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The US should Treat Climate Policy as Economic Policy

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The US should Treat Climate Policy as Economic Policy

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The United States and China jointly account for more than 40 percent of global greenhouse gas emissions, putting these two nations at the center of efforts to address the climate crisis. Yet cooperation on climate policy between Washington and Beijing has stalled in recent years, reflecting a broader deterioration in the U.S.-China relationship. After decades of increasing dependence on imports from China, the pandemic highlighted the vulnerability of global supply chains to external shocks and strengthened calls for national self-sufficiency both in China and the United States.

The stakes and opportunities of such a move are nowhere higher than in clean energy sectors, where China currently dominates global manufacturing. China makes roughly two-thirds of the world’s solar panels, nearly half of global wind turbines, and three quarters of lithium-ion batteries needed for electric vehicles and on-grid energy storage. To date, the U.S. federal government has not done enough to improve the competitive position of domestic clean energy sectors, which could provide an alternative to the current reliance on China. In the absence of policies to support these industries domestically, tariffs—the main U.S. government response to China’s rise—have made clean energy technologies more expensive but have not drastically improved the competitive position of American firms.

Other economies have taken a different approach. Partly in response to China’s dominance in clean technology industries, European policymaking  now treats climate change as an economic imperative, as governments seek to expand shares for domestic firms in growing global clean energy technologies markets and hope to meet a growing share of domestic demand with home-grown technologies. From offshore wind turbines to hydrogen and battery technologies, Europe has combined economic and climate objectives in strategic initiatives to support the growth of domestic clean energy industries. For instance, the EU established the European Battery Alliance to reduce dependence on China for the highest value components in electric vehicle manufacturing. Its goal is to position domestic firms along the entire battery supply chain for economic and security reasons, with the alliance taking on a coordinating function to bring the required industrial actors together. The EU’s push to self-sufficiency in the use of clean energy technologies has taken on new urgency since Russia’s invasion of Ukraine, as the continent seeks to reduce its dependence on imports of Russian fossil fuels.

The United States needs to treat climate policy as economic policy or risk falling behind other economies that have made clean energy industries a domestic priority. Not just since the beginning of the Ukraine crisis, the Biden administration has looked for ways to boost the domestic production of clean energy technologies. Yet the use of tools such as the Defense Production Act alone won’t be sufficient to secure the domestic production of clean energy technologies that are needed more than ever for energy security and to protect the United States from a volatile global price environment. To strengthen the competitive position of domestic clean energy sectors, the United States should (i) improve financing for domestic clean technology industries through the creation of a national lending institution, (ii) create a stable domestic market environment for low-carbon technologies to reduce investment uncertainty, and (iii) renew investments in vocational training to create a workforce ready to tackle the clean energy challenge. Without a clear strategy to support the growth of domestic clean energy sectors, calls for greater economic separation from China will likely jeopardize climate goals while ceding economic gains to nations with more comprehensive green growth strategies.

WHY CLIMATE POLICY IS ECONOMIC POLICY

Historically, governments have often prioritized economic growth over climate policy, particularly during periods of economic hardship. Yet the view that emissions reductions and good economic policy are irreconcilable is increasingly outdated. In 2021, global markets for renewable energy and electric vehicles soared to USD $366 and USD $273 billion, respectively; global investment in the clean transition topped USD $755 billion. Global clean energy markets are now roughly equivalent to the GDP of Switzerland and roughly three times the size they were ten years ago.

In light of rapidly growing markets for clean energy technologies, policymakers around the world have begun to promise new jobs, industries, and sources of prosperity in the transition to a zero-carbon economy. In addition to creating service-sector jobs in the installation and maintenance of clean energy technologies and infrastructure for the electrification of the transportation sector, policymakers have argued that climate policy will lead firms to invest in technological innovation and ultimately co-locate manufacturing to commercialize and produce clean energy technologies domestically. Among policy options to address climate change, those that pursued the dual objective of achieving emissions reductions while creating new sources of economic growth have been easier to implement politically. Such economic benefits have also helped justify growing public investments in the clean energy transition.

Yet economic co-benefits from climate policy have not been achieved everywhere. Although governments worldwide have connected climate policymaking to the broader premise of “green growth,” not all economies have successfully built large industrial sectors in support of decarbonization. One reason green sources of economic growth have proven elusive has been the political opposition of industries invested in fossil fuels. Clean energy sectors—wind, solar, storage, and electric vehicles, among others—continue to compete with an existing fossil fuel-based energy system. Utility companies, car manufacturers, and traditional energy providers have mounted political opposition to the clean energy transition. In many cases, such opposition has undermined policies to create markets for clean energy technologies and prevented state support for firms seeking to develop zero-carbon alternatives. This is true even if in many parts of the world new energy technologies are now cheaper than those they are seeking to replace.

Other governments have begun to strategically position their domestic economies to benefit from rapidly growing investment in clean energy. Nowhere is this more the case than in China, which has rapidly established itself as the dominant manufacturer in industries central to addressing greenhouse gas emissions. Over the past two decades, China has increased its share of global solar photovoltaic production from less than 1 percent to over 60 percent of the world’s solar panels. For 15 of the past 17 years, China has added more production capacity for crystalline solar cells than any other country in the world. China is also one of the world’s largest producers of and market for electric vehicles. It now commands roughly 75 percent of global production capacity for non-consumer batteries, which are the highest value component in electric vehicles and critical for on-grid electricity storage. China dominates most individual steps in the supply chain, including in the mining and production of Nickel, Cobalt, and Lithium, in the manufacturing of cathodes and anodes, and lithium-ion cell manufacturing. In 2020, China accounted for 58 percent of global production capacity for wind turbine nacelles, primarily for its large and growing domestic market. In addition to producing components for domestic turbine assembly, China produces gearboxes and generators that are used by turbine manufacturers around the world.

