Much of the push coming today from both the political right and the political left for industrial policy – and coming also for simple protectionism – has to do with helping Americans better ‘compete’ with China. As the argument goes, China is a bad actor in part because, being communist, its government has no problem using large-scale government initiatives to promote China’s role on the world stage and to boost the Chinese economy by funneling resources toward Chinese producers, innovators, exporters.
The results of these actions by the CCP are allegedly helping China achieve global economic dominance, which will in turn allow them to kick our American butts.
The biggest of all these initiatives that American politicians and pundits love to be scared of is the Belt and Road Initiative (BRI). Senator Marco Rubio (R-FL) is one of those hyper-vigilant politicians who has been tirelessly warning us about the risks of this Chinese policy. He put out report titled “Made in China 2025 and the Future of American Industry” outlining “the challenges posed by China’s whole-of-state industrial planning for America’s prosperity and productivity, including the jobs and wages of American workers.” He also offers a list of policy ideas meant to challenge Chinese central planning with our own central planning.
I pick on Senator Rubio, but he’s far from alone. The CHIPS Act, which was enacted a few weeks ago by Congress and signed into law by the President, is all about using more subsidies and other protectionist measures to “compete with China.” While I can appreciate that there are some legitimate national-security concerns relating to China, I don’t buy the claim that to compete economically with the communist regime we must emulate that regime’s anti-market policies. To be sure, the Chinese government gets an A in spending a ton of its people’s money in subsidies and stuff. However, the assumption that this prosperity, economic growth, and innovation depends on who wins the battle of subsidies is ludicrous if you understand anything about the incentives that plague government decisions to spend money on special interests- not to mention that we have thousands examples of crony investments failing to achieve their goals.
Speaking of failure… A few days ago, the Wall Street Journal had a great piece by its chief China correspondent Lingling Wei on how China is working on an overhaul of its Belt and Road Initiative. The cause? After a decade and some $1 trillion BRI “investments” in 150 countries, most of which are in serious financial distress, mostly what it has to show for is malinvestments are high default rates on its loans and failure to deliver. A tidbit:
Nearly 60% of China’s overseas loans are now held by countries considered to be in financial distress, compared with 5% in 2010, according to economists Sebastian Horn, Carmen Reinhart and Christoph Trebesch, who have written about international debt….
The process could force Chinese banks to accept losses, something they’ve long opposed. For years, Beijing preferred to extend the maturity of troubled loans, a practice known in the finance industry as “extend and pretend.” That strategy risks prolonging countries’ debt woes rather than fixing them.
Beijing has also dialed down its rhetoric in state media. …
By 2017, Chinese banking executives were complaining to Beijing that they were being asked to finance projects that had little prospect of returns, according to executives involved in the discussions. Some lenders threatened to stop supporting certain projects unless regulators let them clarify that those loans were “policy-instructed,” the executives said, so the banks wouldn’t be held accountable for defaults.
You can read the whole saga here.
It’s not as if none of the initiative has worked. As the Journal reports:
For all its troubles, the initiative has succeeded in drawing more countries into Beijing’s orbit over the past decade, with many recipient countries voting alongside China at the United Nations.
But while reform of the BRI and more prudent lending can limit the program’s losses, bad incentives, bureaucracy, mismanagement and so on and so forth will still be at play.
The road to prosperity isn’t paved with industrial policy, loan guarantees, and subsidies. Shouldn’t we know this lesson by now?
Veronique de Rugy is a Senior research fellow at the Mercatus Center and syndicated columnist at Creators.