The decision Americans must make about industrial policy is whether policies that drive the nature and direction of the U.S. economy should be designed at home or abroad by its trade partners. In a hyperglobalized world, trade and industrial policies in one country are transmitted through trade imbalances into their obverse among that country’s trade partners.
Can industrial policy boost long-term growth? Recent policies implemented by U.S. President Joe Biden and his administration have revived a very old American argument about the extent to which the U.S. economy might gain or lose from trade and industrial policy. While some argue that these policies consist mainly of coddling inefficient industries, others note that they have a long history of boosting industrial activity and productivity growth.
But under current circumstances, to argue whether or not the United States should subject its economy to trade and industrial policy mostly misses the point. Like it or not, the U.S. economy is already subject to aggressive trade and industrial policies, and has been for decades, only these policies have been designed at least as much abroad as they have been in the United States.
That is because in a hyperglobalized world, every country is affected by policies and conditions initiated abroad. When one country boosts its manufacturing sector relative to domestic demand, for example, as long as that country can freely export its excess production, its trading partners must reduce their manufacturing sectors relative to their own domestic demand. Supply and demand must balance globally, and that is the only way this can happen.
Savings and investment must also balance globally, to take another example, in such a way that when one economy implements policies that create a domestic imbalance between the two, this forces the rest of the world to adjust by running the opposite imbalance. To be more specific, if export-enhancing policies in one country force domestic savings to exceed domestic investment, as long as that country has unfettered access to foreign financial and capital markets, the country into which it directs its excess savings must either increase its investment or, if it cannot do so (as is the case in most advanced and many developing economies), it must accept structural changes that reduce domestic savings. The imbalance between savings and investment in the latter country, in other words, is determined by the imbalance created in the former.
This is especially true of the United States because of the special role the U.S. economy plays as absorber of last resort of global excess savings or, to say the same thing in another way, as global consumer of last resort. This role emerges from the fact that the United States takes on by far the dominant role globally in accommodating global trade and capital distortions. It does so mainly because, since the 1970s and early 1980s, the United States has chosen for geopolitical and ideological reasons to eliminate most restrictions on its capital account, letting foreign investors have unfettered access to open U.S. financial markets.
This decision has had three important consequences for the U.S. economy. First, because of its deep and sophisticated financial markets and its transparent and high-quality governance, roughly half of all the excess savings in the world find their way into the U.S. economy. Although this has less to do with the needs of the United States than with the needs of foreign investors, the U.S. economy must nonetheless adjust to these massive net inflows, by allowing foreign purchases to drive up the value of the U.S. dollar, among other ways. Because investment in the United States is constrained by weak demand rather than by scarce capital, this leaves the U.S. economy no option but to adjust in the form of lower domestic savings.1
Second, a country’s capital account is the obverse of its trade account, so the fact that the United States absorbs roughly half of all the excess savings in the world also means that the United States absorbs roughly half of all global trade surpluses, which it does by running the world’s largest persistent trade deficits. This is why describing the U.S. role as “absorber of last resort” of excess global savings is just another way of describing the U.S. role as “global consumer of last resort.” The two mean the same thing.
And third, because U.S. trade and savings imbalances are partly, or even mostly, driven by industrial policies implemented abroad, this means that U.S. unemployment, debt levels, interest rates, the competitiveness of the U.S. manufacturing sector, and many other aspects of the U.S. economy are also affected by these policies implemented abroad. The idea that the United States controls these and other major aspects of its economy, in other words, is just a fantasy. In a hyperglobalized world, no country can control its domestic economy unless it controls its trade and capital accounts.
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