China’s dominance in the production of low-carbon energy technologies has national security implications in the United States and elsewhere. Without investments in alternative supply chains from raw materials to final assembly, meeting global climate goals could mean trading dependence on Russian fossil fuels for  reliance on China for electric vehicle batteries and renewable energy products. As the Ukraine crisis has demonstrated, such interdependencies are easily weaponized.

China’s rise to dominance in clean energy industries was not accidental, but the result of strategic and aggressive government support for R&D and manufacturing. No other economy has devoted a similar level of resources to the expansion of production capacity and manufacturing R&D in clean energy sectors central to reducing greenhouse gas emissions.

This has especially been the case since 2006, when the central government began encouraging “indigenous innovation” to reduce dependence on foreign technologies through increased domestic R&D efforts. Efforts further accelerated under President Xi’s Made in China 2025 initiative, which designated the development of domestic low-carbon emitting technology sectors as a strategic national priority. China’s provincial and municipal governments, meanwhile, brokered bank loans and provided land, facilities, and tax incentives to manufacturers in wind, solar, and battery industries. It is estimated that between 2010 and 2012 alone, wind and solar firms received credit lines of USD $47 billion by Chinese banks; the China Development Bank, one of three state-owned policy banks, reportedly extended USD $29 billion in credit to the 15 largest wind and solar firms.

In part in response to China’s rise in clean energy industries, the European Union has increasingly treated climate policy as economic policy. The EU’s “Fit for 55” proposal seeks to marry climate and economic goals by investing in low-carbon industries that guarantee jobs and prosperity as Europe pushes emissions reductions. Such goals are also noticeable in Europe’s transportation sector, where the EU has proposed reducing new vehicles’ average emissions by 55 percent in 2030 and 100 percent in 2035. This amounts to an outright ban of internal combustion engine vehicles by 2035, expanding on policies that have already passed in individual member states including France.

The EU proposals send a strong signal to European firms that they need to participate in the transition away from fossil fuels or be left behind in a global industrial policy competition with China. In combination with promises to expand renewable energy capacity and charging infrastructure, increase taxes on conventional fuels, and develop low-carbon sources of hydrogen, these policies for clean energy industries build on ongoing efforts to close key gaps in industrial supply chains. As mentioned above, the EU has already funded a European Battery Alliance to establish a competitive European battery industry that would reduce Europe’s dependence on China.

All this fits with a broader shift to push back globalization and create domestic sources of growth, particularly in strategic clean energy sectors with rapidly growing global markets and domestic security implications. More than forty percent of Europe’s pandemic stimulus package is dedicated to projects that further both economic competitiveness and address greenhouse gas emissions through support for green industries. The pace and level of support of the creation of domestic low-carbon industries has only accelerated since Russia’s invasion of Ukraine.

THE PROBLEM WITH U.S. POLICIES FOR LOW-CARBON INDUSTRIES

As China began to dominate global supply chains for clean energy technologies, the U.S. responded with a series of trade barriers against Chinese imports. Initially targeting Chinese wind turbine towers, tariffs were expanded to Chinese solar panels under the Obama administration. Tariffs were renewed in 2018 under the Trump administration, again targeting Chinese solar cells despite vocal opposition from the domestic solar industry which feared the impact of rising prices in the large U.S. solar installation and maintenance industry.

Despite these trade barriers, manufacturing did not “come back” to the United States as both Democratic and Republican administrations had argued. Tariffs instead led to relocation of production capacity to other Asian economies, including to Vietnam and Malaysia, but they did not forge a reorganization of the solar industry in the United States or promote the expansion of domestic manufacturing capacity. China continues to account for roughly two-thirds of global production capacity in the solar sector, and most U.S. panels are imported.

More recently, the Biden administration launched a broad investigation into gaps in domestic supply chains from both economic and security perspectives in the context of China’s dominance in key industrial sectors. But the administration has thus far continued to primarily rely on tariffs implemented under previous administrations as its main tool to improve the competitiveness of domestic firms. The Strategic Competition Act, which seeks authorization to assist U.S. companies with supply chain diversification away from China, proposes new investments in domestic infrastructure to compete with China and emphasizes the need to build alliances to counteract China’s growing international influence. The bill remains stalled in Congress. The Infrastructure and Investment Jobs Act, which passed in November 2021 with bipartisan support, includes investments in the domestic grid and electric vehicle (EV)-related infrastructure, but does not directly address the competitiveness of domestic clean energy technology firms. Proposals such as the use of the Defense Production Act to accelerate domestic mining could increase the availability of raw materials needed for low-carbon technologies but do little to address underlying structural problems of U.S. clean tech manufacturing. Meanwhile, the March 2022 launch of an investigation into possible tariff evasion by Chinese companies—and the prospect of new tariffs on Asian solar panels—has prompted protest by the U.S. solar industry which fears higher prices.

WHAT THE UNITED STATES CAN DO TO BUILD A CLEAN ENERGY MANUFACTURING INDUSTRY

The United States is uniquely equipped to lead the development of new energy technologies needed to meet global climate goals. However, China is on course to overtake the U.S. in R&D spending unless domestic efforts are accelerated. The U.S. has historically been the largest investor in clean energy R&D and continues to lead research and development for many key low-carbon technologies. U.S. companies remain at the forefront of developing next-generation technologies that could make decarbonization cheaper and more efficient, including next-generation solar technologies, advanced battery chemistries, new building materials, smart grid technologies, and software to manage complex energy systems.

Eventually, new technologies have to be commercialized and manufactured at scale, and currently little support exists for such activities domestically. U.S. startups, unable to fund or find domestic manufacturing capabilities, often work with foreign partners or are bought by multinational firms. Tariffs against Chinese imports or finger-pointing at China’s industrial policies have done little to change the global division of labor in favor of domestic clean energy industries.

