Dominick Sokotoff Sipa USA via AP
Hummer EV vehicles at the the grand opening of the General Motors Factory ZERO in Detroit, November 17, 2021
There’s something particularly galling about the Trump economic policy, beyond the tariff whipsawing, beyond the potential for financial collapse. For me and others, it’s that the very goal Trump claims to be after—to curtail the mercantilist rise of China and allow for a more balanced and diversified supply chain—was already being addressed, and achieved, by the last administration. Under Joe Biden, the government encouraged advanced manufacturing in critical and emerging industries, using subsidies, advance market commitments, and even tariffs to allow them to build and grow. And even ardent free-traders agree that it was successful: Manufacturing construction skyrocketed, manufacturing jobs gained after a recession for the first time in 60 years, and the clusters and knowledge share that is critical for virtuous circles of production were starting to take hold.
Then Trump broke it, through illegal pauses on grants and cuts to important manufacturing programs and the tariff uncertainty. States reliant on manufacturing are stumbling, and some startups are shuttering. Worst of all, the Biden advanced-manufacturing boom risks moving down the memory hole. That would be disastrous for smart policy to address a legitimate gap in industrial strategy.
To talk about what is happening now and what was done a few years ago, I talked to Alex Jacquez, who was a special assistant to President Biden for economic development and industrial strategy at the National Economic Council. Alex now serves as chief of policy and advocacy at Groundwork Collaborative. We discussed Trump’s tariffs and how the business community will handle them, the role of tariffs as part of a “triangle” of industrial policy, and how Democrats should think about bringing home manufacturing.
David Dayen: So there’s been a big change since I set up this interview with you. Trump paused a bunch of his tariffs, but now the China tariff is up to 125 percent. I’m not one to get too dug in on business certainty, but if you’re a business, how can you invest, how can you make decisions right now?
Alex Jacquez: What Trump is talking about is the reshoring of manufacturing, which is a specific type of capital expenditure investment. For large companies, these are multibillion-dollar factories that require years to build. That is not something you can take to your board right now when you cannot tell them what the inputs cost and what the situation will be. And so as a result I think you’re going to see real investment freeze up, anything which is predicated on policy. You’re not going to see a rush to the United States. You can’t rely on what’s going to happen next week, let alone down the road. The tariff policy has been sold through many goals, but if one of them was reshoring manufacturing, this is the worst way you can go about it.
Alex Jacquez
Do you get the sense that with Trump and the business world, what’s been broken now is trust, and it’s hard to unbreak it?
That’s right. I watched a lot of CNBC over the last week or so. This is not my usual media diet. But you turn that on and you had CEOs saying this is the end of American capitalism. Trump’s strongest soldiers online, Bill Ackman and others, flipped on him. They were just begging the president to flip things. Now, you saw macro shops making recession calls, none of that is gone. There was a spike in the market [Wednesday] but it’s still down since Liberation Day, and still down since the beginning of the year. Investor climate wasn’t where it was since the end of the Biden administration. I think it’s going to be irreparable for CEOs that signed up for a big tax cut and deregulation and ended up with all of this.
Obviously, this has now become a trade war with China, and we get a lot of goods from them. How do you expect this to play out with companies that source components or finished goods from China? How will these tariffs be translated into what people pay?
So I think you’re going to see a few things. One, smaller manufacturers and small businesses will feel this immediately. If you’re a small manufacturer that sources components from China, that’s now more than double the price. And you don’t hold inventory for that long, and you won’t be first in line to source elsewhere. You can’t absorb this through margin, and you are too small to have the ability to negotiate with your suppliers. Bigger companies will ride this out. You might have seen that Albertsons sent a letter to its suppliers saying it will not accept price increases from them, because they can dictate terms. For everybody else, margins will squeeze or we will have bottlenecks.
Do you mean bottlenecks because China will impose export controls and prevent the shipments of goods to the U.S., or that companies will not be able to make a profit with their current supply chain, so they’ll go out of business, or what?
Or you will see a rush to find alternative sources, that pushes more of the demand if everyone is sourcing from Vietnam. And because of capacity some people have to go back to China, and if it’s prohibitively expensive, you end up not sourcing the part. That’s where bottlenecks can occur. You I’m sure saw that Howmet declared force majeure, saying an act of God has struck and they can no longer send out orders. This will eat at larger companies with globalized supply chains, which for better or worse a large amount has concentrated in China, but that can’t be changed overnight.
China is clearly not ready to back down, they are fully ready to retaliate. They have been hinting at some other measures like devaluation of the currency to counteract the impact of the tariffs. Once you have a tariff that is essentially an embargo, you start to hear rumors about things like capital controls, banning outbound investment or delisting Chinese stocks. If you’re a big business in China now, you can expect to be investigated. But they’re going to play the game too. They know they have chokeholds on certain supply chains that they can easily bottleneck.
