Introduction to Political Economy

• Industrial policy can be defined as any government initiative to promote specific private industries in a bid to improve the productivity and competitiveness of the whole economy and so foster its foreign competitiveness.



• Industrial Policy is the newest phase of the continuing attempt to find that careful mixture of market and state processes that adequately addresses new challenges in resource allocation.



• Throughout human history, especially since the introduction of market economics in the form of agricultural commerce in the mid-1700s, state authorities have always kept a vigilant eye on the operations of the market, ready with all kinds of collective measures to save the market whenever new challenges threaten to undermine its vitality.



• Thus we have gone through the mercantilist state, the public goods state, the social rights or welfare state, the development state, the socialist state, (in restricted number of countries) the communist state, the macroeconomic stabilization state, and now since the last quarter of the last century, the industrial policy state.



• Industrial policy engineering is the last phase of how power processes are combined with market forces to solve current problems.

So does the US, a free enterprise market system, engage in industrial policy planning?

• In the United States, the levels of government known to have been involved in industrial policy planning range form the city governments to county, state, and federal governments.



• The essential component of any industrial policy measure include the following: Intervention in the market must be authorized by an official government agent; the intervention which is always on behalf of firms and industries which are within the domestic purview of the official government agency taking the action is always very specific and usually on-time; and invariably, the action is intended to enhance the competitiveness of the domestic actor against competitors foreign to that domestic environment.



• Thus the main objective in launching any industrial policy program is boost the competitiveness of domestic firms, industries, or economy against foreign competition.



• Increased competitiveness can take the forms of securing jobs at home by preventing relocation away from declining markets, or securing the location of firms that would otherwise go elsewhere, at the federal level, promoting domestic industries in order to reduce dependence on foreign imports now or in the future, and providing subsidies to various producers especially US farmers to stability the prices of their commodities.



• A major aspect of industrial policy planning in Japan, Germany, France, and Sweden has been direct payment to subsidize producer prices in order to encourage consumption.
• What are the differences between macroeconomic and industrial policy engineering?

What factors led to the introduction of industrial policy programming in the US?

• 1. As a result of the New Deal programs of the 1930s, the GI Bill of 1944, and the passage of the 1946 Full Employment Act, Americans have come to expect government protection against economic insecurity as a constitutional right.



• 2. Stagflation of 1969-70 sent mixed signals about the health of the economy that macroeconomics or Keynesianism was too paralyzed to handle. An economy that is experiencing both inflation and recession at the same time could not respond to either version of monetary or fiscal policy without severely damaging certain of its components.



• Dealing with the stagflation of this period is tailor made for the specificity of industrial policy: the appropriate remedies could be directly targeted at the specific areas needing such help without affecting the rest of the economy.



• 3. An upsurge in the economic power of Newly Industrializing Countries (NICs) during the 1980s, especially as shown in their increased level of manufactured exports to the US market.



• 4. The perception of negative impact of industrial policy related trade of key US competitors also provided a major stimulus to the industrial policy momentum.

Which groups support increasing the scope of US industrial policy planning?

• Liberal economists, Congressional Democrats, workers' unions, and individual corporations benefitting from extensive US corporate welfare programs urge the US to adopt an industrial policy because they do not think the current level of industrial policy engineering in the country sufficiently counters the negative impact of industrial policy related trade of its key competitors.



• Not only does the US not have a coherent industrial policy, they claim, but whatever help recent administrations have given to the private sector pales miserably before the level of government assistance to private industries in such US trade rival countries like France, Japan, Germany, and Britain



• They take their cue from the Founding Father Treasury Secretary Alexander Hamilton who argued that government could and should guide the nation's economic development by nurturing industry and trade.

Which groups argue against increasing the scope of US industrial policy planning?

• Like Thomas Jefferson, pro-market economists and Congressional Conservatives argue that even the relatively low level of industrial policy engineering that existed at the start of the pro-industrial policy big push in the mid-1980s already far exceeds the level of government intervention on behalf of private industries and firms commensurate with the pluralist market economic model of the United States.