A three-pronged policy approach to support domestic clean energy industries as part of a national strategy for technological innovation could help America combine economic and climate objectives.

1. A national lending institution to help fund manufacturing

First, a government-established lending institution should finance clean energy firms that the U.S. financial system has been unwilling to fund. A key reason for the lack of domestic clean tech manufacturing in particular has been the scarcity of capital among clean technology firms. Clean energy startups have struggled to raise sufficient funds to invest in domestic manufacturing capacity, as American financial institutions have prioritized industrial sectors—including software—that have historically yielded higher and faster returns. Proposals to establish a national climate bank have not included support for the clean technology industries needed to achieve climate goals.

A government-owned lending institution tasked with providing capital to manufacturing businesses in critical industries such as clean energy would address a financing problem that the private sector has been unable to solve. Although the United States has historically led in the development of new technologies as a result of large injections of public and private capital, long investment horizons, large upfront investment costs, and technological risks associated with the commercialization of new technologies have prevented private investors from supporting domestic manufacturing. This is particularly the case for technologies central to reducing greenhouse gas emissions, including renewable energy, batteries, and high-voltage transmission.

A national lending institution would not crowd out the private sector since private financial institutions have historically avoided lending to clean energy manufacturing firms. After a one-time capitalization through the U.S. government, a politically-independent, non-partisan, and not-for-profit lending institution would be self-sustaining, generating enough revenue to maintain and even grow its capital base. It would focus on supporting domestic supply chains in critical industries and promoting the commercialization of U.S.-developed technologies, and it would prioritize the capital needs of manufacturers in traditionally underfunded industrial sectors such as clean energy.

The creation of such an institution—modelled on U.S. intervention in home financing through the establishment of Fannie Mae and Freddie Mac or the government-owned EXIM Bank—would put clean energy manufacturing firms in the United States on equal footing with firms in other parts of the world, where such financing corporations already exist. China’s state-owned development banks have already demonstrated that large loans for manufacturing business were central to China’s rise in clean energy industries. Germany’s KfW bank, one of the largest in the country, is another example of a government-owned financial institution tasked with addressing the capital needs of underfunded sectors of the economy. Perhaps somewhat ironically, KfW’s initial capitalization, in 1949, was made with U.S. funds dispensed through the Marshall Plan.

2. Stable support for low-carbon technology markets

 Historically, the share of domestically manufactured parts and components in clean energy technologies deployed in the United States have been lower than in other economies, including those in Europe with similar or higher cost of labor. A key obstacle to investments in domestic production has been the unstable regulatory environment and frequent changes or expirations of government incentives. Examples include the federal production and investment tax credits for wind and solar installations, which, although critically important for the financial viability of such projects particularly in early years of the industry, were often allowed to expire or renewed at the last minute. Such uncertainty deterred manufacturers (and their investors), which faced significant investments to build or retool domestic plants for the production of clean energy technologies with uncertain future markets. The lack of industrial coalitions in support of long-term climate policy in turn further undermined the establishment of a regulatory and market environment that would attract such firms in the first place, leaving U.S. climate policy exposed to political pressure from the fossil fuel lobby.

Long-term federal support for low-carbon technology markets, including through government procurement, caps on future auto emissions, and federal incentives for clean energy targets at the state level, could make it easier for firms to finance investments in U.S. production. The Biden administration has already announced federal procurement goals for electric vehicles, which prompted a number of manufacturers to explore the establishment of U.S. production facilities for EV batteries. But other measures would help. For instance, a number of key industrial economies with large domestic auto industries announced future bans of the internal combustion engine, both prompting their automakers to invest in electric vehicle technologies and ensuring them that domestic markets would reward such investments. The United States has not announced such plans at the federal level. Federal procurement goals for renewable energy, energy efficiency, and public support for clean hydrogen and other next-generation technologies would provide additional motivation for the private sector to invest in the U.S. market. Long-term procurement contracts could provide some insulation against the political volatility that often comes with changes in presidential administrations. Russia’s invasion of Ukraine and the repercussions for global energy markets may have opened new avenues for bipartisan support of domestic low-carbon industries, particularly if public investments are spread across both Republican and Democratic states.

3. Renewed federal investment in vocational training

Third, federal investments in vocational training programs are needed to meet the workforce needs of a growing clean energy manufacturing industry. Historically, large manufacturing corporations in the United States conducted much vocational training internally, with spillover effects for the economy as a whole. They also supported vocational schools in their communities to actively train a labor pool from which they could recruit. Long job tenures provided incentives for firms to invest in such training. Yet changes in the composition of the U.S. manufacturing sector has in many places ended such investments. At the same time, shortening of job tenures now means that firms worry that workers will undergo expensive training only to be poached by other firms. Vocational schools have closed in many parts of the country, as a declining community of local manufacturing businesses has reduced the demand for graduates and public funds have been cut.

The federal government should renew its investments in vocational training programs to train and retrain workers to meet the demand of clean energy industries. Federal grants could support vocational schools and community colleges in establishing dedicated clean energy manufacturing curricula in partnership with industrial partners. Federal support is also critical to overcome collective action problems in the establishment of a paid apprenticeship system, as companies are reluctant to invest in such training on their own for fear that their trainees will eventually be recruited by other firms. The federal government should complement and support state-level initiatives, which often have better information about local conditions, including demand from local businesses and strengths and weaknesses of existing training institutions. But, as the European approach to building a battery industry has demonstrated, training needs for entire new industrial sectors are often greater than the capacity of individual states. The federal government is uniquely equipped to work with the private sector to establish training needs, coordinate such efforts along the entire supply chain, take advantage of network effects in education, and pool resources, particularly in areas with a weak fiscal base.