What drives me nuts is hearing about the need to confront China or deal with China, when that’s what the Biden administration was already doing successfully. Could you sketch out the thought process behind the administration’s policy to bolster critical industries, including those dominated by China?
First, again to your point, we were succeeding. Investment in manufacturing construction, the graph I point to ceaselessly, was soaring, driven by industries like clean energy and semiconductors, driven by the Inflation Reduction Act and CHIPS, which Trump has said he wants to end. We need domestic production in sectors with national-security purposes, like steel, aluminum, semiconductors. We need resilience in these sectors, so we need to build back at home, not only because of national security but also what we saw during the pandemic. We saw shortages that rippled throughout the economy. And then there are sectors like clean energy, chips, and biotechnology, these are strategic sectors we think we can compete in where market share is available. We can develop batteries that have a huge market in the future.
That’s where you also saw the tariff action to support these industries. This is like classic Alexander Hamilton, Report on Manufactures, use tariffs to protect infant industries. You don’t want the knees cut out on them before they are able to increase scale. After the IRA passed, we saw Chinese investment in solar panels and electric vehicles soar, and prices dropped. China was using export-driven growth to get out of their slide. They have been undercutting our industries in this way for years. So we used trade tools to protect workers and manufacturers from being undercut.
But you need the demand side too. It doesn’t matter if you make a million solar panels if no one is buying. Where you see Trump’s war on clean energy, that won’t help U.S. manufacturing either. If we’re not building more clean energy to go on the grid, the demand will fall. You need demand certainty and demand pull to have a manufacturing sector. That’s why we used IRA content requirements, and Buy America, to create that demand certainty.
So like you said, during the Biden administration you did pursue some tariffs on China, some high targeted tariffs like the 100 percent tariff on electric vehicles. There seems to be a theory in the Trump White House that if you raise tariffs, you give companies no choice but to move production back to the U.S. What’s missing from that theory?
You need the other pieces of the triangle. You need the demand pull and you need the subsidy incentive to overcome the capex hurdles, and you need to reach scale to get the benefits of innovation. Electric vehicles are a good example. Despite everything that is going on, we are currently pivoting in the U.S. to making more EVs. Companies are still figuring it out; other than Tesla, they have not pursued EVs at the same scale as ICE [internal combustion engine] vehicles. We did a tax credit for batteries and electric-vehicle manufacturing, along with demand-side incentives like the EV tax credit for purchasers. And because China is shipping EVs across the globe, we imposed tariffs so our producers can grow, and compete. And we do need to compete, we need to sell these vehicles around the world.
With Trump, I guess we are going to buy and sell everything in the U.S. That we are going to close all bilateral trade deficits, and onshore everything all at once. In the Biden administration, we believed there are strategic advantages to having some sectors in the U.S. But it was never our position to make everything in the U.S.
There’s a debate over how to move forward if Democrats return to power, a lot of people claiming the party needs to return to free trade. Do you feel like the model for a targeted industrial policy that the Biden administration just pursued has been neglected or even forgotten?
This is a debate that’s going to play out among factions of Democrats. It’s been going on since the 1940s really, and it won’t stop today. I think what you’ve mostly heard from some pro-free trade people is that if a Democrat dares to say that in the 1990s globalization had some flaws and hurt people, that was empowering Trump. But if you actually listen to Democrats, you find nearly unanimous consensus that what Trump is doing is crazy, that we need to produce things in the United States, and industrial policy can be part of that.
For those who want to see investments for strategic sectors, for the sectors of the future, we didn’t get all of it. I think about the autoworkers and in USMCA [the U.S.-Mexico-Canada Agreement] the threats to offshoring to Mexico and the back door of China into the U.S. market primarily through Mexico was not addressed, but Trump negotiated that trade agreement. There are certainly places to adjust, and a critical part of the strategy is to work multilaterally with partners and allies, to support a market that’s fair for workers, free of corruption. Canada, before becoming our number one enemy, was taking some of the same actions against China that we were. And we were working with them on critical minerals. With the clean-energy transition, there is plenty of demand out there. We would have liked to figure out a way to work together.
The excruciating thing is that aside from these tariffs being imposed, we’re seeing the supports for the Biden manufacturing boom being cut out, whether through killing programs like the Manufacturing Extension Partnership or withholding IRA grants. As someone who helped design this, how does that feel?
The day after Election Day, I had many laments for what was going to happen in the future, laments about our immigration system, laments about cuts to the social safety net. But I was also worried about the eventual strangling of a new industrial policy that we attempted and in some important ways succeeded. If we were given another four years, you would have seen it come to more fruition. It takes time for construction jobs to turn into manufacturing jobs. But even in a quarter or two, there could have been a great opportunity for Trump to go out and cut a bunch of ribbons on new factories. But for whatever reason, he decided to kneecap the whole thing.
So where do we go from here? I think you still have a lot of Democrats, people like Ro Khanna and Chris Deluzio, saying this isn’t the way to do it, but we need an industrial policy for the United States. And so our goal when we get the next opportunity is to put that into practice.
