The U.S. government is giving the Ford Motor Co. a $9.2 billion loan, by far the biggest infusion of taxpayer cash for a U.S. automaker since bailouts during the 2008 financial crisis, to build three battery factories in Kentucky and Tennessee. Neither Ford nor the Energy Department (DOE), which provides loans at far lower interest rates than those available in the private market, have revealed details about the loan.
The U.S. is taking a page from Beijing’s playbook. China has a top-down industrial policy, with serious government planning and support of target industries. China’s sustained industrial policy has yielded the world’s largest battery manufacturers. Between 2009 and 2021, the Chinese government poured more than $130 billion of subsidies into the EV market, according to a report last year by the Center for Strategic and International Studies. Today, more than 80 percent of lithium-ion battery cell manufacturing capacity is in China.
Simply put, industrial policy means that centralized agencies formulate national visions and programs to develop specific industries. It has been a toxic phrase in American politics.
As Gary Becker, who won the Nobel Prize for Economics in 1992, said, “The best industrial policy is none at all.” It has long been associated with pork barrel politics, picking winners, and crony capitalism. The political rhetoric has been that the free market works best and is closely associated with freedom and democracy. The history of the U.S. does not square with this perspective.
On the surface, Ford would seem an unlikely party to receive the largest loan ever extended by the Department’s Loans Programs Office. Just last month, Ford touted having almost $29 billion of cash on its balance sheet and more than $46 billion in total liquidity. It is worth nothing that one of the best known loans made by the DOE was $465 million to Tesla in 2010 to support manufacturing of the Model S.
Ford aims to close the gap with Tesla on electric vehicles, just as the U.S. aims to close a similar gap with China. Ford told investors early last year that it would put $50 billion into its EV manufacturing efforts. By the end of 2026, the company wants to make two million EVs a year.
Starting with Alexander Hamilton, the first Secretary of the Treasury, who outlined a strategy for promoting American manufacturing both to catch up with Britain and provide the material base for a powerful military. Hamilton’s “Report on the Subject of Manufacturers” promoted the use of subsidies and tariffs. Similar practices have been expressed in various forms throughout American history.
During the 19th and 20th centuries, the government played an active role in promoting economic growth, using policies such as high tariffs to protect strategic industries, federal land grants, and subsidies for infrastructure development. The federal government has sometimes backed failures, but it also has remarkable success stories, such as nuclear energy, computers, the Internet, and building the interstate highway system
These days, industrial policy is viewed more positively, spurred by bipartisan concerns about the competitive threat China poses. U.S. programs are now underway to cover semiconductor production, development of critical technologies, to secure key domestic supplies and support industries that are considered strategically important.
For example, subsidies from the Inflation Reduction Act and Infrastructure Investment and Jobs Act are spread across the EV value chain and are carpet bombing the entire automobile industry. There are tax credits for sourcing critical minerals within the U.S. or friendly countries, for manufacturing or assembling the batteries and EVs they go into, for the consumers who buy the vehicles, and even for anyone building the public chargers needed to keep those vehicles moving.
The debate over industrial policy will continue because it gets to the longstanding controversy over the role of the government in our economy. One thing is clear: the rosy rhetoric about the U.S. not engaging in industrial policy is contradicted by the country’s history.