Industrial Policy, Politics, and Local Supply Chains

Everyone is talking about tariffs and bracing for a trade war. The real story, however, is the sudden rise of industrial policy and what to do about it, not only having a backup plan for sourcing somewhere other than China.??

Chief supply chain officers will increasingly need to tap unfamiliar expertise in politics and policy to make smart, risk-adjusted choices about supply networks. It’s a tricky right-brain problem for engineering-oriented left-brain leaders, and it’s all about thinking locally.?

Trump’s Tariffs Are Just the Tip of the Iceberg?

Tariffs of 60% on everything imported from China to the US are absolutely a big deal. It would probably be inflationary for American consumers, depressing to growth in both the US and China, and very likely to trigger reprisals, including huge shifts in agricultural sales away from US farmers and in favor of Latin American producers.??

The underlying megatrend is a renewed confidence in the belief that governments can and should take a proactive role in helping select industries succeed. Industrial policy, an idea as old as the East India Company in pre-industrial England, includes government measures like tariffs, export controls, subsidies, tax breaks, R&D credits, and localization regulations. And it’s back with a vengeance.??

Discredited after failing spectacularly in the 1930s, this philosophy is back in favor, especially in response to the meteoric rise of China as factory to the world. Trump’s victory in the US election is a resounding endorsement of this old idea that economists generally hate but politicians love.??

The Customer Is No Longer King?

China’s admission to the World Trade Organization (WTO) in 2001 was the beginning of a free-trade explosion that was amazing for consumers. Low-cost labor and aggressive government support for business investment in China, plus Most Favored Nation trading status, gave US shoppers two decades of fast, good, and cheap products.??

It also created a trade deficit that peaked in 2018 at $418B. From the perspective of eighteenth-century economist David Ricardo, this deficit could be seen as a healthy result of his theory of comparative advantage. The idea is that different countries excel at different things, and free markets are the best way to sort out who should focus on what.?

That sounded fine for a while, but it gradually changed the definition of economic well-being in the eyes of Americans in communities where jobs had disappeared. Things were cheap and available on Amazon and at Walmart, but factories were closing, towns were dying, and for many people, China was to blame.?

Industrial Policy Isn’t Crazy?

Free market orthodoxy says that government intervention, including subsidies, protectionism, or any kind of favoritism for chosen companies or industries, is bad. Governments can be “captured” by businesses, which plunder the benefit of customers while feeding the greed of politicians and industrialists. Planned economies, according to free-market purists, simply don’t work.?

Yet examples like Airbus, whose situation looks a lot better than rival Boeing, or General Motors, which was saved by Barack Obama in 2009, are hard to ignore if policy goals include producer as well as consumer well-being. Europe’s open protectionism for agriculture, US subsidies for domestic semiconductor manufacturing in the CHIPS Act, and the entire economic plan of the Chinese Communist Party are all aggressive industrial policy platforms that have popular support. Something is clearly working.?

Learn to Play Politics with Supply Chain?

For supply chain leaders, this is a confusing and counterintuitive game to learn. As engineers and quantitative problem solvers, supply chain people want to frame network design and sourcing choices in terms of risk-adjusted cost-to-serve. Politics and policy are now essential vectors of risk and opportunity.?

Many organizations are starting to build teams capable of tackling this kind of analysis. Our research shows that over 50% of companies in sectors like pharmaceuticals and industrials are currently hiring for these skills.??

The key, however, is to focus on data at the right level of granularity, which often includes lobbying at the national or state level. But since most of the benefit from a new plant, distribution center, or operations technology hub goes to those living in the neighborhood, the game is often best played locally.??

As they say, all politics is local.?