What’s fashionable in policymaking

By Bernard Keane

Monday April 26, 2021

(Image: Adobe/magele-picture)

In the battle of industry policy versus competition policy, the latter is most definitely on the back foot — whether rebooted or not, writes Bernard Keane.

With the world into its second year of pandemic and a long road ahead on the vaccination front, industry policy is back in fashion in economic policymaking.

“Onshoring” is the new buzzword. Politicians proudly speak of “sovereign capability”. Global supply chains are now vulnerabilities, not strengths, weak links as susceptible to a virus as any human. Worsening tensions with China, hitherto the workshop of the world but now an aggressive regional hegemon to be countered at every turn, has fuelled the shift. Manufacturing is having billions lavished on it, with vaccine manufacturing now likely to join defence manufacturing as a politically crucial “sovereign capability” that will enjoy taxpayer largesse. Onshore production of even basic medical equipment is a sought-after goal of industry policy, no matter the cost.

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There are few government bodies in Australia prepared to criticise this headlong rush back to the 1980s. The Productivity Commission is one. Its recent interim report on vulnerable supply chains draft pointed out that few products widely consumed in Australia were actually vulnerable to disruption and, with an edge of faint mockery, noted that they included Christmas decorations and champagne. Government policies to establish domestic capacity “could outweigh many times the cost of other strategies,” the PC suggests.

In Europe, such debates have been played out on a far bigger scale, with the forces for and against interventionism far more powerful. And watching how European policymakers have responded to the pandemic might provide some interesting lessons for those in the contest over industry policy here.

The pushback against China, for example, has led to a remarkable clash between the most powerful European Union countries and the European Union’s competition arm. In 2017, French transport giant Alstom announced plans to merge with a key division of German tech colossus Siemens, creating what they labelled a “European Champion in Mobility”. The merger was strongly backed by Emmanuel Macron and Angela Merkel, who saw the merged entity as the kind of European champion that could take the fight for manufacturing supremacy up to China — not to mention the then-United States of Trump.

The merger — with the resulting entity to be headquartered in Paris — and the thinking behind it would not have been out of place in the post-war France of dirigisme and Gaullist state-controlled industries, but the European Union was having none of it. While other competition regulators around world, including the ACCC here, worked through the competition implications, the European Commission came out in February 2019 and axed the merger, declaring it “would have harmed competition in markets for railway signalling systems and very high-speed trains”.

This did not go down well. French and German politicians had already been attacking the EC before the decision and the criticism ramped up afterward; the fact that the EC had waved through General Electric’s purchase of Alstom’s power division a couple of years earlier probably didn’t help. France’s Finance minister said the veto would “serve the economic and industrial interests of China”. Merkel immediately demanded an overhaul of EU competition law, complaining that it prevented the emergence of “global players”.

According to the narrative pushed by European politicians, the EC was a naive, glibly neoliberal institution with too much faith in the power of markets and an insufficient understanding of the realities of global capitalism, in which major competitors like the Chinese government controlled — officially or unofficially — major corporations that sought to dominate western markets.

In response, the French and German governments promptly issued a joint manifesto for a European industrial policy fit for the 21st Century in which they warned “the choice is simple when it comes to industrial policy: unite our forces or allow our industrial base and capacity to gradually disappear.

“Competition rules are essential but existing rules need to be revised to be able to adequately take into account industrial policy considerations in order to enable European companies to successfully compete on the world stage. Today, amongst the top 40 biggest companies in the world, only five are European.”

Arguments for national or — in this case — continental champions are a staple of protectionist rhetoric, and the interaction between national champion arguments and competition law has been much studied. But the public pressure exerted by the EU’s two most dominant states that forced a change in the EC’s position — and the arrival of the pandemic.

In March last year, the EC released a new paper called A New Industrial Strategy For Europe in which it noted “we must resist the simplistic temptations that come with protectionism or market distortions, while not being naïve in the face of unfair competition.” While claiming the EU’s competition policy had served Europe well, the commission agreed now was the time to review it. “This is looking at how current competition rules are applied, notably in relation to anti-trust remedies, and whether rules governing horizontal and vertical agreements and the market definition notice are still fit for purpose.”

The Commission also said it would take a more aggressive stance on unfair competition, particularly in relation to subsidies and lack of reciprocal access (subsidies also include the implicit subsidy in the lack of climate policies, such as those enjoyed by Australian exporters).

In December, much-demonised competition executive vice president Margrethe Vestager — who incurred widespread criticism over the Siemens-Alstom decision — said in a speech that EU competition law would not be “reset”, but would be “rebooted”. “When they reboot old movies and TV shows,“ she explained somewhat superfluously, “they bring back the characters we know, but with the details refreshed and updated for a new era. And that’s pretty much what competition policy needs.” She singled out both market definition and anti-trust guidance as areas for “reboot”.

By that time the EC had already demonstrated its changed attitude. In mid-year, the Commission signed off on Alstom’s acquisition of Bombardier Transportation, a division of the Canadian company that shifted its focus to Europe two decades ago and has until the merger been headquartered in Berlin.

In the battle of industry policy versus competition policy, the latter is most definitely on the back foot — whether rebooted or not.


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