The US-China Rivalry and the Green Revolution provides an Inflation Supercycle in prospects

Old ideas are like old clothes-wait long enough and they will come back into fashion. Thirty years ago, “industrial policy” was about as fashionable as a bowler hat. But now governments all over the world, from Washington to Beijing and New Delhi to London, are rediscovering the joy of subsidies and singing the praises of economic self-reliance and “strategic” investment.

The significance of this development in our opinion goes well beyond economics. The international embrace of free markets and globalization in the 1990s went hand in hand with declining geopolitical tension. The cold war was over, and governments were competing to attract investment rather than to dominate territory. Now the resurgence of geopolitical rivalry is driving the new fashion for state intervention in the economy. As trust declines between the US and China, so each has begun to see reliance on the other for any vital commodity-whether semiconductors or rare earth minerals-as a dangerous vulnerability. Domestic production and security of supply are in our opinion the new watchwords.

As the economic and industrial struggle intensifies, the US has banned the exports of key technologies to China and pushed to repatriate supply chains. It is also moving towards direct state funding of semiconductor manufacturing. For its part. China has adopted a “dual circulation” economy policy that emphasizes domestic demand and the achievement of “major breakthrough in the key technologies”. The government of Xi Jinping is also tightening state control over the tech sector.

The logic of an arms race is setting in, as each side justifies its moves towards protectionism as a response to actions by the other side. In Washington, the US-China Strategic Competition Act, currently wending its way through Congress, accuses China of pursuing “state-led mercantilist economic policies” and industrial espionage. The announcement in 2015 of Beijing’s “Made in China 2025” industrial strategy is after cited as a turning point. In Beijing, by contrast, it is argued that a fading America has turned against globalization in an effort to block China’s rise. President Xi has said the backlash against globalization in the west means China must become more self-reliant.

The new emphasis on industrial strategy is not confined to the US and China. In India, Narendra Modi’s government is promoting a policy of Atmanirbhar Bhorat (self-reliant India), which encourages domestic production of key commodities. The EU published a paper on industrial strategy last year, which is seen as part of a drive towards strategic autonomy and less reliance on the outside world. Ursula von dor Leyen, European Commission president, has called for Europe to have “mastery and ownership of key technologies”.

Covid-19 in our opinion has strengthened the fashion for industrial policy. The domestic production of vaccines is increasingly seen as a vital national interest. Even as they decoy “vaccine nationalism” elsewhere, many governments have moved to restrict exports and to build up domestic suppliers. The lessons about national resilience learnt from the pandemic may now be applied to other areas, from energy to food supplies. In the US, national security arguments for industrial policy are already meshing with the wider backlash against globalization and free trade. Joe Biden’s rhetoric is frankly protectionist. The president proclaimed to Congress: “All the investments in the American jobs plan will be guided by one principle: Buy American.”

China’s long boom on the other side of the globe, like so many industrial revolutions, relied on pulling people and things into the cities. That in our opinion contributed to the commodities “supercycle” of the 2000s. The entry of about a billion people into the global economy raised demand for iron, copper, and oil. Factories needed raw material as well as workers. While the country’s population probably fell last year commodity priced are still rising. Last month in Singapore iron are futures prices reached a record in dollar terms, increasing by 10 percent during the day’s trading. The metal, used in the production of steel, is not alone. Copper prices have similarly hit record highs. Aluminum prices have rallied, as has timber. The price of palladium, used in catalytic converters for cars, has risen. Even the prices of agricultural commodities such as crops, and livestock are higher.