Weekly Business Insights from Top Ten Business Magazines | Week 305 | Shaping | 1

Extractive summaries and key takeaways from the articles curated from TOP TEN BUSINESS MAGAZINES to promote informed business decision-making | Week 305 | July 14-20, 2023

Subsidies and protection for manufacturing will harm the world economy

Reshaping the world’s supply chains comes at a great cost

The Economist | July 13, 2023

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Politicians have always been captivated by manufacturing but rarely has their desire to make things been as zealous as it is today. In the West they are doling out enormous subsidies to manufacturers, especially chipmakers and those behind green technologies, such as batteries. They say they are fighting climate change, enhancing national security and correcting for four decades of globalisation during which workers suffered and growth slowed. In the emerging world, governments hope that subsidies can secure a foothold in supply chains as worried Westerners move production out of China.

An industrial arms race is under way.  America welcomes it, saying the world needs green technologies and a diversified supply of chips. It is true that an ocean of public money is bound to accelerate the green transition and reshape supply chains in ways that should increase the security of democracies. Alas, the accompanying economic benefits being promised are an illusion. As The Economist report this week, governments that subsidise and protect manufacturing are more likely to harm their economies than help them.

In ideal conditions, promoting manufacturing can add to innovation and growth.  In industries like planemaking the enormous costs of entry and uncertain future demand can justify support for new firms, as when Europe backed Airbus in the 1970s. Likewise, targeted help can boost national security.

In industries like planemaking the enormous costs of entry and uncertain future demand can justify support for new firms. Likewise, targeted help can boost national security.  Duplicating production reduces specialisation, raising costs and hitting economic growth. Some analysts expect the price of a chip produced in Texas to be 30% higher than one made in Taiwan.  A decade ago about 9,000 protectionist measures were in place worldwide, reckons Global Trade Alert, a charity. Today there are around 35,000.

European leaders think they must match America or face catastrophic deindustrialisation. They have forgotten the logic of comparative advantage, which guarantees that countries will always have something to export, no matter how many cheques foreign governments write or how productive their trading partners become.

The potential for the manufacturing obsession to backfire is enormous.  The lesson from South Korea is that national champions must be exposed to global competition and allowed to fail. The temptation today will be to protect them, come what may.  

Governments are not wrong to pursue good jobs, the green transition or national security. But if they succumb to the manufacturing delusion, they will leave their countries worse off.

2 key takeaways from the article

1. An industrial arms race is under way.  America welcomes it, saying the world needs green technologies and a diversified supply of chips. European leaders think they must match America or face catastrophic deindustrialisation.  In the emerging world, governments hope that subsidies can secure a foothold in supply chains as worried Westerners move production out of China.
2. It is true that an ocean of public money is bound to accelerate the green transition and reshape supply chains in ways that should increase the security of democracies. Alas, the accompanying economic benefits being promised are an illusion. Governments subsidies and protective manufacturing are more likely to harm their economies than help them.

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Topic:  Manufacturing, Global Economy, Protectionism