Made in Holland: A case for economic nationalism & industrial policy (Part III)
By Sam Volkers
Why we need Economic Nationalism & Industrial Policy
As mentioned in the previous article, free trade and globalization are not without their problems. One would assume that governments would take action to deal with these problems, however this is not the case. Governments have given up a lot of their economic sovereignty to organizations such as the WTO and the EU, which has severely restricted their abilities to support industries and regulate imports and exports. The WTO is fiercely opposed to national governments giving preference to their domestic industries, and has its own courts to prosecute member-states who do use these measures. The EU has strict procurement laws that often prevent member-states from supporting local industries. These measures have severely restricted the possibilities for governments to help their citizens and protect their national economies, making them less powerful.
Multinationals on the other hand, have seen their power increase significantly. Besides posing a threat to the democratic political decision-making process of sovereign countries (e.g. by using ISDS-clauses), they have also enriched themselves by dodging taxes and offshoring activities to wherever labour is cheapest, and taxes are lowest. Because of this, states have seen their revenue streams shrink, which has made it increasingly difficult for national governments to fulfill their duties towards the public. The reason why multinationals keep getting away with this behavior, is that they have been encouraging a race to the bottom for years. They tell countries to lower their taxes, and if these countries do not want to comply, the multinationals threaten to go to other competing countries (Stiglitz 2019).
These developments have led to the degradation of the democratic decision-making power of individual nation-states. It has led citizens to feel left-behind, as they see their workplaces close and jobs moved overseas, while their governments are unable to do something about it. When comparing this with foreign competitors such as China, who do give support to local businesses, protect their domestic industries, and manipulate their currency, it is like we are fighting with one hand tied behind our backs.
This is why we need to take back control over our economies. We need to re-gain our economic sovereignty, rebuild vital industries, and make the economy work for the benefit of our families, communities, and nation again.
For this we need economic nationalism and industrial policy.
Why economic nationalism?
The Netherlands is a nation blessed with the benefits of good access to the open sea. Because of this, our country has always had a vested interest in international trade. Although international trade has benefitted our country, it has also had negative effects. It is important that the government — in co-operation with social partners and other interest groups — exerts more control over the economy and commerce, to deal with the downsides of free trade and globalization. Doing this will ensure that our country regains its economic sovereignty, which in turn will guarantee our national freedom.
To guide this new economic strategy, the government needs to adopt a new way of thinking about economics. This means a shift from a neoliberal model focused mostly on enhancing GDP-growth, to an economic nationalist model that puts security, national interests, and the people’s well-being on the same level of importance as economic growth.
We should learn from the Covid-19 crisis and become more self-sufficient — in particular when it comes to strategic sectors (e.g. medical equipment) — which can be achieved by fostering a more diverse internal market and the creation of strong local supply-chains to replace the global ones that have proven so unreliable during the pandemic. This economic strategy goes hand-in-hand with the already existing export-oriented economic strategy. It is a perfect middle-ground between free trade and autarky: it ensures that our country is secure during future crises (e.g. pandemics or political conflicts), while also maintaining our strong export sector and healthy trade relations with other countries. This way, the system will be able to maintain the people’s welfare both during normal times, as well during times of crisis and disruptions of global trade.
Besides creating a prosperous and secure economy for our citizens, this new economic strategy will also help strengthen our position in international affairs, because it takes geoeconomics into account during policy-making. Geoeconomics can be defined as (Ferguson et al. 2018):
“The use of economic instruments to promote and defend national interests, and to produce beneficial geopolitical results.”
This is an important part of economic policy-making and is more relevant than ever, now that the big geopolitical shifts that have been in motion for the last two decades have started to speed-up. American might has been on the decline, while China’s political and economic power is growing at an enormous pace. The country has been expanding its influence both in its surrounding region, as well as in the rest of the world. During the pandemic this has been taken to the next level, as China plays divide and conquer with its investments and vaccines (Ho et al. 2021). Add to this the ever-looming threat of terrorism, the Brexit and the declining relationship between Russia and the West, and you will see an increasingly unstable world. Unlike in the past, when Atlanticism (1) seemed the logical way to go, the European nations today cannot rely on the United States for protection, because the Americans are too busy with their own problems. It is now up to the Netherlands (and Europe in general) to find its own way in this time of great geopolitical change.
