The govt's big policy is a bit like a kids' soccer match. Let me explain

Nothing happens. Nobody wins. It's just chaos.

The world's approach to industry policy is very similar, albeit less amusing.

Whether they are motivated by the climate transition or geopolitical tensions, countries are subsidising everything from batteries and solar panels to semi-conductors and electric vehicles.

But when countries try to out-export each other in the same industries at the same time, the result is the same as the kid's soccer game: nothing happens, nobody wins, it's just chaos - and a lot of wasted money.

To see why, consider a hypothetical. Suppose Japan exports more semi-conductors than Korea because Japan's semi-conductors are cheaper.

Now suppose Korea is unhappy with this, so it decides to spend $1 billion subsidising its semi-conductor manufacturers.

The result is that the price of Korea's semi-conductors goes down and Korea overtakes Japan as the biggest exporter.

Japan, quite reasonably, might be annoyed by this. In response, Japan spends $1 billion and starts subsidising Japan's own manufacturers, pushing its prices down further so it overtakes Korea once again.

What's the end result?

The result is that we end up back where we started, with Japan exporting more semi-conductors than Korea. The only difference is that both countries have now spent a billion dollars to achieve nothing.

There are winners and losers from this.

The winners are foreign consumers. They didn't do anything and now they are suddenly getting very cheap semi-conductors.

The other winners are the semi-conductor manufacturers in Korea who (albeit briefly) enjoyed a competitive advantage over Japan.

The losers are much bigger: the taxpayers in both countries who are either paying more tax, receiving fewer services or being lumped with more government debt to pay back in the future - all so that foreigners can have cheaper products.

The idea of depriving your own citizens so foreigners can have cheaper products is an odd strategy, to say the least, and yet it's the strategy that China has employed for decades which the West is now seeking to emulate.

To clear up any confusion, China is not a rich country. Average incomes in China today are where average incomes in the US were back in 1950s. Don't let the Lamborghinis in Shanghai fool you. If China's current economic woes persist, China could end up getting stuck in the "middle income trap" - failing to become a rich country like so many before it.

One of the reasons China isn't rich is because China has employed the above strategy. The government sidelines productive markets and productive businesses and taxes its citizens so it can use this money to subsidise its preferred unproductive industries to make cheaper products for (primarily) American consumers.

Put simply, Chinese citizens take a pay cut so that Americans - whose per capita incomes are 3.5 times higher than theirs under even the most generous measure of incomes for China - can have cheaper goods and services.

This is the strategy that Western countries are now seeking to emulate.

Putting aside the folly of this strategy, the strategy has an even more fundamental problem: it's not a strategy that every country can do at the same time.

Just as in the semi-conductor example above, if countries all try to build their battery or solar panel or semi-conductor industries through subsidies at the same time, the result is that they cancel each other out. We go back to where we started, minus the billions of dollars of taxpayers' money that's been lost for no gain.

This might sound like a hypothetical. But it's not.

The hundreds of billions dollars of subsidies in the US Inflation Reduction Act has undercut a bunch of industries around the world: from electric vehicles to green technologies.

The massive expansion in nickel mining in Indonesia has seen multiple nickel miners in Australia collapse.

The response from countries impacted by these overseas policies has been to do exactly what Korea did in the hypothetical above: introduce their own industry supports to get their competitive advantage back.

It's understandable why countries might do this, but the end result is the same as the kids' soccer game.

There is obviously a better solution: to have countries coordinate and work together.

If Western countries are bent on cutting China out of supply chains, for example, they should work together on how each country will participate in the different parts of the supply chain rather than try to wrestle market share off each other.

If markets won't deliver the technologies and products required for the green transition, like-minded countries should work together to agree on who does what.

And it's not like countries aren't experienced in this. Before the collapse of the gold standard, countries would regularly come together and decide on what the exchange rates would be between their countries, with massive implications for who makes what and who imports what.

Coordination is possible, and it delivers much better outcomes than the kids' soccer game we are currently watching.

If people want to get through the climate transition without an eye-watering tax bill at the end of it, countries had best start working together.