Such public support for vocational training and retraining is especially important in places that currently depend heavily on fossil fuel industries. Coordination with the private sector is critical to ensure that training meets the needs of clean energy manufacturers. The European Battery Alliance could serve as an example; a key objective of it has been to establish future workforce education needs through public-private collaboration. In the United States, many states have set up “Just Transition” programs with the goal of diversifying the economy, but their coverage is uneven, and they do not always specifically target workforce development for the clean energy industry. Historically, the United States has been outspent by other economies on government resources devoted to training and retraining initiatives, often preventing workers from transitioning to new industrial sectors.

CONCLUSION

The United States has traditionally been the largest investor in clean energy research and development and continues to lead in many areas critical for decarbonization. Yet the United States risks losing its leadership position as other economies, including China and the European Union, have made low-carbon industries a priority. To change this, the United States needs to treat climate policy as economic policy and begin improving conditions for segments of low-carbon energy supply chains that are currently not well-supported domestically. This also means investing in domestic manufacturing capabilities as part of a national strategy for technological innovation. Even then, it is unlikely that entire value chains for complex energy technologies would lie entirely within national borders. The United States should therefore not lose sight of the substantial domestic economic benefits from investments in decarbonization, even if a share of these low-carbon energy technologies is, for now, manufactured abroad.

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A Holistic Approach to Strengthening the Semiconductor Supply Chain

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The COVID-19 pandemic brought the consequences of offshoring semiconductors into sharp relief for American consumers and businesses. When the pandemic struck—snarling global supply chains and spiking demand for consumer electronics—American businesses and consumers were left without the inputs and supplies they had come to rely upon. This supply chain will remain at risk: Its core nodes remain in locations with high geopolitical uncertainty—none more important than Taiwan, whose semiconductor industry Beijing jealously eyes.

Such supply chain vulnerabilities alongside the recognition that semiconductors represent a strategic resource have inspired a push in Washington to rebuild American chip manufacturing. In June 2021, the U.S. Senate, in a rare act of bipartisan consensus, passed the U.S. Innovation and Competition Act (USICA), which would spend $52 billion to bolster the American semiconductor industry. In February of this year, the House of Representatives passed similar legislation—the America COMPETES Act—along mostly party lines. House and Senate negotiators now must reconcile these bills. President Joe Biden argued in his State of the Union address that passing some version of this legislation was essential “to compete for the jobs of the future” and to “level the playing field with China.”

But reshoring the semiconductor supply chain is unlikely to resolve the supply-chain shocks caused by the pandemic: construction of the most important nodes, namely fabrication of the chips themselves, would require not only tremendous up-front costs, but possibly a steady stream of government assistance in perpetuity. As lawmakers on Capitol Hill iron out how best to position the United States to maintain access to a key technology, it’s worth considering what a more holistic strategy to address semiconductor availability might look like.

Here, we propose a two-pronged approach. First, the United States should focus on deepening its high-tech collaboration with supply-chain partners such as South Korea, Taiwan, or even Europe. The U.S. should also amend immigration rules to permit more skilled workers to enter the country, augmenting the talent pool during a period of labor shortages and increasing the competitiveness of U.S.-based industry. We recommend this combination of policies rather than the costlier and riskier proposition of reshoring the industry from the ground up. The United States may not return to its 40% semiconductor manufacturing market share from the 1990s, but these policies would nonetheless help boost domestic production from 10-12% of the global market and increase supply-chain resilience while minimizing potential efficiency losses from over-reliance on local manufacturing.

Semiconductors and supply chains

The rampant offshoring of chip manufacturing from the U.S. to places such as South Korea, Taiwan, and China made good economic sense for companies in pre-pandemic times. East Asia has cultivated a comparative advantage in semiconductor production by virtue of access to cheap inputs and labor. Turning back the tide, conversely, appears to be considerably more costly. Full-scale self-sufficiency by region, according to a Boston Consulting Group report, would require “$1 trillion in incremental upfront investment, resulting in a 35% to 65% overall increase in semiconductor prices and ultimately higher costs of electronic devices for end users.”

Perhaps more importantly, restoring American chip manufacturing capabilities requires much more than the erection of domestic factories. The production of semiconductor chips involves an intricate set of steps from design to front-end fabrication to back-end assembly, testing, and packaging. Such steps are carried out by different firms and countries that have developed comparative advantages in divergent pieces of the supply chain, such that no country has complete end-to-end control of chip manufacturing. Indeed, as Brookings nonresident senior fellow Chris Thomas notes, this hyper-specialization and complexity “makes semiconductors a winner-take-all industry” such that “the top one or two players in any given niche […] earn all the economic profits in that niche due to scale, learning efficiencies, and high switching costs to customers.”

U.S. companies are among the most important designers of microchips in the world, but the supply chain that supports their physical manufacturing is located thousands of miles away in East Asia. Seven of the top 10 (by revenue) fabless semiconductor design firms—those that design and market the hardware but outsource the manufacturing of silicon wafers to a foundry—are American companies, according to a Congressional Research Service report. But the fabrication facilities (foundries) that make the chips designed by firms like Nvidia and AMD are controlled by Taiwanese and South Korean companies. Other parts of the chain are also equally difficult to reproduce: The most important equipment suppliers are a Dutch and a Japanese firm—ASML and Tokyo Electronics. Back-end production, which is labor-intensive, is concentrated in Malaysia, Vietnam, and the Philippines. For large-scale reshoring initiatives, there’s simply a lot to reshore.

The specialization of the semiconductor supply chain means that efforts to reshore the industry will require more than just the construction of foundries in the United States. These factories will be unable to meet their production and cost targets without reliable access to inputs. Decades of competition among East Asian technology hubs have honed regional supply chains to cheaply and reliably deliver components and materials for semiconductor manufacturing. In the short term, access to critical supplies is likely to remain strained. Russia and Ukraine both provide key inputs for semiconductor manufacturing, such as nickel, palladium, and neon—and the Russian invasion of Ukraine is likely to throw yet another wrench in the global supply chain for chips. The semiconductor industry has sought to increase production, but according to U.S. government data, significant gaps between supply and demand remain. While congressional initiatives to restructure semiconductor supply chains may be aimed at longer-term resilience, the current state of the industry illustrates the complex logistical challenges facing any reshoring initiatives.

