Smart industrial policy is a good thing but oligopoly is not
Rana Foroohar
© Matt Kenyon
Corporate concentration has been growing in the US. According to the McKinsey Global Institute, profits and losses among both US and European companies are more concentrated than two decades ago. So why are calls for “national champions”— large companies protected and supported by the state — growing too?
European policymakers want to create Franco-German giants that could rival those in the US or China. The German government may use its stake in Commerzbank to orchestrate a merger with Deutsche Bank, creating a state-backed behemoth. In the US, Big Tech has promoted the idea that breaking up companies like Facebook or Google could mean losing the tech race with China. US government officials are urging the oil industry to support American foreign policy goals and threaten countries including Germany and the UK with losing US intelligence information if they do business with China’s Huawei.
The rise of China, with its model of state-supported capitalism, is the obvious trigger. Although Beijing is now playing down its Made in China 2025 campaign, which stoked economic nationalism in the US and Europe, the basic strategy of favouring local players hasn’t changed. The US-China trade war may further Balkanise markets, as Europeans and developing countries are forced to decide whose 5G networks, chips and digital technologies they want to use.
Some of this is justified, given the different national philosophies around data protection and what is called surveillance capitalism. But even before all the concerns about digital competition, state support for individual industries was growing. In the aftermath of the financial crisis, both the US and Europe bailed out banks and automakers.
Even after the crisis eased, there was a lasting sense that more government planning was necessary. From France to Japan, governments tried to deepen connections with business. In the US, President Barack Obama called for politicians to make “strategic decisions about strategic industries”, and built public support for manufacturing in particular. Donald Trump has also talked about supporting the Rust Belt, although his “opportunity zones” are highly political, and much of his focus has been on taking down China rather than rebuilding the US.
National growth strategies aren’t a bad thing — they can be positive for both individual nations and the global economy if they support those communities and industries hardest hit by globalisation. It is crucial that countries find ways to soften the backlash against laissez-faire capitalism if they want to protect liberal democracy. That will entail more co-operation between the state and the private sector in areas such as education and training; JPMorgan’s five-year, $350m education plan announced last week, which includes money to revamp vocational training at community colleges, is one example.
Smart industrial policy is of value. Oligopoly isn’t. Witness the Boeing safety scandal, which has highlighted warnings from Federal Aviation Administration employees that the company had too much control over safety approvals.
Likewise, the idea of Germany creating an even bigger “too big to fail” bank fills me with dread. Does no one remember that the German state-owned Landesbanks were some of the biggest contributors to the 2008 crisis?
It is easier to capitulate to populism by supporting national champions than it is to craft and pass smart national growth strategies. This is particularly true in the US, where big companies in technology, finance and healthcare, among others, collectively spend billions on lobbying and political donations to push their own causes.
That behaviour is one of the things driving a backlash against free market capitalism and globalisation that eventually hurts business. Public evidence that rich companies and individuals get preferential treatment in everything from college admissions to political access has fuelled much of the extremism that is polarising markets.
Creating state-run giants won’t fix that problem. French and German officials may want to create their own Big Tech players. But their plans run counter to the efforts of the EU competition commissioner, who is doing much more to curb Silicon Valley and create an even playing field than any cross-border European conglomerate ever could.
The US can keep Huawei out of American telecom networks, but unless the Trump administration can develop a coherent trade and development strategy at home, it will not really matter. A handful of tech giants are unlikely to create sustained growth on their own. A broad and diverse supply chain, including companies of all sizes, in high growth industries, could.
That may require more state intervention and there’s nothing illiberal about that. It wasn’t China, but rather America’s first Treasury Secretary Alexander Hamilton who came up with the first formal industrial policy in 1791. But governments should be encouraging investment in human capital, revamping education, rebuilding infrastructure and fostering economic diversity — not making big companies bigger.
National growth strategies are welcome. National champions are not.
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