Competitive Nation-Building

The backlash against decades of hyper-globalization, which spread wealth to new winners across the emerging economies while hollowing out the manufacturing base of more advanced countries, most notably the United States, is exhausting its first wave of reactive populism and entering the reconstruction stage of nation-building at home. 

As Nils Gilman and Yakov Feygin write in Noema, there is a rising consensus across the political spectrum in the U.S. that eschews the invisible hand of the market that drove globalization in favor of what used be called “industrial policy” to restore the nation’s lost prowess through state intervention. This shift is manifested in President Biden’s key initiatives — the Inflation Reduction Act, the largest-ever green energy transition investment in American history, and the CHIPS Act, aimed at rebuilding self-reliance and secure supply chains for semiconductor manufacturing. 

Though that legislation passed in the U.S. Congress by a strictly partisan vote of blue-state Democrats, multiple analyses show that the primary benefit of new jobs and production facilities will flow to Republican red-state strongholds, especially the southern Midwest. 

Indeed, Gilman and Feygin note how the interests of disparate constituencies that will benefit from the guiding hand of the state converge across old ideological barriers. These include “jobs creators” focused on regional development; green technology accelerationists; social democrats promoting greater welfare; “national developmentalists” whom they call the new Hamiltonians after the nation-building founding father; and “supply chain hawks” focused on national security. 

On the domestic front, this alignment portends a dampening of the heightened political polarization that gave rise to the MAGA movement. As I have written previously, by treading where Trump only tweeted, Biden is shifting the balance of the domestic political economy back toward a stable center.

Deglobalization Also Has Winners And Losers

When the leading economy in the world turns inward to nation-building that seeks to undo the dependencies and dislocations of the hyper-globalization it once fostered, it necessarily entails unraveling the structures of market interdependence for those “winners” who fashioned their economic strategy accordingly. What is “positive economic nationalism” to the broad American constituencies Gilman and Feygin identify is seen as “negative protectionism” by those who will now lose out.

In turn, they will move to shield their own economies from the disadvantages they face if they stick to the open trading and free market rules of the post-Cold War era abandoned by the hegemonic power that once held it all together.

Anticipating the trajectory of deglobalization now unfolding, China’s President Xi Jinping announced, already three years ago, a policy of “dual circulation.” Essentially, what he outlined is a path to greater self-reliance through less dependence on the West and more dependence on its own technological development and domestic consumer market, while shifting its trading networks toward the Global South. 

Biden’s IRA has deeply unsettled America’s allies, especially in Europe. They see the massive subsidies for domestic production of clean energy technology as sucking investment and jobs across the Atlantic from the continent. Geopolitically united under NATO for the moment, Europe and the U.S. are jointly sending their coveted tanks off to Ukraine. But, geo-economically, they are going their own way, each seeking to firmly plant solar panel, windmill, battery and EV production on the home soil.

The leaders of France and Germany are calling for their own set of subsidies to counter America’s as the European Commission is already loosening the strictures on state aid. The commission president, Ursula von der Leyen, has just announced a “Green Industrial Plan” that will allocate hundreds of billions of euros, on a comparable scale with the IRA, to remain competitive with both America and China.

Though their responses are as of yet unclear, America’s allies in Asia, most notably Japan and South Korea, are equally unsettled by not only the IRA, but the CHIPS Act and the U.S. restrictions on tech trade with China, to which they are closely tethered.

Green Transition And The Geopolitical Economy

The great paradox of this historical moment is that the competitive nation-building that aims to repair the domestic damage of globalization is being driven forward by the planetary imperative of meeting the common climate challenge. Can the nation-state be the path to a global energy transition? Or will the geopolitical economy frustrate and splinter that possibility? In any case, is there any alternative?

In an interview with Noema, the Brazilian philosopher Roberto Mangabeira Unger argues there is no realistic substitute for the nation-state as the mobilizing political unit of effective action. Despite the wooly dreams of the one-worlders, he reflects, all that is possible is the “voluntary cooperation among sovereign states to help solve problems they cannot adequately solve alone.” For Unger, the implicit pluralism of paths is even an advantage: “Humanity develops its powers and its potential only by doing so in different directions, and can be unified only by being allowed to diverge. Visions of convergence — that we will all converge on the same set of best available practices and institutions — are a disaster. They subvert and impede the experiments by which humanity develops its potential.”

One can see Unger’s point. It is not a foregone conclusion that green industrial policies must mean a “race to the bottom” of subsidy vs. subsidy. Competitive state policies may instead drive each other toward “a race to the top,” since not even the advanced economy markets are anywhere near saturated with the necessary green technologies and infrastructure necessary to meet already proclaimed climate goals. In short, there is plenty of demand all around for supply to meet.

To be sure, there will be a “national premium” to be paid since clean energy and its technologies will be more expensive if limited to domestic production, albeit with the benefit of greater employment and capture of wealth at home.  

But there are pragmatic ways to hedge against the downside of exclusive national industrial policies. For example, their terms could be limited to a decade or so as each targeted domestic industry develops sufficient strength to face global competitors head-on. Another idea might be “reverse quotas” that would exempt, say, 20% of imports from allied nations from domestic content requirements. Both adjustments would keep the door ajar and avoid a spiral into self-defeating decoupling.

Overall, the new geopolitical economy could revert to what Harvard Professor Dani Rodrick calls “a thin and unambitious set of rules” not unlike the General Agreement on Tariffs and Trade that preceded the overly invasive World Trade Organization. “The secret” of the GATT success, which expanded world trade and the attendant prosperity significantly, says Rodrick, “was that the old regime understood that you need to provide countries with much greater policy space. … I am in favor of allowing countries much greater latitude in the conduct of industrial policies. When they succeed, this is good not only for the countries themselves, but also for other nations because it enables greater economic growth, and hence greater trade opportunities. When they fail, the costs are borne primarily by domestic consumers and taxpayers.” 

The same benefits of flexibility apply where trade meets security concerns. As former Google CEO Eric Schmidt has similarly argued, “Overall decoupling of supply chains and integration with China will be counterproductive to the well-being of Western economies. But ‘strategic decoupling’ in technologies that touch communication and control are necessary.”

Such a limber approach would temper the deleterious consequences of nation-building in a way that threads the geopolitical needle instead of provokes the abiding hostility that inevitably arises from zero-sum solutions in one world that, despite all that has changed, remains highly intertwined.