Addressing the broader nature of the supply-chain challenge is among the issues facing congressional negotiators trying to reconcile House and Senate bills aimed at boosting U.S. semiconductor manufacturing. The Senate version—the USICA—takes a relatively narrow view of the industries eligible for support, limiting it to microchip manufacturers. The House version—the America COMPETES Act—applies a wider lens and also provides funding for companies supplying equipment and materials used in manufacturing chips. However, the House bill also cuts about $200 billion for regional technology hubs promised in the Senate bill. Invariably, these bills are based on the assumption that the money will be remunerative and assuredly beneficial in propping up domestic industry.

A new era of industrial policy?

As the Senate and House negotiate to work out a compromise between the two pieces of legislation, there is reason to be skeptical about the wisdom of a policy that would reshore the semiconductor manufacturing base. Semiconductor manufacturing facilities will take several years to build. Intel broke ground on two chip factories in Arizona last September, a $20 billion expansion, but the foundry will not be fully operational until 2024. Even once fabrication plants are constructed, it is unclear whether they will be profitable without government assistance. While semiconductor supply chains remain strained, fewer COVID-19-related disruptions and the industry’s efforts to expand capacity may ease shortages in the medium term. The legislation, then, may be a long-term solution to a short-term problem.

The new facilities may bolster the manufacturing base, but companies are facing both blue- and white-collar labor shortages that are likely to be difficult to resolve because of unfavorable demographic, educational, and economic trends in the economy. The Intel plant’s promise of 7,000 construction jobs and another 3,000 permanent jobs therefore faces potential labor challenges. They may be resolved with higher wages, but this raises a different issue: Estimates suggest that the silicon wafers that TSMC is making in Arizona will be more expensive than those made in Taiwan, costs that will be passed along to consumers at a time when consumers are already paying more as a result of high inflation.

Government intervention to prop up the U.S. semiconductor industry and improve its competitiveness would be reminiscent of 20th century efforts to create “national champions” by offering subsidies to firms in domestically popular industries. Politicians have long campaigned successfully on reviving strategic industries, like steel and coal, in which the United States is comparatively disadvantaged, despite the fact that there is no consensus that industrial policy is efficacious. As Daniel Yergin and Joseph Stanislaw document in their book Commanding Heights, the adoption of industrial policies to support domestic industries tends to require a perpetual stream of government assistance to maintain a comparative advantage. A better way to improve the availability of semiconductors and improve the resiliency of the chip supply chain would be to embrace foreign expertise and talent rather than expensive unilateralism.

A third way: partnerships and talent promotion

Even if the United States can reshore some of its domestic manufacturing capacity, the gains will come at considerable cost. Supply-chain resilience should not rely on costly, long-term policies. The United States should be mindful that reshoring risks increasing costs for consumers and consider that countries such as Taiwan and South Korea have developed expertise and efficiency in semiconductor manufacturing and happen to be close American security partners. Foreign direct investment (FDI) in these countries, for example, might allow for a more assured supply of chips. Promoting the expansion of a cheaper foundry abroad, thus, might be far more economical than constructing an expensive one at home.

Furthermore, the United States should welcome foreign firms building manufacturing capacity in the United States, like TSMC’s $12 billion investment in Arizona and Samsung’s $17 billion investment in Texas. Despite these firms not being American, the investments in the manufacturing base are decidedly American, as are the supply-chain advantages brought by insulation from the geopolitical dynamics in Asia.

The United States has long excelled because of its human capital. Yet just as new plants are being built that will require high-tech labor, the United States faces engineering and manufacturing talent shortages. The semiconductor industry can promote STEM skills in universities, but the impacts of those investments will be felt in the medium- to long-term. The government can promote immigration policies that raise the ceiling for high-skilled labor to increase the competitiveness of the U.S.-based semiconductor industry.

In other words, the United States can try to have it both ways—hedging against geopolitical risk in Asia by welcoming investments in American manufacturing and promoting inward migration while also bolstering relations with allies and leading chip producers like South Korea and Taiwan. Doing so mitigates potential security risks without large sacrifices in economic efficiency. Indeed, the logic of comparative advantage that led semiconductor manufacturing to be offshored in the first place still applies today. Promoting “national champions” in an effort to reshore the entire supply chain would only drive up consumer costs at a time when inflation has become a political, economic, and ultimately a national-security liability.

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The Treasury Option: How the US Can Achieve the Financial Inclusion Benefits of a CBDC Now

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As public debate heats up over whether the United States should create a central bank digital currency (CBDC), there is another option that deserves consideration:  Treasury Accounts.  The Treasury Department could, relatively quickly, create digital accounts to provide payment services that would be especially valuable to unbanked and underbanked individuals.  These accounts might not possess all the technological advances of a full-blown CBDC, but they would be much easier to establish and could be implemented now under existing statutory authority.  Importantly, Treasury Accounts could immediately improve access to financial services for the millions of Americans who have limited access to banking services today and also greatly facilitate the distribution of federal benefit programs to all Americans.  Treasury Accounts are not an alternative to CBDCs but rather a faster, easier way to achieve some of the primary objectives of those who favor creating a CBDC.  The creation of Treasury Accounts would represent a concrete step forward in the Treasury Department’s efforts “to unlock the unrealized potential of underserved communities,” an initiative the Department announced in connection with Secretary Yellen’s appointment of the Department’s first counselor for racial equity last Fall.

