America needs to sort out its industrial policy confusion

In case you haven’t noticed, Washington has been agitated about China lately. Lawmakers introduced more than 500 bills and resolutions mentioning it by name in the last Congress, a nearly fivefold increase from the 112th Congress a decade prior.

The backdrop for this activity has been an intensifying geopolitical rivalry. That’s why nearly one in five bills mentioning China last session also mentioned “national security,” and more than half mentioned “trade” or “technology.” But beyond the clear consensus that the United States is locked in fierce competition with China — and that America’s strength stems from its economic power, which is based on technological leadership — there has been no unified strategy or organizing principle in evidence.

This creates a stark contrast: China is rapidly becoming a dominant economic and technological force by carrying out a state-orchestrated industrial strategy, and America is responding with… industrial policy confusion.

Consider two of the most consequential economic bills passed in the 117th Congress: the CHIPS and Science Act and the Inflation Reduction Act (IRA). Because of the bills’ scale, many analysts and commentators have argued Washington has entered a new era, leaving behind neoliberal economic principles and embracing the long-verboten idea of supply-side industrial policy. But in fact, the bills illustrate how little Washington understands about competitive-focused industrial strategy and how far it is from adopting one.

Start with the IRA. The commentariat’s hot takes notwithstanding, it was not industrial policy but climate policy. As important as addressing climate change is, subsidizing clean energy production has little to do with meeting the China challenge. Chinese control of many clean energy sectors would have little strategic impact on the United States. For example, if the Chinese Communist Party banned solar panel exports, the effects would be negligible; we’d just burn more natural gas to produce electricity.

Likewise, the science component of the CHIPS and Science Act was not true industrial policy, it was science policy. The initial Endless Frontier Act, introduced by Sens. Chuck Schumer (D-N.Y.) and Todd Young (R-Ind.), was closer to an industrial policy as it was focused on applied research in key technology areas critical to staying ahead of China. But the House Science Committee watered down the final legislation. As a result, the lion’s share of money now goes to basic scientific research in universities and federal labs, little of which will help America compete economically against China. In fact, to the extent those investments produce knowledge or inventions with economic potential, they might help China, too, since they will be freely available in the public domain.

Even the component of the CHIPS Act that was ostensibly about the semiconductor industry was not industrial policy, per se; it was defense policy, as its core rationale was to reduce U.S. dependency on Taiwan for semiconductors. Without that rationale, CHIPS likely would not have passed. This same national defense rationale is shaping the Biden administration’s principal techno-economic policy toward China: export controls on advanced chips and chip-making equipment. What about flat panels, robotics, electric vehicles, chemicals, drugs, aerospace, shipbuilding, and the vast array of other dual-use industries China has set out to dominate through a combination of legitimate industrial policy and illegal predation? By and large, the national security establishment ignores these industries.

Between the final legislative text that emerged from Congress and the way the administration has chosen to implement it, the CHIPS Act has become conspicuously diluted with progressive social policies that look more like the Democrats’ failed Build Back Better plan than competitiveness policy. For example, semiconductor companies have to build daycare centers, and other rules mandate union construction jobs, limit stock buybacks, impose complicated environmental rules, tack on “Buy American” provisions for inputs, and guarantee opportunities for minority-owned, veteran-owned and women-owned businesses.

There are two key problems with shoehorning green-equity provisions such as these into what should be China competitiveness policies. The first is that the federal government has limited economic leverage. The extent to which it can provide subsidies is dwarfed by what other nations can provide as a share of GDP, especially China. So, we can ill-afford to siphon from comparatively modest industrial policy funding to achieve green-equity goals.

The second problem is that doing so poisons the political well for future industrial policy. Many Republicans and some moderate Democrats now are likely to have second thoughts about supporting similar legislation given the precedent of green-equity politicization.

Washington needs to forge a consensus on what constitutes America’s most important techno-economic goal.

If it’s job creation, then funding social services and hamstringing competitiveness policies with Buy America provisions might make sense — although it would be hard to fathom with near-record-low unemployment and high inflation. Similarly, if the goal is to advance “liberty” by reducing taxes and regulations — something many conservatives seek — then rejecting industrial policy out of hand might make sense. Just get out of the way and pray that China implodes or that the CCP will become a benevolent hegemon. But both are unlikely outcomes.

The wiser course would be to agree that America’s overriding techno-economic policy goal is ensuring that China never overtakes us in advanced-industry leadership and that we retain vastly more techno-economic leverage over China than it has over us. Otherwise, the endgame will not be pretty: perhaps an economy focused on supplying China with minerals, food, college educations, financial services, and tourism experiences.

To achieve consensus on meeting the China challenge with a coherent U.S. industrial strategy, policymakers in Washington will need to find inspiration, not in the precepts of progressive, neoliberal, or conservative ideology, but in America’s long-forgotten tradition of national developmentalism first voiced by Treasury Secretary Alexander Hamilton in his 1791 “Report on Manufactures.”

In relation to becoming free of industrial dependency on Britain, Hamilton wrote: “To produce the desirable changes, as early as may be expedient, may therefore require the incitement and patronage of government.”

Our task now is to revive America’s Hamiltonian tradition to win the techno-economic competition with China. Later this month, the Information Technology and Innovation Foundation will host a conference with leading experts and policymakers to take up that challenge. Please join us.

Robert D. Atkinson is president of the Information Technology and Innovation Foundation (ITIF).