Making US Industrial Policy Effective

Outstanding failures characterized industrial policies aimed at reviving flagging industries through trade protection. Minor agricultural products, such as sugar, peanuts, honey and butter have enjoyed such protection for decades at high cost to consumers with modest productivity gains. Our study examined such protection both for the steel industry, and for textiles and apparel. Jobs were saved but at consumer costs upwards of $500,000 per job year, and neither industry has become truly competitive in world markets. 

Numerous initiatives are occupying a middle ground, particularly at the state level, to recruit leading firms to expand local production. When state subsidies and tax incentives attract auto or electronic firms or, as in my home state of New Mexico, film producers, the costs per job year are seldom extravagant and the political payoff can be handsome. But such incentives essentially shuffle jobs between states rather than create new jobs or new technology at a national level.

In your report, you said: "with the Soviet Union, it was an arms race; with China, it's a technology race". What are the main areas in which this race is played out today and do you think the tools implemented by the Biden administration will allow the US to stay in this race?

Fear has gripped Congress and the American public that China will soon dominate the United States in frontier technologies such as quantum computing, artificial intelligence, cyber technology, hypersonic missiles, and more. One response is to ban trade, investment and technology sharing with China in a widening range of sensitive industries. Prohibitions on Huawei are Exhibit A in this strand of policy. Another response is targeted federal spending on select high-tech products, like electric vehicles and semiconductors . 

But amidst the prevalent populist and nativist attitudes, these prescriptions are rejected. If China wins the technology race, a major reason will be the US practice of handicapping the strongest features of its own economy.

After being introduced in April 2021, the Innovation and Competition Act was passed in the Senate in June with a 68-vote majority. Although it is currently stalled in the House, is this legislation a sign that there is a bipartisan consensus on industrial policy?

A bipartisan Congressional majority is seeking to spur US semiconductor production and high technology R&D across a broad front. Towards that end, the Innovation and Competition Act, which singles out China, passed the Senate on a 68-vote majority. The Act would provide $50 billion for semiconductor tax credits, and another $200 billion for high technology for various domains, including space exploration, 5G and 6G communications, and new technology hubs.

While this act, or similar measures nestled in other legislative bills, are likely to reach President Biden’s desk during 2022, and while the budget figures are impressive, new spending will be spread over five years or more, perhaps averaging $50 billion a year. Since public and private R&D currently amounts to about 3% of GDP, more than $600 billion annually, the promised increment is modest, and will not make a life-changing difference to the US-China technology race. If the Chinese technology threat is as formidable as American hawks claim, the US response measured in private and public R&D outlays should be far larger. 

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