A vital part of this is a re-assessment of our thinking about international trade and economic interdependence. Although economic interdependence might help to increase economic efficiency it also makes countries strategically vulnerable. Economics might not be zero-sum, but power is. If you let competing countries produce important goods for you, they will both have a strategic influence over you, as well as grow at a faster pace then you. This will result in them becoming wealthier and more powerful than you are, and eventually supersede you. This is why economic policy should always keep national interests and geopolitics in account.
Some forms of economic nationalist policies that can be used for this are tariffs, import quotas, and restrictions on foreign ownership in strategic sectors. These policies are necessary to protect the new industries in the strategic sectors, as explained by the infant-industry argument (Kenton 2021):
“The infant-industry theory states that new industries in developing countries need protection against competitive pressures until they mature and develop economies of scale that can rival their competitors.”
This will give these industries time to develop until they can stand on their own feet and prevent them from being destroyed by established economic competitors.
Although this theory was made with developing countries in mind — something which the Netherlands is not in any way — times have changed. The Netherlands has lost its industrial edge and became dependent on other countries whose economic might would crush our infant-industries if not protected. Some might see this as an unfair interference in international trade, however, it will in the long run protect our economic sovereignty and thus our national freedom. Montesquieu explained this well in his 1748 work The Spirit of Laws (Montesquieu 1751: 230):
“The constraint of the merchant is not the constraint of commerce. It is in the freest countries that the merchant finds innumerable obstacles; and he is never less crossed by laws than in a country of slaves.”
The importance of industry
The re-industrialization of our country is the most important part of this new economic strategy, with manufacturing industries being particularly important, because they are key to our national security. This will in turn protect our freedom and strengthen our geopolitical power. As the famous 19th century German-American economist Friedrich List noted in his book The National System of Political Economy (List 1841: 27):
“From the period of the emancipation of the Italian cities by Otho the Great, they gave evidence of what history has testified alike in earlier and later times, namely, that freedom and industry are inseparable companions, even although not unfrequently the one has come into existence before the other. If commerce and industry are flourishing anywhere, one may be certain that there freedom is nigh at hand: if anywhere Freedom has unfolded her banner, it is as certain that sooner or later Industry will there establish herself; for nothing is more natural than that when man has acquired material or mental wealth he should strive to obtain guarantees for the transmission of his acquisitions to his successors, or that when he has acquired freedom, he should devote all his energies to improve his physical and intellectual condition.”
Besides their importance for our national security and independence, manufacturing industries are an engine of economic growth. As Hirschman pointed out in his economic theory (Yülek 2018: 126–127):
“Along the value chain, a firm (or a sector) receives raw or intermediate inputs from other firms (and sectors). Forward linkages refer to the firms (or sectors) receiving inputs from the firm (or sector) in question; backward linkages are firms/sectors that supply inputs to the firm.”
This means that the manufacturing industries create a spill-over effect into other sectors, which will grow as well. A factory needs places to buy its materials, and workers need stores and other places to spend their hard-earned money. This new growth also creates new jobs, as mentioned before, studies have shown that one job in advanced industry supports roughly two other jobs in the local economy (Morrison 2018). In the Netherlands, we can find some examples of this, with a big one being the economic cluster around the city of Eindhoven. Around Eindhoven, a strong industrial cluster has developed in the mechanical engineering and semiconductor sector (Scholtes 2020). If we could replicate this with other industries, we could revitalize our declining industrial regions. Although this growth might be hindered by our (relatively) small industrial labour force at first, in the (near) future this issue could be solved by utilizing automation, robotics and other forms of smart industry, which will allow us to produce more efficient, cheaper, and quicker than we do now (Doelman 2021).
Why industrial policy?
To carry out this economic nationalist policy and re-industrialization in a successful way, a coherent economic strategy is needed. If this is not the case, protectionist policies can have unforeseen consequences. A good example was the fate of two nearby factories in Michigan, which were both impacted by Trump’s import tariffs. While one of the two factories, an aluminium plant called Magnitude 7 Metals, benefitted from the measures, the other plant, a nail manufacturer called Mid Continent Steel and Wire, suffered over a 100 job losses (PBS 2018). If Trump’s protectionist policies had been guided by a coherent economic strategy, situations like these could have been prevented.
