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US Industrial Policy: Navigating a New Era in Trade Strategy

by Anna

The United States, long a proponent of free trade, is experiencing a paradigm shift in its approach to economic policies. Historically, free traders have been wary of industrial policies, viewing them as potential instruments for picking winners and losers. However, a changing global landscape has prompted a reevaluation of this stance, with the realization that many trading partners have adopted industrial policies and mercantile strategies.

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The context is framed against the backdrop of the US facing 25 trading partners, all of whom employ value-added taxes (VATs) and tariffs, manipulate currencies to maintain a trade surplus, and engage in unfair trade practices. China, in particular, has been scrutinized for currency manipulation, technology theft, and trade imbalances.

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The industrial policy shift in the US began with President Donald Trump’s implementation of Section 301 tariffs on Chinese goods and general tariffs on steel and aluminum in 2018. This marked a departure from relying solely on markets to determine winners and losers, signaling the commencement of a new era in industrial policy.

The Biden Administration has continued this trajectory with an ambitious industrial policy aimed at bringing manufacturing back to the US. Bidenomics, as it’s termed, leverages subsidies, tax credits, and tariffs to incentivize private investment by American companies. Three significant legislative acts shape this policy:

Inflation Reduction Act: This legislation addresses various aspects, including affordable healthcare, climate change initiatives, and a 15% minimum tax on corporations. It features substantial investments in climate protection, clean energy production, and carbon emission reduction through tax credits.

CHIPS and Science Act: Enacted in 2022, this act allocates $53 billion to boost US semiconductor manufacturing, research, and development. It provides incentives to semiconductor companies, including tax credits for capital investments and substantial investments in semiconductor and electronics projects.

Infrastructure Investment and Jobs Act (IIJA): This $1.2 trillion act focuses on repairing and upgrading US infrastructure. It encompasses investments in roads, bridges, public transit, broadband, the electrical grid, electric vehicles, clean drinking water, airports, road safety, and climate change mitigation.

Critics raise concerns about the potential increase in national debt due to these programs, with estimates varying between $260 billion and $400 billion over ten years. However, proponents argue that these investments will stimulate job creation, economic growth, and a revival of the manufacturing sector.

The Coalition for a Prosperous America’s modified Global Trade Analysis Project (GTAP) model predicts positive outcomes from the industrial policies. It suggests that reducing the tax burden on US manufacturers could increase real household income, create millions of jobs, boost GDP, and enhance manufacturing output and exports.

The industrial policy shift reflects a response to the challenges posed by decades of free trade agreements, which resulted in job losses, increased trade deficits, and the decline of key industries. The US aims to build reciprocity into its trade relationships, employing tax rebates, tariffs, and subsidies to counteract unfair trade practices by competitors.

In conclusion, the US is navigating a new era in trade strategy, recognizing the need for a more proactive approach to protect its economic interests. The industrial policy shift seeks to strike a balance between promoting domestic industries and engaging in global trade, marking a departure from the traditional free trade paradigm.

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