Many believe a CBDC can be a means to expand financial inclusion.  One prominent proposal known as Fed Accounts—which has attracted support from progressive members of Congress–would create a system of retail accounts at the Federal Reserve that would provide all Americans with the opportunity to have a bank account at no cost.  These accounts could also be used to distribute federal benefits on an expedited basis.  But many believe that direct Federal Reserve accounts for individuals would be an inappropriate expansion of the Federal Reserve’s role, and that in any event the Federal Reserve would not be well equipped to reach the kinds of retail customers that do not have traditional bank accounts.  Moreover, the creation of a CBDC in the United States faces many challenges, both technical and political.  There is substantial debate not only as to how such an instrument should be designed, but whether it is even needed.  Almost certainly it will take a number of years before a consensus emerges on the proper path forward.

The financial inclusion need remains significant and urgent, however.  According to the FDIC, 5.4% of American households are unbanked and roughly three times as many more underbanked—the latter term meaning those who have a bank account but use expensive nonbank services like check cashing, money orders, payday lenders and international remittance services.  The unbanked as a percentage of the population is greater in the United States than in all other G7 countries and far more concentrated among those at the lower end of the income distribution.  Despite considerable efforts from consumer advocates over decades, neither regulatory authorities nor private initiatives have succeeded in providing universal access to financial services.

The Treasury Department, in our view, is a much more logical place for the federal government to experiment with improving access to financial services.  It has decades of experience as well as the legal authority to create a program of Treasury Accounts that could reach the underserved.  During the Pandemic, it was the Treasury Department along with the Internal Revenue Service, which is a bureau within the Department, that was charged with distributing emergency payments and later advanced Child Tax Credits to millions of households, including many without traditional bank accounts.   While the process was bumpy at times, the Department’s overall performance in distributing almost $1 trillion in Pandemic benefits in over half a billion separate payments was impressive.  The Treasury has also devised multiple programs over the years designed to reach the underserved.  This includes programs to distribute federal benefits which in some cases incorporated payment services.  The Treasury created the Direct Express program which enables unbanked individuals to receive federal benefits on a privately-managed pre-paid card.  It also developed the digital Treasury Direct interface that allows individuals to invest directly in government securities, and it has experimented with the creation of a new class of digital savings bonds designed to encourage retirement savings.

Our proposal for Treasury Accounts would provide low cost, no-frills payment services and encourage the accumulation of emergency savings reserves.  The breadth of the eligibility criteria would need to be determined, but they would be designed to meet the needs of low-income individuals and particularly the unbanked and underbanked, leveraging the experiences that the Department has gained working with fintech firms and non-profit groups during the Pandemic. For example, Treasury Accounts could provide:

  • basic services and fees incorporating recent Fintech approaches built on streamlined mobile banking interfaces and  checkless payments as well as no overdraft or non-sufficient funds fees and very low or no balance requirements and monthly maintenance fees.
  • faster clearing of deposited checks compared to private market offerings, a critical need for people who live paycheck to paycheck.  The Treasury could provide for immediate clearing of government checks and facilitate direct deposit from participating employers.
  • more efficient know-your-customer screening, which often prevents or discourages unbanked persons from obtaining private accounts.  The account opening screening could be considered largely or entirely satisfied by the fact that someone has already established eligibility for and is receiving government benefits; and
  • a maximum balance to minimize disintermediation risk, with provisions for rolling over accounts that reach such limitations into private accounts.

The program could be implemented using Treasury’s financial agent authority to partner with commercial institutions, the cost of which is covered under a permanent, indefinite appropriation enacted in 2004.  The financial agents would provide all customer-facing functions.  These agents could include fintech firms that could provide innovative forms of outreach, including through mobile applications, as well as minority-owned and other firms that have experience reaching  underserved populations.  We describe two possible legal structures for creating Treasury Accounts that would not require new legislation, one building on the existing Direct Express program, and the other utilizing Treasury’s savings bond authority.  We conclude by discussing how Treasury Accounts compare to a CBDC as a vehicle to promote financial access, and how they could generate useful information and insights that might later be incorporated into any CBDC that the nation eventually decides to adopt.

american flag and manufacturing industry
Archives, Global Trade Daily, News

US Regions Must Collaborate on Planning to Maximize New Federal Funds

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Thanks to historic commitments by Congress and resilient local economies, the next five years have the potential to be a grand era of reinvestment in metropolitan America. The American Rescue Plan Act (ARP) and Infrastructure Investment and Jobs Act (IIJA) have committed billions of dollars for communities to modernize their infrastructure networks, ranging from older water systems to cutting-edge broadband. Meanwhile, the House and Senate are set to make big bets on innovation-focused growth centers and targeted industries. State and local budgets also performed better than expected through 2020 and 2021, leaving additional fiscal resources available for economic and community development

Periods of intense investment like this don’t come around often. Communities and the country need projects and policies that deliver transformative, long-term value. That’s where planning comes into the picture.

Most metro areas already have established economic and workforce strategies, transportation plans, and comprehensive housing and land use plans to prioritize what industries to invest in, where to develop real estate, and what infrastructure is needed to connect them. But if metro areas can coordinate those long-range plans around common goals, the chances of delivering lasting value go up. If not, expensive projects could fail to maximize outcomes—or worse, end up working against one another. Either way, a generational opportunity would be wasted.

Unfortunately, there are few existing mechanisms or incentives to encourage this sort of coordination. Even though the federal government formally promotes regional economic strategy-building, there is no requirement that different plans talk to each other. Coordination also isn’t required between state and metropolitan plans, or between plans developed by neighboring jurisdictions within the same metro area. The situation gets considerably more complicated in the country’s largest metro areas, which are home to the most jurisdictions, the most diverse industries, and the widest array of investment alternatives.

