Development Done Right
Senator Vance’s Drive American Act refutes the idea that industrial policy can’t be done thoughtfully.
Much of life boils down to execution. Air-raid offense or shotgun? Fish or pork chops? Ranch-style or Cape Cod? Well, it depends on how well done each option is.
Execution is particularly important when it comes to writing legislation. There are plenty of methods for pursuing high-level policy goals, each with its characteristic pros and cons. Tariffs or subsidies? State agency or contractor? Well, it depends.
Take the recent CHIPS Act, which passed on a bipartisan basis in August 2022. The second of the Biden era’s forays into industrial policy splashed $280 billion at America’s domestic semiconductor manufacturing industry. A worthy goal—nobody thinks the American tech sector, and all the other economic sectors that rely on it, should be beholden to Taiwan’s current world-beater chip manufacturer, TSMC, and the caprices of Xi Jinping’s plans for Chinese reunification. And, per the Semiconductor Industry Association, some worthy results—SIA claims that the Act prompted the construction of 23 new fabs and the expansion of nine existing fabs.
Yet some billions of dollars’ worth of CHIPS Act subsidies have gone to foreign-based corporations like France’s Mersen and—you guessed it—TSMC. Foreign-owned operating in the U.S. is an improvement over foreign-owned operating abroad, but is still an impediment to maintaining American control of the American industrial base. The American government would ideally not be funneling American taxpayers’ money to overseas corporations, even if they do employ Americans. And that isn’t a given. TSMC’s travails in the (currently stalled) construction of an Arizona fab are particularly instructive: American labor unions are calling foul on the corporation’s proposal to bring upward of 200 Taiwanese workers to the Grand Canyon State to get the plant built and under way.
The insultingly named Inflation Reduction Act, a budget reconciliation bill pushed by the Democrats unaided, has proven even more susceptible to abuse. The “green subsidies” fostering the transition from fossil fuels to “clean” energy have mostly gone to foreign corporations, including those in China, which dominates battery manufacturing. As of 2021, China produced 79 percent of the world’s lithium-ion batteries. The communist nation holds a commanding position at nearly every point in the battery supply chain and has a 30 percent cost advantage over battery manufacturing in the U.S., in large part because of lower energy costs. The laundry list of Chinese advantages in battery production (and other green energy industries) can go on indefinitely—lithium refining! cobalt mining! solar panels!—but it only strengthens the underlying point. The IRA subsidies are strengthening a rival in a sector where it already holds a forbidding advantage over the U.S. These are badly designed measures.
Senator J.D. Vance, a Republican from Ohio, proposes to rectify a portion of the IRA’s fatuity. The Drive American Act would repeal the consumer tax credit for buying an electric vehicle and replace it with a credit for buying an American-manufactured vehicle with an internal combustion engine. The IRA measure is particularly stupid: The tax credit is scaled to a vehicle’s battery capacity, which is to say, to the part of the vehicle most likely to have been manufactured in China. It is almost as if it had been written specifically to fund Chinese industrial concerns. The Drive American Act takes the form of this scaling structure and repurposes it to increase with vehicle payload and seating. (This last bit does double duty as a canny piece of family policy—the complications of getting a large family into an automobile have a documented depressing effect on family size.) It tightens the nation-of-origin requirements: Sixty percent of components must come from the U.S. and Canada, and final assembly must occur in the U.S. Further, it establishes labor-protecting provisions about the relation between the vehicle’s cost and the wage at the assembly plant to discourage corporations from pocketing the economic rents from the subsidy.
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There’s always the chance of unforeseen consequences when a program is launched into the real world, but, on paper, the Drive American Act remedies some of the gross defects of the IRA: It doesn’t funnel money to rival nations’ industries, it plays to American industrial strengths, and it guarantees that American workers are dealt in at a certain minimum. On the political side, it helps auto plants in Vance’s own state. In short, this subsidy is well designed.
Rebuilding the American industrial base after decades of neglect and trade deficit–fueled decline is the single most pressing economic priority today. Doing this is difficult. Merely splashing around large sums is unlikely to do much besides distort healthy markets and fuel inflation; at worst, the money ends up with competitor nations. Unfortunately, politics requires thought as well as will. There is no replacement for being careful. The current administration and its legislative allies are not careful—assuming you believe they’re well intentioned. The gentleman from Ohio shows that there is a better way.