Treasury Secretary Scott Bessent on industrial policy: We have to be vigilant

Key Concepts Trade Negotiations, Industrial Policy, Non-Market Economy, Rare Earths, Processing and Refining, Price Floors, Forward Buying, Strategic Industries, Strategic Petroleum Reserve, Strategic Mineral Reserves, CapEx Boom, CFIUS (Committee for Foreign Investment in the US), Stock Buybacks.

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I. Current Status of US Trade Negotiations

The speaker provided an update on several ongoing trade negotiations and upcoming diplomatic engagements:

• Korea: Negotiations are nearing completion, with the "devil in the details" being ironed out.
• US-Canada: Relations are "back on track" following a productive meeting between the President and Prime Minister Carney.
• Mexico and India: Both teams are engaged, with India's negotiations expected to progress soon.
• Upcoming Asia Trip: The speaker plans to travel early to Asia to meet with their Chinese counterpart, Vice Premier Hui Fung, whom they hold in high regard. The President's itinerary includes visits to Japan and Korea for the APEC conference, where leaders are scheduled to meet. Additionally, conferences and visits are planned for ASEAN and Malaysia.

II. Evolution of US Industrial Policy: Strategic Stakes in Private Companies

The administration's industrial policy has shifted to include taking strategic stakes in private companies deemed vital for US interests.

• Rationale for Intervention: This approach is necessitated by facing "non-market economies like China," which require the US to exercise industrial policy to ensure self-sufficiency or sufficiency with allies. The speaker indicated that there have been five such instances, with more expected.
• Focus on Strategic Importance: The policy targets companies critical for US national security and economic resilience.

A. Case Study: Rare Earths

The rare earths sector serves as a primary example of the need for and application of this industrial policy.

• The Problem:
  • Dominance by China: While "rare earths are not rare," the critical aspect is their processing and refining, which China overwhelmingly dominates. China accounts for approximately 70% of rare earth mining and a staggering 95% of processing and refining.
  • Market Manipulation: For two decades, any market-based economy attempting to establish rare earth processing and refining capabilities was undermined by China, which "came in, cut price and put them out of business."
• The Solution: To counter this, the US plans to implement price floors and forward buying mechanisms. This strategy aims to stabilize the market and ensure that domestic or allied processors can operate without being undercut, and will be applied "across a range of industries."
• Historical Context: The speaker noted that the leading Chinese rare earth company was once owned by General Motors, which sold it in 1995. The CFIUS (Committee for Foreign Investment in the US), chaired by the speaker, mandated that it remain in the US for five years post-sale.

B. Other Strategic Industries and Concerns

• Defense Companies: The speaker expressed concern that US defense companies are "woefully behind in terms of deliveries." As the largest customer, the government may "prod them to do a little more research" and "do a little few stock buybacks," citing stock buybacks as a factor that "got Boeing into trouble."
• Pharmaceuticals: Pharmaceuticals were also identified as crucial for national security.

C. Government Exit Strategy and Private Sector Involvement

Addressing concerns about government equity stakes, the speaker outlined the approach to exit and private sector engagement:

• Intel Example: The government's stake in Intel was a "conversion of a grant," aimed at securing "upside" and "governance."
• Mountain Pass Example: For companies like Mountain Pass, a rare earth miner and processor, the strategy involves attracting private capital. The speaker mentioned Jamie Dimon's statement that JP Morgan will enter the business, providing lending and potentially setting up an exchange.
• Strategic Reserves: The goal is to establish "strategic mineral reserves," akin to the existing strategic petroleum reserve, with significant private sector involvement. This is seen as part of a broader "CapEx boom."

III. Addressing Criticisms of Industrial Policy

The speaker directly addressed the criticism that government taking stakes in private companies and "picking winners and losers" sounds "socialist."

• Justification: This policy is a direct response to the problems caused by a lack of vigilance over the past "20, 25 years," which led to critical dependencies (e.g., the rare earth problem).
• Limited Scope: The intervention is strictly limited to "strategic industries," not non-strategic ones. The speaker identified seven such industries and referenced a paper they wrote on this topic about 15 months prior for a speech delivered at the Manhattan Institute.
• Caution and Vigilance: The speaker emphasized the need to "be very careful not to overreach" and to "go back and examine, okay, have we accomplished our goal?" before potentially moving on. However, continuous "vigilance" is paramount, given past failures to maintain it.

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IV. Synthesis and Conclusion

The US is actively recalibrating its economic strategy to counter challenges from non-market economies, particularly China. This involves a proactive industrial policy that includes strategic government intervention in critical sectors, exemplified by the rare earths industry. The approach combines measures like price floors and forward buying with strategic equity stakes, aiming to foster domestic self-sufficiency and resilience. While acknowledging concerns about government overreach, the policy is framed as a necessary and targeted response to ensure national security and economic stability, with a clear emphasis on attracting private capital and maintaining long-term vigilance.