The federal government helped start this next great wave of metropolitan capital investment, so it should ensure that investment will be used to the best effect. We recommend Congress establish a new planning coordination program within the Economic Development Administration (EDA), which would support local governments and business organizations in metropolitan areas of at least 1 million people to formally integrate objectives and priority projects across multiple long-range plans. For a relative pittance compared to the costs of capital projects, the federal government can incentivize metropolitan partners to develop the coordination template America needs to make good on its investment ambitions.

The bones of America’s planning paradigm are strong. Cities, counties, and special-purpose governments like utilities use tools such as zoning codes and capital budgets to decide where public dollars are spent and attempt to influence where private investments occur. Metropolitan planning organizations and councils of government convene local governments to plan regional investments, particularly inter-jurisdictional transportation like highways and transit lines. The private and civic sectors play a role too, often working with local governments to design long-range economic development strategies, including how to deliver more inclusive career pathways, what big bets to make on innovative industries, or drafting master plans for specific districts.

The federal government is also an established partner in many planning exercises. Since 1991, federal surface transportation law mandates that metro areas designate a regional government to lead transportation planning and, at least every five years, develop a long-range transportation plan. Laws administered by the Department of Housing and Urban Development (HUD) mandate the creation of three- to five-year consolidated plans to qualify for agency grants. The Department of Commerce and the EDA use the certification of a Comprehensive Economic Development Strategy (CEDS) or equivalent plan every five years to qualify for a range of EDA grants. The Department of Labor funds workforce development boards to define and act on regional workforce priorities. And these are just a sampling of federal planning requirements.

soiled planning processes impact the built enviroment
soiled planning processes impact the built environment

Yet for all the planning taking place, there is often little coordination among these various processes, and the result is formal plans that often directly contradict one another. In some cases, those contradictions may occur between the local and regional levels. This is the case when a regional entity like the Association of Bay Area Governments in metropolitan San Francisco wants to build more housing, but locality after locality limits housing construction. In other instances, the conflict may be within different planning documents written by the same local government or regional entity; for example, most large American cities have been unable to match their land use and development practices to their climate goals. Even timing can be a conflict: A metro area’s major planning cycles can fall on different years, with different offices and staff leading them, making coordination all the more difficult.

This is a missed opportunity. With so much complementarity between infrastructure, real estate, and economic and workforce development, making sure formal plans talk to one another can increase the odds that metropolitan development leads to agreed-upon outcomes—advancing particular industry sectors, for example, or enhancing local commercial corridors. That means ensuring that policies and strategies identified in these plans—focused on businesses, transit, land use, education, marketing, parks and public space, etc.—are aligned toward these specific ends.

Now is an ideal time to support this kind of coordination with federal incentives. The federal government knows this is a good idea—it’s why HUD, the EDA, the Environmental Protection Agency, and the Department of Transportation all run offices and programs to promote the concept. Even the Government Accountability Office has affirmed the need, particularly within economic development. The federal government also has the regulatory power to compel regional and local actors to work together across different disciplines. What regions require is the resources and staff time to help them do it—and the mandate to make it multiple people’s job. Now, with EDA reauthorization conversations starting in Congress, there is a legislative vehicle to address the need.

The new EDA planning coordination program we propose would provide grants to support staffing resources within those entities responsible for regional planning. Since CEDS already includes industrial and infrastructure goals, CEDS authors within a given metro area could be the primary recipient(s) and make sub-awards to transportation, housing, workforce, and other regional planning entities. The grants would cover staff time to regularly convene regional actors, coordinate with the public (including a steering committee), and revise formal plans. The core output of the program would be evidence of those revisions, including adjustments to overarching goals, capital projects, and other policies.

Ideally, Congress would help the EDA improve its staffing to support these new regional activities. Staff in the EDA’s regional offices are vital conduits for explaining how federal programs work, sharing best and failed practices from across the country and communicating needs back to EDA headquarters. Likewise, the EDA’s Washington, D.C. office should receive more staffing to consolidate all the lessons and experiences into a common knowledge hub for nonparticipating regions, smaller places, or peers across the economic development and research communities.

Some metropolitan leaders are already experimenting with new ways to merge regional planning and major investments. In Kansas City, the bistate KC Rising initiative between Missouri and Kansas brings together the business, government, and civic communities to align their efforts around seven common pillars. And the multisectoral board of the Greater Portland Economic Development District in the Pacific Northwest used their CEDS process to formally adopt a new set of integrated values and principles. These are the kinds of emerging models that a new EDA program can support—and that the EDA should seek, collect, and share with other regions to inform their planning work.

Congress should finish the job it started when it approved historic levels of investment in metropolitan America by supporting a coordination program like the one recommended here. Planning is far cheaper than capital projects or tax incentives—and it is money well spent if it ensures physical investments lead to better projects with better outcomes that advance regional prosperity, resiliency, and opportunity.

US metro areas have more shipments of export cargo and import cargo in international trade.
Archives, Commentary, Global Trade Daily, Imports/Exports, International Trade

Exports Increased in Most of Metro America In 2017

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Even as the largest economy in the world, the United States must continue to export goods and services to take advantage of the fact that 85 percent of economic growth will occur abroad over the next five years.

Local economies—whether large metropolitan areas, smaller cities and towns, or rural areas—also depend on exports to support growth and well-paying jobs. Since 2010, the Brookings Export Monitor has estimated goods and services exports as part of a Global Cities Initiative, which seeks to strengthen the international competitiveness and connections of cities and metro areas. In this latest installment, we examine recent exporting trends across the country as well as take a deeper dive into the connection between politics and national trade policy; in particular, we analyze how local economies are implicated in the recent round of Chinese tariffs on US exports.

