[Bigiron]

U.S. and EU embrace of industrial policy puts Asia at risk 

https://asia.nikkei.com/Opinion/U.S.-and...ia-at-risk

[cityhantam]

There has been a long-running tendency to underestimate China's manufacturing prowess.

Even as its share of global exports continued to grow, an oft-repeated refrain has been that increasing labor costs will dent its competitiveness, while profound structural impediments will prevent its progression into more advanced industries.

Proponents of this view have regularly argued that the country's current manufacturing dominance will ultimately be reversed -- it was simply seen as a matter of time.

It is odd that these arguments remain pervasive. Despite the doomsayers, China's competitiveness has shrugged off higher input costs, while developing leading-edge expertise across numerous advanced sectors.

But the real proof of how competitive China is, and the permanence of this competitiveness, can be seen in the adoption of more interventionist industrial policies across the U.S. and the EU. Even in economics, imitation really is the sincerest form of flattery.

Most notably, the U.S. has embraced active industrial development with vigor. The rhetoric emanating from the administration of U.S. President Joe Biden about the need to preserve American technological leadership, especially in advanced sectors, and to prioritize U.S. jobs, is, in many ways, more Trumpian than Trump.

But unlike Trump's "America first" doctrine, Biden's push to reinvigorate American manufacturing will be successful in the long term because of the vast commitment behind it. Nor will this ideological shift be reversed anytime soon, given the bipartisan support behind it.

America's newfound manufacturing zeal has prompted angst across Europe, especially as fears of a technological and manufacturing shift across the Atlantic have already been realized, with some European companies prioritizing investments in the U.S. to access the generous subsidies now on offer there.

In response, the EU is seeking to match the U.S., punch for punch. Its Net-Zero Industry Act aims to ensure domestic provision of at least 40% of the bloc's demand for strategic net-zero technologies by 2030. The bloc is also seeking to protect its industries through the Carbon Border Adjustment Mechanism, which will impose the costs of Europe's high carbon prices on all trade partners.

These actions may be justified by a shared desire by the world's three economic superpowers to increase the competitiveness of their manufacturers, secure ownership of key technologies and establish domestic resilience.

But none of this is good for the international trading system. China, the U.S. and the EU may point fingers on where responsibility lies for the erosion of the underlying principles of open markets and free trade, but the direction of travel is clear: a focus on domestic self-sufficiency and a willingness to adopt more protectionist policies. All undertaken, however, without consideration of the consequences for trading partners, including those in Asia.

The fundamental problem is that manufacturing competitiveness is primarily about scale. This underpins relative cost efficiencies as well as determining the resources available for innovation, and the ability to support a greater level of specialization.

A lack of domestic scale can be offset through the classic export-led model of development, as successfully demonstrated by the Asian Tiger economies. But if the three economic superpowers -- which together account for 60% of global gross domestic product and 54% of manufactured imports -- effectively reduce market access, then it would be naive to imagine that the consequences will not be punitive for the rest of the world.

Asian economies most at risk from the current dynamics are those at the same stage of industrial development and developing comparable industries, including Japan, South Korea and Taiwan.

None of them will be able to match the firepower being applied across the three economic superpowers. But even less-developed countries may find their efforts to develop or expand manufacturing constrained as increasingly protectionist sentiment impedes access to Western and Chinese markets.

The subsequent concentration of global manufacturing in China, Europe and the U.S. will have insidious longer-term economic and political consequences.


U.S. First Lady Jill Biden visits an Intel factory in Arizona in 2022: It may not be realistic to suggest that Washington will remain a steadfast security partner of Taiwan and South Korea if it replicates their semiconductor capabilities. (Sipa via AP Images)
The link between dynamic and competitive manufacturing industries on the one hand, and economic growth and prosperity on the other, is frequently overlooked. But manufacturing is often the magic ingredient necessary for sustainable and self-reinforcing development.

This is most evident for countries struggling to develop economically. But the detrimental consequences of deindustrialization have also been widely demonstrated, including reduced productivity gains, stagnant incomes, widening inequality and a declining capacity for innovation.

And then there are the geopolitical risks. The first is that a loss of manufacturing will result in technological dependencies and subsequent political leverage. Countries will be forced into technological choices from which it will later be difficult to extricate themselves and which will foreclose access to much of the global economy.

But the second risk is that because a country's geopolitical relevance is, in large part, a function of its involvement in global supply chains, its importance will inevitably decline as its role shrinks.

If the U.S., for example, successfully replicates the semiconductor capabilities of South Korea and Taiwan, is it realistic to suggest that it will remain a steadfast security partner? Unlikely. After all, American involvement in the Middle East has weakened as the region's importance as an energy supplier has waned. A similar dynamic must be assumed as the U.S. and the EU bring other strategic industries onshore.

Asia's manufacturers already face an existential crisis given China's hypercompetitiveness. But the actions of the EU and the U.S. hardly suggest that they can be trusted as "friends in need." Instead, the international trading system is under growing stress, with protectionism increasingly justified on geopolitical grounds, while long-term trading partners, such as Japan and South Korea, are simply unavoidable collateral damage in a battle being waged between the economic superpowers.

There is, unfortunately, a degree of inevitability to this regionalization of manufacturing and its punitive outcomes for other countries.

But one alternative path would be to strengthen free trade agreements which exclude the three economic superpowers to ensure that preferred international partnerships are more symmetrical, both economically and geopolitically. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership, as currently comprised, would fit this purpose.

The risk otherwise is that China's Asian neighbors face a sequence of enforced choices that will darken their economic and geopolitical futures.