A new economic order for the globe is being constructed, based around heavy government intervention, a disregard for existing trade and subsidy rules, and the sometimes aggressive defence of perceived national interests. The days of globalisation are long gone and the UK, under the unashamedly free-market Rishi Sunak, has been left on the wrong side of these shifts.
The US’s Inflation Reduction Act has been the most striking example to date. At its core is $375bn of subsidies for green industries. These are mostly delivered via tax breaks rather than direct government investment and focus heavily on tech-lead decarbonisation, with electric vehicles (EVs) a particular focus for funding. EV buyers will be able to claim a generous $7,500 subsidy if the manufacturer can demonstrate that the battery manufacturing, sourcing of key components, and final assembly all took place in the US – or, in some cases, in countries where the US has a free trade agreement.
Alongside the Chips Act, signed into law last summer and providing around $52bn of government funding for semiconductor manufacturing, the Inflation Reduction Act is the clearest sign yet that the Biden administration is committed to a fundamental shift in US economic policy – and to a transformation in the US economy itself. The days when governments could shrug their shoulders at manufacturing job losses, or prime ministers could claim that debating globalisation was like “debating whether autumn should follow summer” are long gone.
Instead, in a fusion of domestic politics and international relations, the Biden administration is seeking the win-win of jobs at home to meet competition from abroad. And it is China setting the pace. Behind the rush to implement the Inflation Reduction Act and, especially, the Chips Act is the sense in Washington that without a focused, directed effort to take on Beijing in key sectors, the technological lead that the US has enjoyed for decades will be lost.
There is a striking continuity between the Trump and Biden administrations on this point – Biden reinforcing Trump’s aggressive trade policy, imposing tariffs and restrictions on US technology exports, and now adding hefty domestic economic interventions to support US producers. The scale still falls well short of the sums being pledged by China – a trillion yuan ($143bn) support package for Chinese semiconductor production is being prepared – but represents a step-change for the US government.
[See also: The age of hyper-globalisation is ending]
It is this international competition that is driving the embrace of government intervention across the world. Beyond clashes between corporations, states themselves are being pitted against each other via subsidies, preferential regulation and even direct restrictions on trade. The result is to force a common pattern of behaviour across the world’s major economies, with increased state intervention as the binding theme, tied to the development and rollout of new technologies.
This also applies to the world’s largest single market, the European Union, where decades of dogged commitment to free-market rules are being shredded with surprising speed. Previously, the German government was among those complaining that joint liabilities for EU debt could mean (for example) German taxpayers being expected to pay for Greek defaults. But since summer 2020, the European Commission has agreed to issue €750bn of EU-wide bonds for recovery from Covid-19 until 2025. This is a small amount, equivalent to about 5 per cent of the EU’s GDP, but a significant breach in the defences against joint liability – too late for Greece and other EU members who suffered a decade of austerity, but perhaps in time for the scale of investment required to compete with the US and China.
Crucially, state aid rules, which act as a hefty barrier to government subsidies and public ownership inside the EU, are on the verge of being weakened in the drive to create a world-leading, EU-wide green technology industry. The Green Deal Industrial Plan should see billions directed at strategic industries in the rush to net zero.
But if state aid rules are being diluted and EU-wide industrial policies are being drawn up, almost nothing remains of the economic case for Brexit. For the project to make sense, it was of critical necessity that the UK government compensate for lost trade through its new-found freedom to subsidise and promote strategic industries, unencumbered by state aid and EU rules. Once the EU is less committed to a “level playing field” for competition inside the bloc, there isn’t much left to justify Brexit.
Worse, at least in principle, the resources the EU can draw on as the world’s largest single market are vastly greater than anything the UK has immediate access to. The commission’s green technology and semiconductor strategies point towards a future in which the EU is capable of coordinating and directing its economic power, matching the capacities of the US and China. In a world organised like this, the UK will be very much an also-ran – excluded from the major power blocs, denied ready access to their vast markets and resources.
Brexit, contrary to some predictions by Leavers, has brought the remaining member states far closer together – if only through the power of a bad example – and some unsubtle attempts by successive prime ministers to use Ukraine as a wedge issue against the bloc have not seriously changed this. The existence of secretive cross-party meetings to discuss a future, much closer relationship to the EU reflect that reality.
Britain is an anachronism in this respect. Its political class clings on to shop-worn ideas about the necessity of free markets, or government not “picking winners” (an odd objection: surely this is exactly what you want government to do?). Boris Johnson, with his interventionist inclinations, was a significantly better prime minister for the economy than the neoliberal retread currently in No 10. The scrapping of the government’s industrial strategy department and the prolonged failure to publish the much-delayed strategy for semiconductors do not bode well for the immediate future. Semiconductors, especially, are an industry in which the UK has some genuinely world-leading companies, but around which government policy, as a recent committee report found, has been confused and sometimes contradictory.
Labour has an important political opportunity to seize the interventionist moment and define its terms for Britain. Jeremy Corbyn’s leadership had already offered a state-led programme for national economic regeneration, including substantial green investment, an industrial policy, and direct support for UK manufacturing.
Keir Starmer’s Labour has been bolder than Corbyn’s in crucial respects – promising higher annual green investment (£28bn) than the previous leadership and proposing a new national wealth fund to take publicly held stakes in new companies and technologies. Its industrial strategy, unveiled by the shadow business secretary Jonathan Reynolds at last year’s party conference, marks an advance on Corbyn’s by including data and digital technologies as a crucial area for intervention.
It’s a sign that Labour is paying at least some attention to how the world is changing. But the party will also have to abandon its defensiveness over investment and economic intervention. Ritualistic denials of the magic money tree’s existence, or reflexive defensiveness over public ownership, are useless in a world where governments are prepared to spend big and aggressively defend their own national economic interests. Labour wins, as it did in 1945, 1964 and 1997, when it is in step with the times.
Read more:
Politics eclipses economics as globalisation falters
How Britain’s failure to reckon with global forces led to a cost-of-living crisis
Martin Wolf interview: “Austerity and Brexit made everything worse”
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