NEC Director Deese Outlines Biden’s 21st Century Industrial Strategy

We have heard the slogan Build Back Better for nearly a year now. Brian Deese, director of the National Economic Council, has gone one further. He is declaring that we need a 21^st Century industrial strategy, which is a clear rhetorical break from Davos Man neoliberalism of Obama, Clinton, and Bush. It can also, if done right, lead to a counter to Chairman Xi’s Made in China 2025 and similar programs.

Earlier this week, on June 23, Deese gave a speech at The Atlantic Council on what he described as the ‘Five Pillars’ of this foundational approach; an approach, he says, is rooted in old school Hamiltonian economics.

“The pandemic exposed unique economic vulnerabilities,” he said, listing empty store shelves of everything from chemical cleaners like Lysol (chemicals from China), shortages of PPE (almost all from China), and recent supply chain bottlenecks in computer chips (almost all from Taiwan and South Korea).

“The acute crisis exposed a long-term hollowing out of our country’s industrial base, occurring over decades. Nearly 90 percent of generic active pharmaceutical ingredient facilities are located overseas and have been moving offshore for the last fifty years,” he said. “Until the 1980s, the United States was the world leader in rare earths production. Now, China controls 85 percent of global refining capacity.”

The U.S. share of semiconductor production has fallen from almost 40 percent to just over 10 percent over the last forty years, though this is due to a combination of our global-thinking chip makers like Intel and countries like South Korea saying – hey, we’ll make your chips. And in doing so, provide massive state-support to make the foundries needed to manufacture the chips used in our cars, or smartphones and laptops, and even our refrigerators.

He called the supply chain disaster, highlighted via a shocking pandemic, as a “wake-up call”.

Deese’s speech was used to layout the Biden vision for what he called a “twenty-first-century American industrial strategy.”

The American System set up in the days of statesman Alexander Hamilton was one of a set of federal policies designed to grow early America’s nascent infrastructure and industrial base at a time when the nation’s economy was based on agriculture.

An industrial strategy is modeled on the old economic plans of Alexander Hamilton. After years of neoliberal open markets, and China’s rise, Biden wants to go back to the drawing board on national economic policy. What are we waiting for?

“These policies, including subsidies for transportation and the creation of a national bank, grew the U.S. economy in a way that benefited diverse regions of the US. In the twentieth century the federal government again made major strategic investments after World War II, developing emerging technologies and industries such as microelectronics and biotechnology through federal purchasing, public research, and public-private partnerships,” he said.

Biden wants to do exactly that, though there are serious divisions in his administration which include old-guard free-trade globalists.

Still, his industrial strategy talk is a clear break from the bipartisan Washington Consensus, promoting free markets, free trade, and free movement of capital. We have been told that we are the freest market in the world, leading the way to free trade as our tariffs were lowered more than anyone else’s in the world. They ignored the nationalistic economic strategies of other countries when proclaiming that products made in Ohio could freely and fairly compete with those made in Thailand.

Trump changed that, and Biden’s team is putting its own shape to economic nationalism rather than returning to the kind of full-throated globalization espoused by the World Economic Forum Masters of the Universe. CPA has long championed industrial and trade strategies to maximize domestic producer’s share of our massive domestic market first, to achieve dominance and scale, then move to dominate global markets. While Deese’s strategy is different than what CPA would prioritize, we appreciate that industrial policy is central to the administration’s thinking.

Deese’s key statement to the Atlantic Council was that, “the approach of our competitors and allies has changed. We should be clear-eyed that the idea of an open, free-market global economy ignores the reality that China and other countries are playing by a different set of rules. Strategic public investment to shelter and grow champion industries is a reality of the twenty-first-century economy. That’s why we need a new strategy. An industrial strategy for the second quarter of the twenty-first century. One that draws from the best lessons of the past but leans into the challenges of the future,” he said.

And now on to the Five Pillars that are designed to hold up that strategy together. Some quotes from Deese and some thoughts from CPA:

Supply chain:

“We need to leverage the Defense Production Act authority in new ways—like investing in advanced pharmaceutical manufacturing technologies. We need to make strategic investments to build domestic supply chain capacity, like computer chips.”

The Senate recently passed the U.S. Innovation and Competition Act which sets aside $50 billion for domestic semiconductor research and new foundries so we are less reliant on Asia.

“We need to work with allies and partners. It is neither feasible or advisable for us to re-shore all supply chains; it is essential that we form partnerships with our allies that promote more stable access to key inputs while improving environmental sustainability and workers’ rights.”

This is fine, but policymakers should be wary about the “work with allies” and “environmental and labor rights” rhetoric.  While we are getting Europe to go along with our human rights pressures on China, Germany is often at odds with the U.S. on this issue.

Moreover, environmental and labor regulations are now being used by those in the Senate who want to jumpstart the Trans-Pacific Partnership. They think if we can get better environmental and labor standards in Southeast Asia, we can convince Congress to vote for TPP, a USMCA on steroids. CPA is against these large trade deals as they do not counter China, nor guarantee markets for U.S. goods made in the U.S. (They may be U.S. company products, but they will increasingly be made in Asia, not here.)