This is why an industrial policy is needed. With a coherent industrial policy, the state can help re-industrialize the country in an efficient and successful way. The state can help create balanced growth, which ensures that every region benefits from this re-industrialization, and that in case of imbalances (e.g. those seen in the aforementioned case of the two factories in Michigan), balance can be restored and the problems mitigated. The state can help balance the burdens that come with a process this complex, and bear some of them. It can also use its position to bring together the different interest groups that will be involved in this process and ensure cordial co-operation between these groups, such as between workers and industrialists.
(Re)industrialization is an expensive process however. No country in history has ever industrialized without government help or protection because the costs were simply too high for private firms to bear all by themselves (Morrison 2018). This is still a relevant problem today, because very often private firms and investors are not attracted to manufacturing industries, because of the high costs and few immediate short-term gains. Private firms and investors are not the only ones with money, however. The state has money too, and with an industrial policy, it can help private industry in the process of industrialization. It can even start up some of its own ventures. In most countries, the government already is the biggest consumer — and thus the biggest spender — on the market. In most developed countries, government spending accounts for 30% -57% of GDP (Chang 2019). The government spending a lot of money is nothing new then, it just is not done in a strategic way, something which could be solved with an industrial policy.
A new economic system
Now that we have looked at the “what” and “why” of economic nationalism and industrial policy, we can look at what this new economic nationalist system should look like.
Protective measures & investments
As in all systems of economic nationalism, the government should protect the local economy from foreign competition and help it grow with investments. The government will need to exert more control over the flow of goods, services, capital, and labour across our borders. It will need to regulate these flows — imports and exports in particular — to ensure that the costs and benefits are balanced and that the gains are used in the optimal way to serve the national economy.
The government should use protective measures such as import tariffs and import quotas to protect both new and established strategic economic sectors (e.g. important manufacturing industries, agriculture, fishing) from foreign competition. These protective policies should be combined with investments in local industries that either have strategic importance or show future growth potential. Dutch manufacturing industries have a lot of potential in the manufacturing of high-value technologies, such as satellite-communication (TechniShow 2020). These are the industries we should be investing in. Furthermore, the government also needs to invest in the infrastructure that supports these industries, as well as in R&D and education, to create the knowledge and skilled workforce needed for this economic program.
Re-shoring production & supply-chains
Besides investing in already existing domestic industries and “industries of the future”, the government should also bring back strategic industries that have been offshored to other countries. If we want to encourage re-shoring, it is important that there is enough demand for domestically produced goods, because no company will re-shore its production if there is no guarantee that there will be demand for its goods.
One way of ensuring this demand — and thus the confidence of investors and firms — is through government purchasing. The government should decide to implement a “Buy Dutch” policy for government purchasing, and demand that companies that are given government subsidies bring back — a significant part of — their production and supply-chains (Adler and Breznitz 2020). This “Buy Dutch” government purchasing policy should be combined with a “Buy Dutch” informational campaign to stimulate people to buy domestically produced products.
The government should also help create the right economic environment for firms that re-shore their production to the Netherlands. As mentioned before, the government should invest in education and training a workforce suited to work in these new sectors, but it should also invest more in R&D to generate the right expertise needed for this re-shoring process (SER 2021). The government can also provide financial incentives (e.g. tax incentives and subsidies) to companies that decide to re-shore production to make re-shoring more attractive. Once re-shored, the firms will be protected against foreign competition so that they can grow without being crushed by already established competitors.
Regaining control over our economy
Regaining our economic sovereignty is not just about re-shoring our production and supply-chains, but also about retaking control over our economy and minimizing foreign influences.
The government needs to better regulate foreign investments, especially if they come from countries that pose a possible threat to our national security. This includes better regulating — or preventing — foreign take-overs of Dutch firms. One way of doing this could be by allowing firms to have a 1 year-long retraction period in case of a foreign take-over, as argued for by former top-ranking official at ING and KPMG, Jan Hommen (Jessayan 2017).
The government also needs to ban foreign ownership of strategic infrastructure and industries. This should be combined with the (re)nationalization of public utilities and key-industries in strategic sectors (e.g. the railways or Tata Steel) and turn these enterprises into national champions. Another sector in which the government should take on a leadership role, is the financial and banking sector. We need a National Investment Bank that funds projects that will create economic growth and further national interests.
