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China, America and why not all growth is equal

Last week was the tenth anniversary of the Rana Plaza factory collapse in Bangladesh, in which 1,100 garment workers were killed because a shoddily constructed factory collapsed on top of them. It turned out that the factory was making goods for major global brands.

The managers who took the decision to outsource to unknown individuals way down the production line were just doing what Finance 101 would tell them to do: move expense off the balance sheet, and treat labour like a cost not an asset. Never mind the risks hidden in plain sight, even those that result in death and despair.

That kind of thinking has been at the centre of global trade for decades. Let capital, goods and labour move where they will, even if that results in human suffering and/or the degradation of the planet. As long as share prices are going up, and consumer costs are going down, there’s no problem.

Chinese labour camps in Xinjiang are perhaps the apex of this sort of thinking. How can any country, or company, compete with state-subsidised operations with few environmental safeguards that are accused of forcing slave labour to dig for silica, which is then used in solar panels, electronics and other types of goods dumped into the world at below market rates?

Answer: you can’t, unless you change the economic rules of the game. The last 40 years of neoliberal economic policy gave us more global growth than ever before, lifting many millions out of poverty, but it also gave us huge amounts of in-country inequality, and numerous negative externalities. These range from forced labour to exacerbating climate change to highly fragile, concentrated supply chains which led to shortages and hyperinflation in key commodities from natural gas to rare earth minerals.

Following the fallout from the war in Ukraine and the growing rivalry with China, the Biden administration, and to a certain extent the EU, has been working to shift the paradigm from efficiency to resilience. Their methods include subsidising diversity of production in semiconductors, which the market hasn’t (Ninety two per cent of all high-end semiconductors are made in Taiwan).

America’s Inflation Reduction Act is designed to go even further, tackling the problem of concentration and the lack of private sector initiative in the clean energy transition. The aim is to counter a country such as China, which has both concentration in crucial areas such as rare earth minerals, along with a government that doesn’t mind using that to its own advantage.

If the US and Europe want multiple sources of such common goods, they must subsidise them. The market system simply won’t compete with cheap solar panels or electric vehicles or chips on its own.

Europeans have complained about the IRA, in part because it came as a surprise. Nobody, including many of us who’ve advocated for more US government involvement in the market for years, expected to see America embrace industrial strategy in our lifetimes. But the EU itself is now coming around to the fact that such programmes are the only way to deal with what private markets won’t incentivise, and to compete with states that have never played by the letter of World Trade Organization rules.

US national security adviser Jake Sullivan laid out some of this new narrative in a speech last week that connected US domestic plans with foreign policy. He made it clear that the old “Washington consensus” was over — in part because it had not been able to manage the challenges of a more vulnerable financial system, fragile supply chains and working-class job losses (with the subsequent blows to democracy).

Embedded in the old system, as he put it, was an assumption “that the type of growth did not matter. All growth was good growth. So, various reforms combined and came together to privilege some sectors of the economy, such as finance, while other essential sectors, like semiconductors and infrastructure, atrophied. Our industrial capacity — which is crucial to any country’s ability to continue to innovate — took a real hit.”

People in this administration insist this is not about “America alone”, or even primarily about containing China (indeed the very notion that any nation could contain China is a fiction). Rather, they believe it’s about working with allies — which are being more broadly defined to include parts of the Global South — to create a system that works on the assumption that power exists and can’t be economically modelled, and that not all growth is the same. “Our objective isn’t autarky,” said Sullivan in his speech. “It’s resilience and security in our supply chains.”

In a welcome shift, policymakers in Washington are also moving away from the term “decoupling” with China, and instead talking about “de-risking” both the nation and global economy, a term also used by European Commission president Ursula von der Leyen in her recent speech on China.

The global trade system as it stands isn’t working well. In his speech, Sullivan talked about the US maintaining its commitment to the WTO, while also recognising the key question of today: “How does trade fit into our international economic policy, and what problems is it seeking to solve?” As I’ll argue further in future, it should start by seeking to solve the problem of concentration and competition.

rana.foroohar@ft.com

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