Joe Biden’s ambitious plans to reindustrialize the American economy, a cornerstone of his administration’s economic policy, are facing significant hurdles. A recent Financial Times report reveals that around 40 percent of major manufacturing investments, subsidized by Biden’s signature Inflation Reduction Act (IRA) and Chips and Science Act, have been delayed or even halted indefinitely. These delays cast a shadow over the efficacy of the administration’s strategy to reinvigorate American hi-tech manufacturing, particularly in sectors like green technology and semiconductors. With approximately $84 billion of the $400 billion in tax credits, loans, and grants affected, the success of these legislative efforts is under intense scrutiny.
Biden’s reindustrialization agenda is not just about boosting the domestic economy; it is a direct response to the economic and technological challenges posed by China. The IRA and Chips Act aim to achieve multiple objectives: reanimate American hi-tech manufacturing to compete with China, strengthen supply chains through “friendshoring” with allied countries, and advance the decarbonization of the US economy. These goals are crucial as the US seeks to maintain its competitive edge in a rapidly evolving global landscape where China’s manufacturing prowess looms large.
China’s dominance in manufacturing is staggering, with its production output surpassing that of the next nine largest manufacturing nations combined. Manufacturing accounts for about 28 percent of China’s GDP, compared to only 11% in the US. This stark contrast highlights the fundamental differences in the economic models of the two superpowers. The US economy has long been characterized as “post-industrial,” with a heavy reliance on services and consumption, which constitutes nearly 70 percent of its GDP. In contrast, China has maintained its status as the “workshop of the world,” with a production-driven economy where personal consumption accounts for only about 40 percent of GDP.
The delays in manufacturing investments under Biden’s plans underscore the inherent difficulties in reindustrializing a service-oriented economy like that of the United States. The challenges are manifold: deficient qualification guidelines for subsidies, shortages of skilled workers, slack demand, and a lack of corporate confidence and commitment are all factors that have contributed to the sluggish progress of these initiatives. These issues are not unique to the current administration but are symptomatic of broader structural problems in the US economy.
One of the central challenges is the difficulty of reversing decades of deindustrialization. The US has long shifted away from manufacturing toward a service-based economy, a transition that has brought both benefits and drawbacks. While the service sector has driven growth and innovation, the decline in manufacturing has led to a loss of industrial capabilities, a hollowing out of the middle class, and increased economic inequality. Biden’s reindustrialization efforts seek to address these issues, but the task is formidable.
On the other side of the Pacific, China faces its own economic challenges. Despite its manufacturing might, the Chinese government under Xi Jinping has been struggling to transition from an investment-driven growth model to one that is more consumption-driven. This shift is seen as essential for sustaining long-term economic growth and improving living standards. However, the transition has proven to be difficult.
Critics argue that China’s economic policies under Xi are overly focused on production, a legacy of Marxist ideology that prioritizes manufacturing over services. This view is reinforced by Western narratives that suggest Xi has abandoned the pragmatism of his predecessors in favor of a more dogmatic approach. Nobel laureate Paul Krugman has described Beijing’s reluctance to boost consumer demand as “bizarrely unwilling,” highlighting the challenges China faces in rebalancing its economy.
However, this narrative may oversimplify the complexities of China’s economic policy. The latest reforms introduced at the Third Plenum of the Chinese Communist Party suggest a concerted effort to shift towards a more consumption-driven model. Liu Qiao, dean of Peking University’s Guanghua School of Management, has emphasized that the goal of these reforms is to transition from the old investment-driven model to one that prioritizes domestic demand and consumption. While these efforts are commendable, the structural challenges in the Chinese economy make this transition far from straightforward.
The economic challenges faced by the US and China are paradoxically intertwined. Both nations are trying to do what the other does best: the US is attempting to revive its manufacturing sector, while China is striving to boost consumption. However, these efforts are hindered by deeply ingrained economic structures and policies that are difficult to change.
For the US, the challenge lies in reversing decades of deindustrialization and building a manufacturing sector that can compete globally, particularly against China. This requires not only significant investments in infrastructure and technology but also addressing broader issues such as labor shortages, education, and corporate governance. The delays in Biden’s reindustrialization efforts reflect the complexity of this task.
For China, the challenge is to create a consumption-driven economy that can sustain long-term growth without relying excessively on manufacturing and investment. This requires significant reforms in areas such as income distribution, social security, and financial markets. The success of these reforms is crucial for China to avoid the so-called “middle-income trap” and to continue its economic ascent.
Amidst these challenges, there is an emerging consensus that the US and China may need to reconsider their current strategies of mutual antagonism. Instead of trying to outcompete each other in areas where they are traditionally strong, there is an economic rationale for reengagement and collaboration. Both countries face significant challenges in adjusting their economic models, and there is potential for mutual benefit through cooperation.
For instance, the US could benefit from China’s expertise in manufacturing, while China could learn from the US about boosting consumption and services. Such collaboration would not only help both economies but also contribute to global economic stability. However, achieving this requires a shift in the current geopolitical dynamics, which are marked by increasing tension and rivalry.
The economic challenges facing the US and China are a reflection of the broader shifts in the global economy. Biden’s reindustrialization efforts, while ambitious, are hampered by structural issues that have accumulated over decades. Similarly, China’s attempts to transition to a consumption-driven economy face significant hurdles. In this context, reengagement rather than confrontation may offer a more viable path forward for both nations. The success of these efforts will not only shape the future of the US and Chinese economies but also have far-reaching implications for the global economic order.