Trade reforms
Besides internal economic reforms, we also need to reconsider the way we look at international trade. We should take initiative again and find our own trading partners without interference of the EU or other countries. If we can make a trade deal that suits our national interests, we should get it done. And when a trade deal has been signed, its effects of should be closely monitored to ensure that any negative effects can be corrected.
The government can no longer make trade deals just on the basis of possible economic growth benefits. When deciding about new trade deals, national interests, security, human rights, quality standards, and the environment should always be considered. The government should also not sign any new trade deals that contain an ISDS-clause or any other form of private arbitrage, as this prevents the government from doing its duty as the protector of the public interests (Jongerius 2017) and will turn trade relations into a judicial swamp.
The Netherlands, as a member of the rich Western nations, should also lead the push for reforming our trade relations with the developing world and ending the predatory trade practices of Western nations and neoliberal institutions such as the IMF and the EU. There should be a shift from “free trade” to “fair trade”: trade should be about more than just economic growth, it should also be about the economic and social development of all partners involved in the deal. This will be in the interest of all those that are involved, because economic and social development will lead to political stability in the developing countries, which in turn well help to create a better and more stable world.
Planning & Co-operation
To carry out these policies, an industrial policy will be needed. For this, the government first needs to create an economic planning bureau (EPB). The EPB will be tasked with creating economic plans and managing the way they are carried out. It will set economic targets and national goals, and allocate funds, knowledge, and resources to help reach these goals.
These decisions however need to be made with consensus, to ensure widespread support. With the economic planning bureau, the government will bring together the different interest groups — e.g. labour unions, employer’s organizations, captains of industry and environmental groups — and involve them in the decision-making process. In this they will be assisted by economists, engineers, scientists, bureaucrats, civil servants and others with useful knowledge and ideas. They will help design policy that is suited to national interests and fit for the future (e.g. give advice on methods to make our economy greener). These groups will also advice the government on the pros and cons of new trade deals and offer (alternative) solutions to improve them.
After the plans are made, they will be carried out either by the affected sector’s self-regulating bedrijfschappen (2) and productschappen (3) — in co-operation with the government — or by the government itself. In this process, the state will manage the economy and ensure that there is a cordial relationship between the different interest groups — labour and management in particular — to ensure that everyone is working together for the betterment of the nation (as explained in my previous article).
Tax reform & (De)regulations
To pay for this plan, tax reform is needed. The government should give (temporary) tax cuts to local businesses that are part of the industrial program — with a special focus on helping small-medium (family) businesses (MKBs) — and get rid of the bureaucratic red tape in areas where it hinders growth. This will help these businesses grow and create new jobs, which will benefit the economy. Of course, the government should make arrangements with these businesses that receive the tax cuts, to ensure that the saved money is spend well. The government should also give financial benefits to firms that decide to keep their company in the Netherlands, while giving financial penalties to those that decide to offshore their production.
As mentioned before, these policies can only be successful if there is demand from consumers for “Made in Holland” products. To stimulate this demand, the government should combine the aforementioned “Buy Dutch” informational campaign, with tax cuts for working- and middle-class families. These tax cuts will boost consumer spending, which will create more economic growth and thus create new jobs. While these tax cuts may cause a drop in tax revenue, this can be balanced by increasing taxes for high income earners and multinationals. In the long-run, tax revenues will be higher than before, because the growth in production and consumer spending will create a lot of new tax revenue, which can then be used to boost the economy even further.
Conclusion
After four decades of neoliberalism, globalization and economic crises, it is clear we need change. We need a new system that works for our people and nation, and that respects the different historical, cultural, political, geographical, and economic situations in countries and adapts to it. A fair system that can both make our country strong again and create stability and prosperity in the world. We need economic nationalism and industrial policy.
Definitions:
1: Atlanticism: Advocation of or support for cooperation among western European and North American nations regarding political, economic, and defense issues. Definition found on: https://www.thefreedictionary.com/Atlanticism.
2: Bedrijfsschap: Organization in which employers and employees in a particular sector work together on the professionalization, regulation, safety, etc. in their sector. Definition found on: https://www.woorden.org/woord/bedrijfschap.
3: Productschap: Interest group in which companies in a certain sector work together on the professionalization, regulations, safety, etc. in their sector. Definition: https://www.woorden.org/woord/productschap.
