From all appearances, the U. S. will be reviving the old concept, widely discredited, of “industrial policy” in an attempt to head off the growing domination of China and compete with them in various strategic components of economic growth. Clear evidence of this strategy is that the U. S. Senate last month approved a bill providing for $52 billion in subsidies for the construction of new semiconductor fabrication plants, a move that has very little precedent and a practice about which we have been extremely critical of China for years. One of the bill’s lead sponsors, Sen. Mark Warner of Virginia, says, “I’ve been impressed with the China model (of state capitalism)” and the other co-sponsor, Sen. John Cornyn of Texas, is also pretty up front about the change in attitude: “What we’re doing is industrial policy unlike anything people with my free market, conservative background would ordinarily be comfortable with. Our driving impetus is what China is doing and the security of the supply chain”. Really.
There has almost always been broad support in the U. S. for government funding of basic research and development, which has long been our competitive edge, but advocates of industrial policy, including many members of Congress and White House staff, are not satisfied with American leadership in innovation; they want to dominate the supply chain with the manufacturing piece as well. For others, not convinced, this is tantamount to the old phrase, “picking winners”, which is anathema to free-marketeers. As noted by Scott Kennedy of the Center for Strategic and International Studies, “it would be a huge mistake for the U. S. to try and match Chinese government spending….so much of it is thrown down bottomless pits, leading to over-investment, lower profits, slower innovation and more debt”. Other skeptics would remind us of the Japanese experience with industrial policy through their Ministry of International Trade and Industry (MITI), which dominated most of Japan’s industrial decisions for decades, but collapsed in the 1990s. Still others say that, despite the successes of China’s model, there remain serious questions about its overall effectiveness and sustainability, but no one questions China’s objective and commitment to a grand strategy, which is to build their model into a “Sino-centric” order based on socialist market economics. All of this should be of valid concern, but Sen. Warner says that we have no choice–that new semiconductor plants are going to be built and without federal intervention they will all be built in China. Then there is the politics of it all, and Sen. Warner has also assured us that U. S. semiconductor subsidies “must be allocated through a clear, rigorous process without political interference”. Now if you buy that, I have oceanfront property in Arizona to show you.