• Conservative believe the various US governments have over the decades adopted policies to develop the economy that turn out to be too extensive, generally ineffective, and most detrimental to US business and global competitiveness.



• They blame overzealous Keynesian White House and industry that has become too dependent on government handouts for the US falling behind its rivals like Japan and Germany during the early 1980s.



• They take their cue from one of the Founding Fathers, Secretary of State Thomas Jefferson who made the famous assertion that, "the government that governs least, governs best."

So who is right?

• Truth is the US has always adopted some of the same policies to aid the private sector that liberals describe as industrial policy in other countries. The controversy comes in the different interpretation given by the pro- and anti-industrial policy forces to this level of industrial policy programming in the country, generally and what it means to pluralism in the US



• The anti-industrial policy advocates take an idealistic approach to the concept of the United States being a pluralist society in which competing economic groups have equal unrestrained access to all resources in the market place, making government intervention on behalf of any particular group both unnecessary and indeed, harmful to other groups.



• The pro-industrial policy advocates adopt a more practical approach to the concept of the United Sates being a pluralist society.

• They point out the big gaps between ideals and how pluralism has actually unfolded in the US.
• They note how certain groups remain forever in the minority and excluded from equal access to the market, which includes the educational process which prepared citizens for the market place.

• Corporatist and pluralist arrangements differ in three fundamental ways: on the mechanism for making production and trade decisions, on the mechanism for dispute settlement, and on the mechanisms and importance of efficiency.

Arguments supporting the anti-industrial policy advocates

On the question of how production decisions are made:

• Under a corporatist set up, government enters into negotiations with other major groups as just another important players, but under a pluralist setup, government is only a broker between the various competing groups.



• Under corporatist arrangements government may adopt its own agenda such as adopt an industrial policy and negotiate it with other groups; but under a pluralist setup government does not have an agenda of its own.



• Conservatives who argue the US is a pluralist society want the market place forces of supply and demand, and not government, to determine who producers what and where.



• According to Chalmers Johnson people in the US differ from other people most especially in two aspects of the market system: (a) they rely on the market mechanism as the supreme arbiter of economic decisions, and on adversarial rather cooperative public-private relations, and(b) their greater devotion than other peoples to free trade.

On how conflict is resolved

• Corporatist societies rely on intergroup negotiations to settle conflict. In strong corporatist states like Sweden, each group would try to find accommodation with other groups conflicting positions looking for compromises.



• By contrast, pluralist societies look favorably on inter-group conflict as a spur to healthy competition and innovativeness. Conflict is resolved through the open and fair competition at the ballot box and by placing pressure on elected officials through informal practices.

On the issue of efficiency

• Critics of US industrial policy think it is inefficient as a means of waste reduction. Industrial policy shelters inefficient firms and industries that would otherwise be phased out in a genuinely open and competitive market place resulting tremendous net lost in the productivity and competitiveness of the US economy as a whole.



• The US cannot embrace the European or Japanese style of nationally planned industrial engineering and in the process sacrifice the strength of its private sector which is the greatest source of US economic power, and the envy of the world.



• Britain, in response to the same kind of pro-leftist movement which is driving the American pro-industrial, experimented with socialist industrial programming in the immediate post-war period only to see its economy decline seriously, and only the revival of conservatism under Margaret Thatcher brought the economy back to health.

On historic evidence:

• There is no evidence of successful economic growth in a pluralist market economy where government attempts to pick winners and losers.

• Using public funds to give protection to some domestic producers means the government is involved in transferring wealth from certain economic groups to others.
• Any trade policy that stops or reduces imports denies all Americans the savings from buying cheaper imports, and hurts American businesses built on imports.
• The postwar French economy similarly collapsed under the weight of too much inefficiency due to too much government industrial policy programming.

Arguments supporting the pro-industrial policy advocates

• According to the pro-industrial policy liberals, the US needs industrial policy programming because its pluralist democratic model with its laissez-faire economics remains only an ideal but one never realized nor does it always reflect the racial, and ethnic diversity of contemporary America.

