Welcome back to Decouple, featuring weekly interviews by Chris Keefer. Watch on YouTube, Spotify, or Apple.
This week, we talk industrial policy. Economist and author Steve Keen joins me to shine light on the present moment by exploring the historical use of tariffs and industrial policy in the development of industrial powers from Britain to China. In his usual style, Keen aims to dismantle the myths of free-market economics, explaining how virtually every successful industrial nation began with protectionist policies. With the US now engaged in a trade war with Canada and other nations under Trump's renewed tariffs, we examine whether such measures can effectively rebuild American industry without the comprehensive industrial policies that powered China's meteoric rise. Hint: Keen believes this simplistic tariff solutions may create more chaos than revival for America's industrial base.
Watch now on YouTube.
We talk about
The history of tariffs and industrial policies in nations like the US, Germany, and Japan during their industrialization phases
How David Ricardo's (1772–1823) theory of comparative advantage fundamentally misrepresents physical capital and the real costs of economic transition
China's strategic approach to industrialization through technology transfer, joint ventures, and skills development
The dismantling of America's Rust Belt and how China leveraged globalization to build world-class manufacturing
Why tariffs alone cannot revitalize American industry without education reform and industrial policy
The challenges of reversing globalization with complex multinational supply chains and compound tariff effects
Modern Monetary Theory and the distinction between public and private debt
Why Trump's tariff-focused approach without robust industrial policy may lead to economic chaos
Deeper Dive
The history of industrialization follows a pattern rarely acknowledged in economic textbooks. Keen points to Harvard economics professor Dani Rodrik's research documenting how virtually every successfully industrialized nation began by protecting nascent industries behind tariff walls. America in the 19th century, Germany, Japan, and later China all restricted foreign competition while building domestic manufacturing capability. Only after achieving industrial parity did these nations embrace trade liberalization. According to Keen, free trade isn't the ladder to development—it's what nations adopt after they've already climbed.
"Virtually every country that is successfully industrialized has done it by initially protecting their industries." – Steve Keen
Britain's industrial revolution offers a stark illustration of this pattern. As Keen explains, while championing free trade through Ricardo's theories, Britain first rose to manufacturing dominance behind strict protectionist barriers. When India had superior textile manufacturing, Britain blocked Indian imports with high tariffs. Only after developing coal-powered factories that could produce cheaper (albeit lower quality) textiles did Britain suddenly embrace "free trade"—devastating India's advanced textile industry. Keen cites historical research showing India transformed from being 70% urban to 70% rural, with massive human costs.
Keen argues that Ricardo's theory of comparative advantage—still taught as gospel in economics classes—contains a fatal flaw. While labor can be shifted between industries, specialized machinery cannot. You can retrain a textile worker to harvest grapes, but you cannot transform spinning jennies into wine presses. When free trade forces industrial transition, the physical capital of declining sectors becomes worthless rust. In Keen's view, the "Rust Belt" isn't just a metaphor—it's the physical reality of abandoned specialized machinery that economists conveniently ignore in their mathematical models.
China's rise represents a masterclass in industrial policy. Keen shares his firsthand experience from a 1981 visit to China, where he witnessed a nation with primitive manufacturing capabilities—light bulb factories using 1930s technology and hand-carved furniture. Within forty years, China transformed into the world's manufacturing powerhouse. This wasn't achieved through tariffs alone but through strategic policies including technology transfer requirements, currency management, and massive skills development. Keen describes how China established Special Economic Zones, shrewdly exploiting American trade loopholes while requiring foreign companies to have Chinese partners who would own half the business within five years.
America's deindustrialization wasn't inevitable—it was a choice, in Keen's assessment. American companies eagerly shifted production to China, trading $15/hour wages for $15/month wages.
"Globalisation wasn't about specialization, it was about exploiting cheap labour.” –Steve Keen
While America embraced financialization—with the FIRE sector (finance, insurance, real estate) growing to 20% of GDP—China invested in industrial capacity, engineering education, and manufacturing skills. Keen relates how Tim Cook reportedly said that if he wanted to meet with all of America's machine tool operators, he could do it in his boardroom, while in China, he'd need a football stadium.
Keen believes Trump's tariff-heavy approach lacks the industrial policy framework needed for genuine reindustrialization. Modern global supply chains have components passing through multiple countries—sometimes within the same corporation. A 25% tariff applied at each border crossing can compound into much higher price increases by the time a product is completed. This breaks down global supply chains but doesn't automatically create domestic alternatives. Rebuilding manufacturing requires skilled workers, engineering capabilities, and industrial ecosystems that take decades to develop. Without addressing America's educational deficiencies and skills gaps, tariffs alone will fail, Keen suggests.
The solution, in Keen's view, requires fundamental restructuring, not just tariffs. Making education accessible without student debt would create the skilled workforce needed for advanced manufacturing. Coordinated planning between government, industry, and labor could identify strategic sectors for development. Reducing finance sector dominance would redirect capital from speculation to production. This coordinated approach—not unlike what has made China successful—would be far more effective than tariffs alone. But such restructuring takes time, patience, and planning, qualities largely absent in America's political system.
Keywords
Tariffs, Industrial Policy, Comparative Advantage, Deindustrialization, Ricardo, China's Economic Rise, Rust Belt, Modern Monetary Theory, Globalization, Supply Chains
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