See our report on China driving U.S. PPE makers out of the market, yet again.

Targeted public investment:

Deese said there is a “compelling and urgent economic need to make a one-time capital investment in this country today.”

This goal is to strengthen the public systems that connect manufacturing, researchers, workers, and small businesses. Public investment in roads, bridges, ports, airports, transit, and rail; universal access to affordable broadband; a modernized power grid; and new school and childcare facilities that allow parents to work.

“China has already realized the importance of public capital in building the manufacturing base. The Chinese Development Bank committed sixty-two billion dollars in 2021 lending to support strategic emerging industries and advanced manufacturing—investing in both upstream and downstream firms. And manufacturing has a high return on investment. It punches above its weight, representing 60 percent of U.S. exports, and 70 percent of business R&D spending. It strengthens our industrial commons by creating positive spillovers for workers, firms, and communities.”

Public procurement:

“We need to reimagine public procurement policy. The U.S. federal government is one of the largest buyers in the world—spending over six hundred billion dollars in contracts annually. We have proposed an almost fifty-billion-dollar investment to pull forward demand for new clean energy products, and his Buy American initiative will ensure procurement supports U.S. manufacturing.”

Our Buy American trade rule is full of holes. Members of the World Trade Organization’s Government Procurement Agreement, which includes all of Western Europe and Hong Kong, are allowed to bid for government contracts as if they are a local company. While the same holds for a U.S. company bidding for a German government contract, this is no way to rebuild or recreate supply chains in the U.S. if manufacturers in the 50 states are bidding with companies from around 40 nations.

See our report titled “Supercharging Public Investment With Strict Buy America Rules”

Climate resilience:

Deese said that the scale, complexity, and urgency of climate change makes it “distinctly apt for an economic policy strategy where government helps unleash the power and ingenuity of the private markets and rapidly mobilizes resources toward decarbonization.”

“We’re calling for investments in retooling existing auto plants to take advantage of the rapidly growing EV market while also making investments that capture more of the upstream supply chain, like lithium batteries. Through targeted investments, we can make sure that when countries around the world install new solar panels, wind turbines, advanced batteries, or other energy efficiency technologies, that they source those products from U.S. factories.”

We don’t need Mexico and Canada to buy solar panels, though that would be great. We need to make sure that domestic manufacturers, including foreign companies, are manufacturing much more of the supply chain here – from polysilicon to solar cells to the solar panels on American rooftops and those connected to municipal power stations.

At the very least, solar power stations should be from solar made entirely in the U.S. This will secure a strong supply chain from soups to nuts. If a homeowner wants to buy imports, they can. But if California wants to turn a mountainside into a solar power facility, it needs to be all made from American factories.

See our report titled “Reclaiming the U.S. Solar Supply Chain from China”

Equity:

The racial wealth gap is projected to cost the U.S. economy between $1 trillion and $1.5 trillion in lost consumption and investment by 2028. By prioritizing opportunities for minorities and women, Deese believes the U.S. will reduce the wealth and opportunity gaps and unleash stronger economic growth as lower-income pockets of society, mostly all of them Black and Latino, catch up on wage gains quicker thanks to more high-quality jobs on offer.

“By investing in all of America—particularly in those regions that have suffered from decades of deindustrialization—we can avoid further geographic entrenchment and polarization,” Deese said.

USMCA and TPP-like trade deals are manufacturing booms for lower-income nations. The Ford Mustang Mach-E, a battery-powered sports car, is being made in Mexico. That’s fine. But the only reason why the Ford Lightning pickup truck is being made in the U.S. is because of tariffs. Policymakers should keep that in mind. These are blue-collar jobs for people who do not wish to learn to code and want other options other than government desk jobs, or low-skill service sector jobs.

See our report on how our trade policies have impacted job quality for Blacks and Hispanic workers.

Deese has tapped into the public’s zeitgeist for more localism, and regionalism, and less globalism. That obviously doesn’t mean everything has to be made in the U.S. But with a trillion-dollar goods deficit fast approaching, record-high drug overdose deaths caused in part by a lack of economic opportunity in trade-wrecking economic dead zones throughout the U.S., reshoring critical supply chains should be riveted into every one of these Five Pillars.

Deese says, “We need to demonstrate that American capitalism can work to benefit everyone, not just shareholders. That smart public investment can help unleash innovation and deliver strong, resilient, inclusive growth. And we must show that our democratic system of government can serve working people—better than any other form of government.”

He is right, of course. The alternative model is the top-down, authoritative model of the Chinese Communist Party. We don’t ever expect the CCP to take over Washington. But we do not want a CCP-lite, whereas a group of large, multinational corporations, with the help of those in Washington, rules the roost.

We have already seen what globally-focused companies do to the Five Pillars Biden wants as the foundation to his Build Back Better agenda. They are as interested in Asian consumers, and Mexican workers, as they are our own. This has often come at a price Deese knows well.