We are all interventionists now. In the US, not long ago the bastion of free market thinking, fear of China, worries over the security of supply chains, aspirations for re-industrialisation and hopes of a green transformation are combining to reshape trade and industrial policies. The EU shares US worries over China, mostly in terms of the technological threat. But it is also concerned by the “America First” character of US policymaking, notably the $369bn Inflation Reduction Act. This growing belief in the ability of governments to reshape their economies for the better may have been inevitable, given economic disappointments and geopolitical tensions. But what does it imply?A big question is what these shifts towards economic nationalism and interventionism will do to the world economy. As things stand today, deep disintegration seems unlikely, though it is, alas, imaginable. It would also be very costly, as Geoeconomic Fragmentation and the Future of Multilateralism, a recent discussion note from the IMF, points out. Moreover, the deeper the disintegration the bigger such costs will be. Technological decoupling would be the most costly of all, especially for emerging and low-income countries. Beyond this are the inevitable geopolitical costs. As James Bacchus, former head of the World Trade Organization appellate body, has rightly noted, containing these costs in today’s world poses huge challenges.
A narrower question is how well the new interventionism will work in its own terms. Will the US federal government, which is the most active and potent player, obtain the results it wants from the policies it is now committed to employ? There are good reasons for doubt. Successful intervention is hard.
It is not that theoretical arguments for intervention are lacking. On the contrary, ever since Alexander Hamilton, arguments for infant industry protection (and other such interventions) have been well known. The core argument is that markets on their own will fail to exploit available opportunities. Harvard’s Ricardo Hausmann has recently restated these arguments. To such infant industry arguments we can add those for protecting economic, technological or military security.