Historic evidence

• The lack of early action by government, liberals maintain, is why the Depression protracted and deepened. Only with the huge government programming associated with the New Deal did the US economy begin its gradual climb out of the Great Depression.

Foreign competition

• The pluralist, government hands-off market model is not equipped to handle many of the newer kind of attacks facing the American economy.

Social mobility within the American pluralist system.

• The American pluralist system has never been sufficiently opened to allow equal access to minorities, instead, we have permanent a permanent majority always enjoying a lock on power and privilege, and a permanent minorities of African Americans, Hispanic Americans, and Native Indians always locked out of economic power.



• The absence of sufficient pluralism within the American socioeconomic system has forced government to intervention on behalf of minority groups through such industrial policy programs as the Small Business Administration, and the Housing Administration.

Failure of the free market system to secure the common good:

• Pluralism with its minimalist government practice cannot work in the US where more often than not the free private enterprise does not sufficiently secure the common welfare.
• Even if the market when left alone could solve all of its problems in the long run, the laissez-faire system has no in-built mechanism to cater to the welfare of those industries, companies, and people whose inefficiency forces them to exit the income earning side of the market in the short term.



• Whether is it offshore assembling to escape US stringent anti-pollution laws or the laying off of millions of unskilled workers as part of the plan to boost profits, say, through company mergers of the 1980s, the laissez faire system does not seem to care for the poor guy.



• Unionized low wage workers threatened by the job insecurity of the 1980s turned, not to their union power or to employers but to legislators for protection.

Permanent or structural failures of the market system

• The laissez faire system has no answers to the following forms of permanent structural failure:

• increased technology use has displaced many unskilled workers creating a permanent unemployment for certain economic groups
• a permanent and growing gap between the rich and poor;
• The introduction in the 1980s of Reaganomics, a slightly different version of laissez faire economics, produced mixed results as an earlier increased level of productivity came to co-exist with massive layoffs, and increased poverty gap.

Complacency of US producers in the 1950s and 1960s

• The fact that World War II was fought exclusively outside US territory meant that it suffered none of that War's total destructiveness of economies of Western Europe and Japan. Secondly, being the only economy to remain in tact throughout the war, the US benefitted technologically from the War, becoming the main factory providing all of the Allied countries war equipment and wherewithal. Thus the many and place where the war was fought put the US technologically ahead of all other advanced countries.



• But US producers mistook other countries' total dependence on US technology exports throughout much of the so-called glorious 1950s and 1960s as meaning US technological superiority, and consequently, failed to innovate.



• According to Ira Magazine and Robert B. Reich, American complacence was the foremost reason why America lost its economic leadership of the world.



• By the late 1960s Japan and Western Europe had not only recovered from the War, but their technological struggle to recover gave certain countries like japan and Germany, at least for a while, a technological urge over the United States. One reason US consumers took to purchasing foreign imports like Japanese autos is the perception that their high quality was higher than most made in America cars.

End to Keynesian Consensus

• Keynesian consensus refers to the use by Western governments since its introduction in the period following World War II of Keynesian fiscal and monetary policies as remedies to cure a notoriously endemic malady of capitalism, namely its exploitation of workers, especially unskilled workers and the resulting wide economic gap between the few rich and the majority poor.



• By helping to reduce the economic gap between the few rich and the majority poor, Keynesian fiscal policies not only reduced unemployment, but were therefore not just remedies against unemployment, but became the instrument for governments to appease and silence labor union power in this country and other western countries.



• But by the mid-1970s Keynesian engineering had lost its magic, its effectiveness undermined by the fundamental changes taking place in global economics during the 1970s.

• At the domestic front, Keynesianism was ineffective as a tool for fighting the stagflation of the 1969-70 period.
• On the external front, (a) the globalization of production and finance had undermined the sense of job-security of American unskilled workers.
• (b) Meanwhile, the steady growth in world trade, and the increasing power of MNCs to defy national policies virtually make nonsense of any attempt at formulating national economic policy.

What does the Industrial Policy Compromise mean?

• It means industrial policy avoids the extremism of laissez-faire economics while enjoying the flexibility which macroeconomics lacks.



