we're prepared to bear costs for that, it should be possible to be able to cooperate with the Japanese and the Europeans, thus getting bigger economies of scale, taking advantage of what we can all do. And yes, there might still be some costs, but then the costs could be reduced in that way and they can be contained. So I'm not hugely worried about that, but there will be costs if we end up with particularly important inputs. It's less important with outputs, with things that are final products.

17:34But if we start ending up with very expensive inputs, that will constrain other industries. And that is important, for example, with chips. Martin, if you ran for president and you won, it sounds like your industrial policy would be very hands-off indeed, except in those areas relevant to national security that you just outlined. Am I reading you correctly? Directly and indirectly, national security. National security has to be defined very broadly. And that's partly because of something we have left out. One of the reasons people are pursuing this policy is they think it will generate a huge amount of employment, industrial employment in the US.

18:18And I think it's a very safe bet that the industries we are talking about are not going to do that. And less and less so as they become more roboticized over time. I think there's a nostalgia for the grand days of 50s, when lots and lots of people, vast numbers worked in huge factories together, the old working class. And that day, I'm convinced if you look at the technological developments we have, is not going to return and certainly not in the industries we're now talking about. I'm afraid that does not sound like a winning presidential platform, Martin. No, no. The truth really is. On that note, we'll be back shortly with Long and Short.

19:14Listeners, welcome back. This is Long and Short, that part of the show where we go long things we like and we go short things we don't like. Martin, are you long or short something? Yes, I'm long aging. That is an out-of-consensus investment. Tell me about it. Well, it's really very simple. There are two reasons to be very long aging. And the first, by far the most important, is that we live in aging societies and we have the possibility of aging because we didn't die as children, young adults, middle-aged adults, or young old adults. And surely we really, really prefer the fact that we didn't.

19:58And we should repeat this very often to ourselves, because it also means that our children and our grandchildren with luck will also not die before you do. They will live on and become old, too. A society of old people is a colossal success, the greatest success, I would argue, in human history. And then, of course, you discover when you do get relatively old that as long as we remain healthy and more and more of us remain healthy, we're reasonably sensible and most of us don't get demented. You can continue to learn. You have more experiences and you can actually go on enjoying life throughout a very long period of what we used to think of as extreme old age.

20:45And if you're all lucky, we all then die quietly in our 90s in not too much misery. And this would have been regarded by humanity, all human beings, as something close to paradise. And we should recognize this as the extraordinary achievement it is. Well, I have a long two. I'm going to take the opposite one, and I'm going to go long babies. You've written about how there is a baby bust. I think we will reach a new equilibrium at some point in the not-too-distant future, and babies will be more in demand, and we will see a gentle rise in the fertility rate. Babies are great, and I am long them.

21:27Martin, thank you for being on the show. Listeners, we will be back in your feed on Thursday. Unhedged is produced by Jake Harper and edited by Bryant Erstat. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhez. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Rob Armstrong. Thanks for listening. We'll be right back.