News

Jul 23, 2023

Pentagon Bolsters Industrial Base As FTC Undermines Innovators.

An Amazon fulfillment center in Spain. Forbes ranks Amazon as the second-most innovative company in ... [+] the world. Politico reports that the Federal Trade Commission is preparing to bring an

An Amazon fulfillment center in Spain. Forbes ranks Amazon as the second-most innovative company in ... [+] the world.

Politico reports that the Federal Trade Commission is preparing to bring an antitrust case against Amazon AMZN —a project that FTC Chair Lina Khan has apparently been contemplating since she was a law student at Yale. The report says the case could potentially result in breakup of the world’s most successful e-commerce firm.

If such a suit is brought, that would make it a clean sweep for the nation’s top innovators: all five of the US companies that most frequently make it to the top of innovation rankings—Alphabet, Amazon, Apple AAPL , Microsoft MSFT and Meta Platforms—would be targets of antitrust regulators.

Amazon and Alphabet unit Google GOOG contribute to my think tank.

Other domestic companies that have recently been moving up in the rankings, such as Illumina ILMN and Nvidia, have already felt the wrath of regulators.

President Biden foreshadowed the current antitrust campaign shortly after he entered office, releasing an executive order on promoting competition that singled out Big Tech for scrutiny.

Big Tech, though, is not alone. During the first year of Biden’s presidency, antitrust actions were launched against oil and gas producers, the meatpacking industry, maritime shippers, railroad mergers, insurance companies and publishers. Not surprisingly, Ms. Khan is seeking a boost to her agency’s budget.

But the assault on Big Tech is particularly noteworthy, not only because it targets an economic sector where America leads the world, but also because that sector is pivotal to staying ahead of rivals that seek to displace America from its status as the world’s sole superpower.

It seems that the administration’s approach to bolstering competition at home does not sync up very well with its efforts to stay ahead of China militarily and economically.

To grasp the tension between these two strands of Biden policy, one need only look at the Pentagon’s growing concern about the vulnerabilities of the domestic industrial base—an economic colossus once characterized as the “arsenal of democracy.”

The twin blows of a global pandemic and war in Ukraine have alerted policymakers to the fact that steady deindustrialization has made the US far more susceptible to supply-chain disruptions than it once was. During the pandemic, for instance, Americans learned to their dismay that production of many drugs, from antibiotics to painkillers, had moved offshore.

The war in Ukraine, in turn, has revealed that domestic production of munitions is at a low ebb, turning out weapons at such a slow pace that shortages of key items would occur within weeks after the onset of a major war.

The larger problem for the Pentagon is that a lack of raw materials, skilled workers and industrial facilities would preclude surging output anytime soon.

During the Iraq war, policymakers discovered there was only one domestic source capable of producing the kind of steel needed for armored vehicles. It seems such “single points of failure” are widespread across the industrial base. For instance, there is only one surviving domestic source of diesel engines for warships.

The more military planners look at the industrial base, the more they realize how tenuous the supply chains supporting warfighters have become. It isn’t just that China has grown, but that it has done so in part by displacing US producers in industries such as steel, aluminum and glass.

This pattern extends beyond basic industries, to high-tech manufacturing in areas such as microelectronics. The Biden administration’s subsidies to the chip industry reflect a growing realization that without government intervention, the US would be hard-pressed to remain competitive in a range of critical industries.

In the absence of sky-high tariffs that once protected US producers, domestic companies are at the mercy of other countries that engage in predatory economic practices. That is one reason why China and South Korea produce hundreds of commercial ships for use in international trade each year, while the US produces virtually none.

Such trends have persisted for many years without provoking a concerted US policy response. Part of the explanation is that even as industrial America was declining, the US was leading the information revolution with innovations like the iPhone, cloud computing and artificial intelligence.

As David Ricardo observed many years ago, countries should concentrate their economic activity in areas where they have a comparative advantage. The US clearly lacks a competitive advantage in labor-intensive industries such as shipbuilding, which helps explain why what remains of the industry requires legal protection against foreign competitors.

But information technologies such as those pioneered by Amazon and Alphabet are areas where the U.S. has a competitive edge. They are also “dual-use” technologies that will contribute disproportionately to military success in the future.

So, the fact that the Federal Trade Commission is targeting the most innovative companies in the information sector is at war with the other strands of Biden industrial policy.

Maybe America will never again lead the global electronics industry, and maybe there are sound environmental reasons for curbing domestic production of minerals such as rare earths.

But software-driven enterprises like Apple and Microsoft have revolutionized commerce and culture without presenting the kinds of problems some traditional industries do. So targeting these companies when they are central to US global success going forward is perverse.

Fortunately, the courts have been less than enthusiastic about cases the FTC has brought. Its “what-if” approach to questioning business practices does not comport well with antitrust precedent. And some of the agency’s challenges to industry are ridiculous, like the complaint that Amazon’s insistence on offering the lowest prices is detrimental to competition.

It isn’t so clear who benefits from most of this antitrust activity other than Beijing. So maybe before launching more antitrust actions, the Biden administration should make an effort to get all its industrial policies on the same script. Right now, different agencies seem to be pursuing contradictory goals.

As noted above, Amazon and Google contribute to my think tank.