• Unlike laissez faire economics which would prevent the government from doing anything by way of wealth redistribution to overcome perennial inequality under capitalism, industrial policy enables government to come to the aid of the weakest industries and companies.



• Without such government intervention, such companies and industries have been eliminated and its workers added to the ranks of the permanent unemployment if exposed directly to the uncompromising survival-of-the-fittest struggle of laissez faireism.



• At the same time, industrial policy allows the government to come to the aid of only those individual companies or industries that actually need help without hurting the healthy ones as the once-fit-all approach of macroeconomics sometimes does.

So does the United States have an industrial policy?

• The answer is yes. While no US governments either federal state or local has ever put out an official industrial policy comparable to the announced industrial policies of other countries such as Sweden or France, they have since the 1970s responded with intermittent ad hoc (on the spur of the moment) aid to help their domestic ailing industries and firms.



• This assistance looks like, walks like, and quacks like industrial policy, so we call it as such. And they can be grouped under three broad categories: New get-tough trade policies; government bail-out of troubled companies; and direct corporate welfare.

Trade as Industrial Policy

• Generally, trade policies do not constitute industrial policy, especially when such policies conform to GATT rules.



• GATT which stands for the General Agreement on Tariffs and Trade was the international trade regime or organization adopted under the United Nations in 1948 to set rules and principles to government trading among nation states following World War II.



• Trade policies that deviate from or violate GATT rules can damage the trade and hence, economy of one's trading partners.



• When a country adopts a trade policy with the explicit intention of damaging the trade and hence, economy of its trading partners, its trade policy becomes an industrial policy.



• While US trade policies have over the years been free of the mean spiritedness that turns trade policy into industrial policy protection for domestic companies, on three historic occasions, US trade policy became vicious aimed at punishing its trading partners.

1. The Smoot-Hawley Tariff of 1930

• The first were the high tariffs adopted under the Smoot-Hawley Tariff of 1930, easily the highest tariff in US economic history. They symbolized America's contribution to the lack of international goodwill that following World War I..



• The tariffs or custom duties averaged about 60% of the landing value of imports; and drew retaliatory tariffs from US trading partners, creating a very hostile trading climate said to be one of the reason the Great Depression was so long and so deep.

2. US Selective Trade During the Cold War

• The second time US trade policy was set deliberately to hurt and punish certain countries was during the Cold War.



• The Cold War: The phrase first used by Bernard Baruch in 1948, refers to hostile military, political, and ideological confrontation between the United States and the Soviet Union and their allies that existed from the beginning of the Berlin Crisis of 1948 until the collapse of the Soviet Union in December 1991.



• During this period, the US used its trade policy as part of its Cold War strategy. In a double take, it accorded its friendly Cold War allies very generous import policies as well as deliberately not retaliating when these countries set up very high tariff against its own (US) exports entering their country, while setting very high tariff for imports from its Cold War enemy countries of the Communist bloc.

Why could the US afford to do this?

• The US could afford to sacrifice its gains from trade (profits from trade) to pursuit its Cold War security interest because of two factors.



• On the one hand, the US was hegemonic (a nation state in a position of predominant world power, that is, controlling about 60% of the world total economic, military, trade, and political power resources). As such, all countries sought to establish trade with the US, and US trade policy toward any particular countries affected that country's overall economy significantly.



• On the other hand, trade accounted for less than 9% of annual US domestic wealth, meaning that its could sacrifice all of its trade without seriously damaging its economy.

3. A Series of Get-Tough Trade Laws

• A new series of trade restrictive measures adopted during the later half of the Reagan administration in response to several developments.



• (a) The US was no longer in a hegemonic position, having lost that capability sometime in the very ate 1960s shortly following the Vietnam War. Since then, the US has faced tough competition for the control of the world exports.



• Japan and Western European economies had recovered sufficiently to become equal competitors to the United States for the control over world trade.



• (b) In the meantime, trade had come to represent about 22% of its overall annual wealth creation. This is too a significant portion of the over all national economy to used as foreign policy giveaways as it did in the 1950s and 60s.

