The Industrial Policy that America has Forgotten

Enlightened U.S. policymakers of the post-war era promoted economic inter-dependence as a key to world peace, says Barry Lynn. But today that approach has been eroded, and the original vision is fading

In the late 1940s, the United States adopted an industrial policy as sophisticated as any in world history. Rather than seek to build up power and wealth at home, Americans aimed instead to forge a deep and equitable industrial inter-dependence among nations.

Washington refined the idea in Europe, where it used the Marshall Plan to all but force France to accept the European Coal and Steel Community. It applied the same principles in east Asia, ceding to Japan and Taiwan large swathes of key U.S. markets. In commodities like oil, ores and cereals, Washington built market structures that ensured a free flow of raw materials to all non-Soviet states at fair prices.

Two goals shaped this strategy. The first was efficiency: to get more people of more nations to work cooperatively, whether to build automobiles, jet fighters or anything else. The second was more fundamental still, for the goal was peace. America’s post-war policymakers believed that the more intimately people relied on their neighbours for industrial goods and food, the harder it would be to go to war with them.

By almost any traditional definition, America’s industrial policy during those years was not mercantilist. On the contrary, Washington routinely forced U.S. companies and workers to sacrifice markets and earning power to others in Europe and Asia.

Looking back over a half century of this industrial policy, the Norwegian historian Geir Lundestad, who heads the Nobel Institute, wrote in 1998 that “the United States [has] behaved rather differently from other leading powers in history.” What the world had witnessed, he remarked, was “empire by integration.” This imperial system delivered exactly the result dreamed of by its designers – peace and prosperity among nations emerging from a war that had been powered by their rival industrial strengths.

Too bad, then, that the United States abandoned this strategy almost 20 years ago, swapping it in for policies that now threaten both prosperity and peace.

The core characteristics of any state strategy depend on who controls that state, and the key to understanding the nature of U.S. industrial policy today is the revolutionary change in American politics in the early 1980s.

Franklin D. Roosevelt’s election in 1932 had marked the culmination of a 40-year-long fight by American citizens to restore democratic control over their domestic political economy. The basic principles of the regime these citizens built – to distribute power wherever possible – shaped the thinking of those who helped structure the post-war international system.

Ronald Reagan’s election in 1980, by contrast, marked the culmination of a 20-year effort by corporate libertarians to restore the private economic rule that had prevailed in late 19th century America. Once in power, they targeted such props of democratic rule as anti-trust law and public control of utilities. For a decade, though, the corporate libertarian effort to enclose markets and restore private corporate control over economic activity went no further than the U.S. border.

But after the fall of the Berlin Wall, they felt able to move towards reshaping the international system in line with their interests. Their goal – largely achieved under the government of Bill Clinton – was to reduce or even eliminate entirely state interference in the flow of goods, information, ideas, and cash so as to maximise their profit and power. This led to an almost total repudiation of the U.S. government’s former approach to managing the economic power of other states.

Ever since the founding of the United States, American leaders reacted strongly to any foreign efforts to concentrate control over any vital industrial activity. This remained true throughout the Cold War. For instance, when Japanese companies attempted in the mid-1980s to monopolise the manufacture of key computer components, the Reagan Administration used tariffs and quotas to prevent that, not least by distributing much of this work to nations like South Korea and Singapore.

After the collapse of the Soviet Union, corporate libertarians ceased to challenge such mercantilist strategies. As the economist Milton Friedman wrote, foreign mercantilism meant only that other peoples would provide Americans with all “the good things of life (…) nearly free.”

The corporate libertarians also moved swiftly to replace traditional political economic frames of discussion with more metaphysical ideas. “Globalisation,” they said, was a “natural process” or “force.” They argued that the distribution of economic activity around the world was not the result of decisions by state leaders and corporate executives, but rather was determined by market “mechanisms.”

The most dramatic use of such metaphysical thinking to sell radical laissez faire policies came in 1997, when President Bill Clinton defended his decision to remove most state controls over commerce between the U.S. and China. For a quarter century, American leaders had been slowly integrating China into the world system, but taking great care in light of their scepticism about Beijing’s Maoist governments. Clinton said this slow and steady course was no longer necessary because commerce itself would do the job. The “Internet, fax machines and photocopiers” would expose the Chinese to the “people, ideas and the world beyond China’s borders,” he declared, making it ultimately impossible for China’s rulers to maintain their “closed political system.”

One practical result was to leave Beijing and other mercantilist regimes free to seek to concentrate physical capacity of production, especially in China. Previously, almost every vital industrial capacity had been widely dispersed around the world. Now, many electronics, chemicals, and assembly operations are located in one place. Another result has been the waning of the U.S. government’s understanding of the dangers of such mercantilism, and its ability to respond in ways that ensure the safe distribution of capacity.

Although Clinton and others said they were simply extending the existing international system to nations that had lain beyond its reach, such as Poland, Russia and especially China, they were in fact abandoning the principles and institutional structures that allowed American policymakers to understand any threats to that system and to project power other than military force to protect the system. Put another way, even as they spread the web of commerce more widely, the corporate libertarians simultaneously hobbled and lobotomized the spider that had spun it.

Industrial inter-dependence was only one part of U.S. imperial strategy. In the decades after the war, Washington projected three other types of power: military, financial and ideological. It was, though, the policy of promoting industrial inter-dependence among nations that was the keystone of the system. It provided a first line of defence against any national attempt to act aggressively. It directly reinforced efforts to manage the international financial system. It provided proof that America’s goals were truly liberal.

Abandonment of this strategy is responsible for many of the biggest problems we face. Economically, the effects are to be seen in the growing instability of the international financial system because the massive trade imbalances of recent years have piled up dangerous concentrations of debt and power. There is growing evidence, too, that concentration of corporate control over economic activity has played a large role in the long stagnation of the U.S.

Politically, America’s increasing dependence on foreign sources of industrial supply is making it even more likely that a foreign power will be tempted to exploit these vulnerabilities. China, for instance, has become almost the sole supply source for America of such vital products as drugs, foods and electronics. And as Beijing proved in 2010 when it cut the flow of rare earth metals to Japan, it is willing to wield its power of embargo in pursuit of political ends.

Most disturbing, perhaps, is the emergence of an entirely new form of threat – the industrial crash. Over the last 20 years the fragmentation of vertically-integrated economies and traditional vertically-integrated industrial corporations has cleared the way for the concentration of entire industries in one place in the world, hence the concentration of all systemic risk in one place in the world

From Brussels, it may seem that America continues to pursue a perfectly coherent industrial policy. The Obama Administration devotes, after all, great efforts to promoting the interests of such corporations as Boeing, Monsanto and Google. But I believe we should view that as no more than the opportunistic use by those corporations of the powers vested in an otherwise senile state. To the extent that the U.S. has any industrial policy today, that policy is made in Beijing. There, and only there, do we find a nation state able to design a coherent world strategy that also has enough power over international networks to enforce that strategy.

The liberal world system can be salvaged, but only if Americans re-learn now that the only path to peace and prosperity is a realistic, coherent, state-centred and truly liberal industrial policy.