Russia’s invasion of Ukraine just over a year ago was the biggest shock to the global economy in 2022. From a policy perspective, however, the fleshing out of what US President Joe Biden calls America’s “modern industrial strategy” may prove no less significant.
This clutch of legislative measures and executive decisions aims to rebuild America’s manufacturing heartland, turbocharge its green transition and beat back China’s quest for the commanding heights of the tech-intensive global economy. To assert that industrial policy is back has become a cliche in Washington, DC, not least because it is one of the few policy areas that engenders bipartisan support.
Taken together, the Inflation Reduction Act ($US394 billion), the CHIPS and Science Act ($US280 billion) and the 2021 Infrastructure Investment and Jobs Act ($US550 billion) herald the most far-reaching reboot of the American state in economic affairs in more than 50 years. Beyond these big industrial policy programs, the US has embarked on selective technology decoupling from China, beginning with advanced semiconductors, including the machines and people that make and service them. The White House is now working on a screening mechanism for outbound tech investments in China.
What’s distinctive about the Biden agenda is the sheer size of the subsidies on offer, for everything from microchips to electric vehicles, and the breadth of goals it seeks to achieve. But beyond a consensus that it’s big and bold, opinions differ on what it means.
The most benign interpretation comes from the administration itself. Treasury Secretary Janet Yellen talks soothingly of “supply side investments” and “friend-shoring” of supply chains. President Biden has been at pains to assure allies that the United States will work with them on shared challenges such as trade coercion, the green transition and supply chain disruptions.
Others aren’t so sure, given the undercurrent of economic nationalism and heavy reliance on “buy American” provisions. French President Emmanuel Macron has warned that US subsidies risk “fragmenting the West”. The treasurer’s economic historian of choice, Adam Tooze, intones that “the US is bent on revising the world economic system”.
How Australia responds to the Biden economic blueprint is central to how we navigate this new era of global disorder and strategic rivalry between the West and autocratic regimes, including our largest trading partner. Faced with the China challenge and now the unleashing US industrial firepower, multilateral institutions look impotent while governments everywhere are scrambling to work out what industries and technologies they should support.
This poses a genuine challenge to Australia’s economic policy establishment given our distinctive (and successful) path since the 1980s centred on trade liberalisation, comparative advantage and specialisation, integration with Asia (not least China), and trust in multilateral rules and institutions to administer globalisation.
To be sure, cracks have been apparent in this policy edifice for some time.
In recent years, Australia has had to contend with China’s trade coercion, pandemic-induced disruptions to supply chains and Donald Trump’s brand of America-first protectionism. On the flip side, shifting geopolitical sands opened up some big-table opportunities for Australia – notably, Quad and G7 plus summit invitations, as well as the AUKUS agreement – all with a major economic security dimension.
The strengths Australia Inc. brings to the table in this new era continue to revolve around our energy and resources sector (critical minerals, rare earths, hydrogen and the like) though anxiety about our manufacturing base and innovation performance is never far from the surface. Former Reserve Bank deputy governor Guy Debelle (wearing his Fortescue Future Industries hat) warns of us missing out on major green tech investments as capital floods into the United States.
Australia needs to develop a geopolitically smart and economically rational response to America’s industrial strategy. There will be some things we like and can take advantage of. And some things we don’t like and will need to push back on.
Without deep pockets or a crystal ball, Canberra needs to be both “strategic” and modest in providing direct industrial support or guiding private sector decision-making.
We should be talking to economic partners to assess opportunities and risks arising from the Biden agenda. Our interests will not always align with other countries, but joint efforts to establish guardrails against beggar-thy-neighbour policies will likely be required.
The good news is that Australia is well-positioned to shape thinking in Washington given our existing free trade agreement and close alignment on national security, economic resilience and climate challenges. Although Commerce Secretary Gina Raimondo looms as the key figure on industrial policy implementation, we should not overlook the role US states will play in shaping outcomes.
Finally, we should take President Biden at his word when he says he wants maximum co-operation, working with regional allies such as Australia, Japan and South Korea. But to borrow the phraseology of another bold and ambitious president, it should be on a basis of “trust, but verify”.