Free but Fair Trade

• New laws are targeted at those US trading partners judged to have engaged in unfair trade practices against the US. In other words, the US sending signal to all its trading partners that it seeks to end all Cold War related trade disadvantages. From then on, they could expect the US to retaliate fully and in kind against every single act of unfair trade against it.



• This has become necessary because of a large and fast growing US trade deficit which the Reagan administration blamed on unfair trade practices especially by Japan, Chine, and some of the Asian newly industrializing countries (NICs).

Why are these new trade laws considered as part of US industrial policy?

• The laws signal US unilateralism away from direct GATT control. The laws empowered the US trade representative to determine if a pattern of unfair trade practices by any country exists and to take immediate retaliatory action.



• Unilateralism here means the US is taking action without consultation with GATT as all member countries of GATT were supposed to. This is seen by other countries as the US breaking collective organizational rules in order to offer greater protection to its exporting and importing firms than is allowed under GATT rules.



• This unilateralism is to be exercised over three forms of trade practice outlawed under GATT but seen by the US as poorly enforced.



• 1. Antidumping Investigation; The GATT rule prohibiting the selling of merchandise exports for less than at home which damages the importing country's companies' ability to make profits at competitive prices.

Does US new antidumping investigation constitute industrial policy?

• Yes, because under the new laws, the determination of dumping is now solely based on the discrepancy between the export price and what US officials estimate as the fair cost of producing the imported item in the exporting host country.

But, is cheating the real concern of this law?

• No. Theoretically, dumping is good for the American consumer because it means a lower price than the consumer would pay in a competitive market.



• The real concern of this law is the preservative of high labor-cost jobs that could be replaced by lower labor-cost production from abroad.



• 2. Countervailing Duty Investigation (CDI) The new law allows the US to be the sole judge and executioner of this old GATT rule that allows member countries to impose duties on all imports that have been subsidized by the importing country's government.

Does the new US CDI constitute an industrial policy?

• Yes, because what the US considers as subsidy other countries consider as good trade practice.



• While the US considers Chinese exports produced by unpaid prisoners' labor as subsidy, the Chinese think no paying prisoners is a good moral lesson and ethically superior to US government subsidizing farmers not to produce too much as to lower the prices of farm products.



• Uruguay Round of GATT: The eighth and last of the specially organized rounds of trade negotiations under the GATT which began in 1986 and ended in 1994 in Uruguay.



• 3. Escape Clause: was a provision under the GATT authorizing import relief as a temporary safeguard for domestic firms which are injured by import competition resulting from prior trade concessions by their government.



• The new get-tough trade laws extend the scope of injury from imports deserving compensation from those related to prior government trade concessions to practically all cases where American firms can show damage from imports.

Does the new US CDI constitute an industrial policy?

• Yes, because modern trade is such that all nation states now import some portion of products they produce at home; meaning imports will always take jobs away from some citizens. In today's global economy, imports cannot be neatly restricted to things not produced in the importing country.



• Understood as an attempt to exclude imports that compete with domestic production, the US is indeed guilty of abandoning free multilateral trade, a point it emphasized when it played the leading role in the creation of GATT in 1947.



• Aggressive unilateralism: The second set of new aggressive get-tough trading laws adopted in 1988 but not protected under GATT that arrogates to the US the exclusive right to determine both when international trade laws are violated as well as the appropriate remedy.



• Section 301: Named after Section 301 of the Omnibus Trade and Competitiveness Act of 1988, this new trade bill arrogates to the US the exclusive right to determine both when any of its rights under GATT international trading laws are violated as well as the appropriate remedy, thus bypassing the authority of the GATT which restricted such direct retaliation only to the special provocative case of dumping, countervailing, and escape clause violations.



• Special 301: A special clause in Section 301 which sought to tailor Section 301 retaliatory action against countries known to have repeatedly violated US property rights laws-laws dealing with innovation and invention rights of American firms. Countries targeted include China, Mexico, and Columbia.



• Super 301: A special amendment to Section 301 which sought to tailor Section 301 retaliatory measures to countries known around the US as habitual violators of free trade with the US. Most observers believe Japan is the exclusive target of Super 301.

