On January 27, 2022, The Institute of World Politics hosted an event entitled “Does America Have the Industrial Base it Needs to be a Great Power?” This lecture examined the ideas of the U.S. industrial base and how it has evolved and changed over time. Dr. Jeb Nadaner discussed U.S. industrial capabilities, U.S. government policy toward domestic and foreign industries, addressing public health and environmental concerns, and the urgency needed in developing a comprehensive global supply chain.
The Waves of U.S. Deindustrialization
“Every country has an economy consisting of capabilities,” Dr. Nadaner stated. That capability is called “industrial capabilities,” and it includes information, research and development, and the labor force. During the 20th century, the U.S. became the most significant industrial base globally. However, in the late 60s and 70s, the U.S. faced three waves of deindustrialization. The first wave was the rise of our allies, such as Japan and Germany. The second wave was during the Cold War when the U.S. cut its defense budget and shut down a range of industries. Finally, the third wave happened when the U.S. gave China almost complete access to the U.S. economy and extended it to the World Trade Organization (W.T.O.). The U.S. could eventually experience a fourth wave of de-industrialization, and the question posed by Dr. Nadaner is: how do we prevent this from happening? He sought to answer this question by first examining current governmental policies.
The U.S. government has had three policies at its disposal to create favorable conditions for companies and industries, said Dr. Nadaner. First is the tax policy, which is the most vital. The overall tax system needs to favor owning existing assets rather than only favoring producing new assets. The second policy is the requirements and barriers to entering the U.S. market. Over many decades, the U.S. has insisted on virtually no reciprocity in its trade relations. Also, the U.S. has one of the lowest tariff rates globally, which creates an unequal condition for the U.S. The third policy is what the U.S. government purchases and industry subsidies.
Over the past forty years, the U.S. has had a bipartisan consensus emerge to lower the tariff barriers immensely, integrate China into the trading order, and let the existing market determine winners and losers. The result was the loss of many critical U.S. industries. The COVID-19 pandemic has also shown America’s reliance on overseas supply chains, especially those of adversaries and strategic competitors. Dependence on authoritarian regimes hostile to the U.S. and our allies creates potential risks. For example, 30% to 60% of the Defense Department’s military systems rely on Chinese semiconductors and microelectronics. If the Chinese government decided to cut off these supplies, it would directly affect our national security.
Semiconductors Industry and Capital Expenditures
Semiconductors were initially invented in the U.S. Today, the U.S. leads the way in semiconductor design; however, the actual semiconductor manufacturing has declined from about 45% to around 12% of global semiconductor production, and it continues to decrease. The primary reason for this phenomenon is our capital expenditures. It costs 7 to 15 billion U.S. dollars to put up a semiconductor foundry, and it is only suitable for a few years before regulation is needed. In contrast, Asia is more advantageous. There are massive subsidies and substantial tax breaks, free land, or direct subsidies. Still, one thing worth mentioning is that China is considered an insecure environment; many Western companies like Intel and Micron are interested in returning to America. It is essential that we have companies investing in the U.S. and setting up foundries here; it would benefit both sides. We would get exposure to the latest manufacturing techniques, and it would allow our allies, such as South Korea and Taiwan, to diversify their assets through collaborating with the U.S.
The U.S. has a fair number of minerals and rare earth elements. However, since the 60s, there has been a vast decline in mining due to the number of regulations and litigation. Moreover, the U.S does not process rare earth minerals. In contrast, China has land with many crucial primary minerals and rare earth elements, and it outcompetes everyone else through subsidies to get contracts to supply these minerals. China also does a lot of processing, often to the detriment of the environment.
For the U.S., the issue is that environmental laws were mainly passed in the early 70s, but since then, technology has advanced. In other words, factories are much cleaner than they used to be in production. It is necessary to update our environmental laws to meet current demands. Lastly, a vital task is to create an alternative supply chain. We need to unlock and update the U.S. system while working with our allies.
Dr. Nadaner mentioned that the fundamental problem for the U.S. is the need to set boundaries and market conditions. The U.S. has an open market, whereas China has a relatively closed market with many subsidies. This leads to companies having an incentive to make things in China and return more profit to the American shareholders. The only way to redress is to reset the boundary conditions, making it more difficult for Chinese goods to be imported into the U.S. if we do not have equal access there.
Dr. Nadaner concluded his remarks by discussing how the U.S. can strengthen its industrial base. First, the government needs to set up the right tax policy to incentivize manufacturing as opposed to outsourcing. Second, the U.S. needs to establish the proper marketing border adjustment for countries that are not reciprocating, taking advantage, or engaging in cyber theft. Looking back to the question, “Does America have the industrial base it needs to be a great power?” The current answer is no. However, it does not mean that it never will; the U.S. needs to address current industrial and global challenges intelligently.
About the Speaker
Dr. Jeb Nadaner is the Executive Vice President of Government and Public Affairs at Securing America’s Future Energy (S.A.F.E.) and the Executive Director of Commanding Heights Initiative at S.A.F.E., focused on protecting and advancing the supply chains of the U.S. and its allies. He also emphasizes business development, executive-level government relations, public affairs, program operations, and business transformation.