Hot wars in Ukraine and Israel have made the national-security argument for reindustrializing the American economy more credible. Securing domestic production of war matériel and other goods requires that the United States decouple defense supply chains from China and scrap policies that benefit Beijing at our expense.
Reindustrialization can be pursued in right and wrong ways, however. One wrong way is the “Bidenomics” approach of subsidizing unprofitable sectors. Encouraging investment in electric vehicles and other products that lack durable consumer demand to survive without taxpayer support is doomed to fail. If consumers had sufficient demand for EVs to support production, the industry wouldn’t need subsidies that some researchers estimate at $50,000 per vehicle.
Bidenomics structurally impedes the efficient utilization of resources, hampering the supply side. For example, the administration has enacted programs that push federal grant recipients to unionize their workforces and pay above-market wages, provide child care that meets exacting standards, and adhere to product regulations, such as installing automatic shutoff mechanisms to lower the carbon emissions of idling vehicles.
This approach raises the cost of domestic production and then uses lavish taxpayer subsidies to offset that. Whereas China uses industrial policy to make its products cheaper and gain export share—it has become the world’s largest auto exporter—the United States implements policies that make its firms’ products costlier. Given our burgeoning debt, we can’t afford to maintain subsidies indefinitely. What happens when they are withdrawn? The beneficiaries will likely collapse in a second wave of deindustrialization.
A better way to boost American industry is to enact aggressive supply-side reforms that make producing in the U.S. much cheaper. Policymakers should relax and streamline rules, making them more targeted across the regulatory state. The status quo is smothering innovation and keeping too much industry overseas.
Consider, for example, how the United States oversees a distinct regulatory regime for air pollutants from semiconductor plants. This industry-specific regulatory framework makes semiconductors more expensive at the same time that we’re subsidizing their American manufacture, via the CHIPS Act. Instead of imposing unnecessary costs on key industries, policymakers should strive to make production as cheap as reasonably possible.
Policymakers should repeal other legislation that drives up the cost of doing business at home. They could junk the Davis-Bacon Act, for example, which forces even nonunionized firms to pay wages above market rates, effectively discouraging them from using American labor. Lawmakers should relax occupational-licensing rules, which burden workers seeking to switch from one sector to another, and reduce excessive land-use restrictions, which make it hard to build both industrial plants and housing near them.
Successful reindustrialization will require Americans to acknowledge that China is our core security threat—and that free-trade principles, however sensible for allies and friendly nations, should not extend to empowering and enriching one’s military opponents, let alone making us reliant upon them for our defense. Policymakers therefore should raise tariffs on China, targeted at essential national-security sectors such as weapons, aerospace, chips, and telecommunications.
These national-security tariffs should be implemented slowly, and with clear guidance. For example, the U.S. could declare that it will raise tariffs on Chinese imports by 2 percent per month until China meets a list of economic and geopolitical requirements. This will minimize short-term disruption and give businesses a planning horizon to invest today for production needs tomorrow.
Moving supply chains back home will require time and foresight. Credible policy can provide both. A forward-guidance approach like the one outlined here also should be used gradually to tighten “Buy American” requirements in critical government-procurement sectors related to defense, since allowing too many exemptions results in dependence on countries that would not be reliable in a future conflict with China. When the federal government purchases goods for defense, it mandates that 55 percent of their component parts come from the United States or one of 28 allied countries. This figure is too low, because it allows almost half our defense goods to come from non-allied countries and because America itself should produce a larger proportion of its own defense. (The allies of today are not always the allies of tomorrow.) At over $700 billion annually, the overall procurement budget can provide huge demand synergy with a reinvigorated supply side.
With geopolitical tensions intensifying, reindustrialization is a national-security imperative. Our current policy of building industrial plants that can’t sustain themselves without ongoing taxpayer support is no match for the moment. Supply-side reforms offer a better way.
Photo By Michael Macor/The San Francisco Chronicle via Getty Image