Why is aggressive unilateralism considered as part of US industrial policy?

• As the term unilateralism suggests, Section 301 sought to by pass GATT in making the US Trade Representative the sole judge, jury and executioner of any alleged trade violation of its trade with other countries.



• Section 301 laws called on US trading partners to unilaterally lower their tariffs and other barriers to US exports without any reciprocal concessions from the US.



• Bypassing GATT was a tacit attack on GATT seen in some US Congressional circles and by the Reagan Administration as lacking the enforcement capability to protect US trade interests. In effect, the introduction of US aggressive unilateralism is considered as the most important single act that killed GATT, and undermined its predecessor regime, the World Trade Organization.

Case Studies: Industrial Trade Policy

• Consists of five cases illustrating the wide and aggressive application of Section 301.



• The Sale of Wood Products in Japan: Using the threat of Section 301 to capture more of the estimated $2 billion Japanese wood import business for American firms.



• Threatening Section 301 retaliation was a last ditch effort to force Japan to increase its wood imports from the US following several not very successful US-Japan trade negotiations over the years, some of them led directly by US presidents.



• The US Trade representative forced to apply Section 301 to open the Japanese Wood market to US exports was Carla Hill.



• Motorola and the Sale of Cellular Phones in Japan: To restrict foreign companies' access to the huge cellular phone market, Japan (a) empowered Nippon, a domestic monopoly, to set national standard to be met by all cellular phone providers in Japan, increasing the already huge monopoly advantages enjoyed by Nippon.



• (b) It also put Nippon in charge of dividing up the Japanese market, and deciding which regions could be served by foreign companies, like Motorola.



• (c) Motorola with its Japanese partner, Daine Denden, were explicitly excluded from the most lucrative market in the area around Tokyo.



• Threats empowered under Section, including 100 percent duties on a variety of Japanese imports in thirty days, were evoked to force Japan to open its cellular telephone market to Motorola , an American company.



• Columbian Cut Flowers: The establishment of daily airline flights enabled Columbia, with its year-long moderate climate most favorable to flower growing, to effectively challenge a long held domestic monopoly on fresh flower suppliers to the US market.



• Aggressive unilateralism created a new climate in Washington which enabled US fresh flower growers to find protection where two previous attempts in 1977 and 1979 had both failed.



• The petition which was filed en-mass by practically all US fresh flower growers shows (a) how political the granting of industrial policy protection to domestic firms has become and (b) the extent to which the US government is willing to go to protect its domestic firms.



• The US-Japanese Auto Accord of 1995: Dispute over lack of access to the Japanese market for US auto companies has been the highlight of the two countries' trade dispute for years, and much of the new aggressive unilateralism trade stance by the US is most directed at opening that market.



• US appeals to the newly created WTO was ineffective in forcing the Japanese to open their market, as Japan simply countered with its own set of complaints against the US.



• Only the threat in 1995 by the Clinton administration to evoke Super 301 finally forced the hands of the Japanese government to sign off on newly negotiated quotas for US auto exports and to agree to verification after a certain period of time.



• US-European Trade Friction: US tried as part of the Uruguay Round of GATT negotiations to have the European Union to remove its subsidies under its Comparable Agricultural Products (CAP) protection system which they US had always complained impeded US agricultural exports to the EU.



• The threat under Section 310 by the Bush administration to impose in 1992, a 200% tariff on a selected number of EU imports finally forced the European Union to make concession to bring its agricultural trade practices in line with WTO multilateral rules for the first time.

FUNCTIONAL PROBLEM SOLVING AS INDUSTRIAL POLICY

• Too-Large-To-Fail argument: The argument that certain companies are too important to the US economy in terms of either the large number of people they hire or the strategic nature of the products they produce to be allowed to fail.



• This argument which was first made in the early 1970s to support propositions for government bailout of the Continental Illinois Bank has become the justification for government bailout of major US companies threatened with failure.



• US Steel: US Steel was the first industry to get government bailout on the grounds of the too-big-to-fail argument.