Exports grow in 2017, especially in energy metro areas

In 2017, the US economy exported nearly $2 trillion in goods and services, which accounted for 10.3 percent of GDP and supported 12.7 million total jobs or 8.4 percent of US employment. Exports increased by 2.3 percent from 2016 to 2017, slightly below overall GDP growth of 2.4 percent. The country’s 2017 export intensity has still not surpassed its peak of 11.8 percent of GDP in 2011 but is higher than it was in 2003 (7.9 percent).

Most exporting occurs in the nation’s metropolitan areas. Of the 12.7 million export-related jobs, 11 million concentrate in metro areas. And, like the nation, exports grew in the nation’s metro areas, although export intensity remains below its 2013 peak of 11.5 percent at 10.0 percent. Three-quarters of the nation’s 381 metro areas experienced positive export growth in 2017, including 77 of the nation’s 100 largest metropolitan areas.

Energy-intensive metropolitan areas expanded exports in 2017 at the fastest rate, including New Orleans (12.5 percent annual export growth), Houston (9.6 percent), and Baton Rouge (6.2 percent). Each of those metro areas are among the most export-intensive in the nation.

By contrast, metro areas that specialize in aircraft, travel and tourism, and pharmaceuticals exports showed much slower growth. The steepest annual export declines occurred in Toledo (-4.1 percent), Wichita (-4.1 percent), Seattle (-3.5 percent), and Honolulu (-3.8 percent).

Overall, notwithstanding the bounce-back year for manufacturing exports and the energy export surge, the trade profiles of the nation’s 100 largest metropolitan areas continue to evolve toward services. From 2003 to 2017, the services share of exports in these markets increased from 38 to 47 percent. Meanwhile, manufacturing accounts for 55 percent of national exports overall, but over the longer term manufacturing exports have not been expanding at the same rate as sectors like finance, technology, tourism, and education and medical services.

Politics and trade, inextricably linked

These industrial transitions are central to understand the trade policy dynamics at play under the Trump administration.

The industrial structure of communities aligns with voting patterns in the most recent presidential elections. Republican voters, in general, are much more likely to live in counties that specialize in commodities and manufacturing, while Obama and Clinton voters are much more likely to live in counties specializing in services.

President Trump put trade front and center of his campaign agenda, drawing support from voters whose local communities most intensely bore the brunt of trade-related job losses.

Trump swing counties—meaning those counties that voted for President Obama in 2008 and 2012, and then flipped to President Trump in 2016—have a 44 and 28 percent higher industrial concentration in agriculture and manufacturing, respectively, than the nation as a whole. These sectors were more exposed to trade competition than advanced services such as finance, tech, and education and medical services. Moreover, Trump swing counties happen to host industries most severely harmed by the last 40 years of unfavorable exchange rates for exporters and offshoring (issues that he directly acknowledged during his campaign).

Our conclusion is not that the economic and industrial circumstances in their communities was the only, or even the primary, reason voters supported President Trump. However, the patterns above provide some striking relationships between voter behavior and the industrial makeup of their surrounding counties. And it is not illogical to conclude that campaign promises to negotiate better trade deals likely resonated with these voters given the industries that drive job growth (or job decline) in their communities.

US-China trade war: Which communities are on the front lines?

Which brings us to the present moment. Campaign promises around trade have evolved into specific proposals to introduce higher tariffs on select products from major trading partners, most prominently China.

China has responded by threatening import tariffs on 234 products. Recently, our colleagues examined where the industries that produce those commodities concentrate, noting that there were about 2 million jobs in those industries nationwide. But not all those jobs are tied to trade nor are they tied to trade with China.

To extend that analysis, we converted the 234 products to four-digit NAICS industry definitions and examined the share of overall US exports in tariff-affected commodities among each four-digit industry going to China. For instance, aircraft were included in China’s tariff list, so we estimated the share of total US aircraft exports that go to China using national trade data. We then assigned that national ratio to each US county.

Based on this method, we estimate that there are about 150,000 direct export jobs that are affected by the Chinese tariffs. But those jobs support an additional 150,000 jobs, which means that there are a little under 300,000 jobs that are directly implicated by the Chinese tariffs. The difference between this estimate and the 2 million estimate from our colleagues is that our analysis attempts to isolate those jobs that are dependent on exports to China in those industries.

Metropolitan areas that specialize in agriculture, aerospace, and automotive manufacturing are most exposed to the Chinese tariffs. The metro areas with the largest share of tariff-affected export jobs are Wichita, Kan. (8.6 percent of export-supported employment, 2,900 jobs), Bakersfield, Calif. (7.7 percent, 1,800 jobs), Jackson, Miss. (7.2 percent, 1,000 jobs), and Stockton, Calif. (6.6 percent, 1,000 jobs). Seattle has, by far, the highest total number of jobs at risk, with just over 16,000.

The metro areas listed above represent a cross-section politically—from redder parts of the South and Midwest to bluer districts in metro areas in California and Washington. While a diversity of places will be implicated, counties that voted for President Trump are more exposed to the Chinese tariffs, as measured by the share of exports in tariff-affected industries (3.9 percent) and the direct and indirect jobs those exports support (187,600). Comparatively, in counties that voted for Clinton, 1.7 percent of exports are in tariff-affected industries, which support 104,000 direct and indirect jobs. Moreover, Trump counties will bear the brunt of the tariff costs accounting for 60 percent of the export value at risk, 68 percent of direct export supported jobs at risk, and 64 percent of total export supported jobs at risk.

This analysis of metro-level exports comes at a time of great trade policy uncertainty. Currently, the relatively short product list means that the impact of the US-China imbroglio is not yet widespread enough to inflict significant economic damage. Yet, our analysis suggests that the result of the Trump administration’s tariffs on China are countervailing measures by the Chinese that would disproportionately target the export base of communities that elected the president. While not yet a full-fledged trade war, the rumblings between the world’s two largest economies is yet another signal of a new era in US trade policy, one that local and state leaders ought to be watching closely.

This Brookings report originally appeared here.