Industrial strategy is back… and with it, industrial subsidies. During the World Economic Forum (WEF) in Davos last week, sharp tensions continued to surface over the re-emergence of subsidies for domestic manufacturing and particularly to support the growth of new green industries.
In the US, the suite of policies recently championed by President Biden and passed by Congress include the American Rescue Plan Act (ARP), Infrastructure Investment and Jobs Act (IIJA), CHIPS and Science Act and the Inflation Reduction Act (IRA). Collectively worth some USD 3.8 trillion and described by Mark Muro at Brookings as doubly remarkable – not just for the eye watering level of investment – but also because it is being spent largely on place-based industrial policy.
As Muro says, these are “direct investments in underdeveloped places and regions” whilst also seeking to “advance national goals such as strengthening domestic supply chains, promoting international economic competitiveness, and mitigating the impacts of climate change”.
Level playing fields?
In Europe there are concerns that these investments and subsidies may have detrimental effects on their own ambitions to grow green industries and technologies. In this context EU Commission President Ursula von der Leyen, reiterated that “competition on net zero must be based on a level playing field“. But there was much less discussion at Davos about how these policies and subsidies might be helping all partners to rebuild local economies in their struggling industrial regions.
Many US communities – particularly in the Midwest – have similar economic challenges to former industrial regions in the UK and Europe. Some have been successful in turning an economic corner, while others are still managing difficult transitions to new local and regional economies. In these places, federal investment in “place-based” policies, including from ARP, IIJA, CHIPS and IRA are now helping regenerate former industrial cities such as Pittsburgh, Pennsylvania and Detroit, Michigan. Mill 19 in Hazlewood Green, near Pittsburgh, a former WW2 munitions factory, has been awarded ARP and other federal and state funding to help develop new research facilities and spin outs in robotics, advanced manufacturing and electric vehicles in conjunction with Carnegie Mellon University. In Detroit, the historic Michigan Central Station, abandoned for years and an icon of the city is now being remade as a Ford centre for new mobility engineering and innovation, hiring thousands of new workers and rehabilitating the ‘hollowed-out’ Corktown neighborhood.
The Inflation Reduction Act is explicitly targeting so-called “energy communities”, defined as those with brownfield sites, coalfields, high fossil fuel employment and high unemployment, to support a “just transition” to new green technologies and industries. In its introduction, the act describes “parts of the United States that are too often overlooked and underserved” or as US Treasury Secretary Janet Yellen recently remarked in Dearborn, Michigan, “we expect to see dollars catalyse innovative investments across cities and towns that haven’t seen such investment in years”.
Areas Eligible for 10 Percent Under Central Interpretation of IRA
Local industrial and place-based policy
Many in the US will note that historically, many European countries have been bolder in delivering active industrial and ‘place based’ policy for many decades. Today they also have common agendas not just for developing new green industries but for renewing economic growth in former industrial communities. As a result, many OECD countries are now adopting more active industrial strategies, both to increase manufacturing capacity and supply chain resilience, but also to target struggling regions. And policymakers in both Europe and North America fear the consequences if they don’t manage to get this right. As Andres Rodriguez-Pose says, the ‘revenge of the places that don’t matter’ can have greater political impact, not just in ‘left behind’ places but on international relations, institutions and the global economy.
Back on the ground, it’s clear as you travel through the Midwest – or for that matter, parts of Northern England – that this is going to take the kinds of long-term investment and intervention that programmes like ARP, IRA and CHIPs are designed to deliver. That’s why countries with high levels of regional inequality are setting similar priorities. In the UK we can see both main political parties focussing on the so called “levelling up” agenda. Perhaps the best example of both the scale and long-term nature of this is Germany and its approach to reintegrating the East after reunification.
So there should be much common ground to explore as US and European allies approach these issues. Investing in new industries and job creation in struggling local economies might be just as important as a level playing field in trade and subsidies. There are some complex “trade offs” here but there is scope for collaboration. Not least because the objective of investment in such manufacturing capacity is not to out do each other, but to reduce dependency on undemocratic regimes and re-establish more resilient supply chains, particularly in former industrial areas.
Stability in supply chains and global institutions
There are additional international benefits if these local and regional “place-based” policies are successful. Creating better jobs and supporting firms and industries in “industrial heartlands”, not only helps rebuild local economies, reducing disaffection amongst “geographies of discontent”, it also makes for more stable national governments as actors in the global economy and in the institutions that govern it. So in other words, these aren’t just debates about protectionism, competition, and unfair domestic subsidies.
The conversations in Davos have been largely about the latter and not the former. But if we want to resolve these issues then we should be thinking as much about the benefits of tackling regional inequalities and the need to create good jobs by supporting new green industries in underperforming regional economies.
Throughout the OECD, these are interrelated issues. So sharing our approaches to local industrial policy, including new “place-based” strategies in the US and more longstanding approaches to regional development in Europe should be just as important as any disputes over trade and domestic subsidies.
Read more on the word of the OECD here.
Andy Westwood is Professor of Government Practice and a Director of the Productivity Institute at the University of Manchester. He has worked as an expert adviser to the EU, the IMF and the OECD and also for the Economic Affairs Committee in the House of Lords. He has also worked as a special adviser to UK ministers on innovation, education and skills.