Tom Williams/CQ Roll Call via AP Images
Democratic lawmakers pose with House Speaker Nancy Pelosi (D-CA), third from left, after a bill enrollment ceremony for the CHIPS and Science Act at the U.S. Capitol, July 29, 2022.
Ever since the beginning of the Cold War, the United States has had bits and pieces of a tacit industrial policy. But they were disconnected, undermined by other policies, and considered ideologically transgressive.
Industrial policy in this era was an incidental by-product of other policy goals. For example, the Pentagon subsidized technologies and industries for defense purposes and guaranteed sales through multiyear, multitrillion-dollar procurement contracts. Many of these, such as aircraft and advanced computer technologies, produced extensive commercial spin-offs. When other nations complained that these were improper subsidies that violated trade agreements, U.S. negotiators could insist apologetically, with straight faces, that any commercial benefits were purely accidental.
Spending by the National Institutes of Health, for scientific and public-health purposes, helped create the U.S. leadership in biotech. Spending by the Department of Energy gave the U.S. a head start in solar and other renewable technologies.
But all of these implicit industrial policies were undermined by U.S.-sponsored global trade policies, which rejected any form of economic nationalism. Standard theory, reflected in trade diplomacy by Democratic administrations as well as Republican ones, held that if other governments were so foolish as to subsidize industries in order to create advantage, American consumers should accept the gift. Thus did Japan and later South Korea, Taiwan, and finally China displace U.S. leadership in one industry after another.
With the Biden administration, this reality has been transformed. We still don’t have all the elements of the comprehensive industrial policy we need. But we have a lot more than anyone had reason to expect. And the government and its economic theorists have stopped feeling guilty about setting industrial goals. On the contrary, the president and his advisers have wholeheartedly embraced them.
Several surprising legislative victories, notably the Inflation Reduction Act and the CHIPS and Science Act, plus innumerable executive actions, explicitly target vital technologies and industries, and spend public money on a scale unknown since World War II. The IRA spends $370 billion on renewable energy, of which $50 billion is for domestic manufacturing. The CHIPS and Science Act adds another $52 billion for domestic production of semiconductors, including at least $10 billion for research. Even better, these industrial policies are also substantially climate policies. The measures target green technologies, industries, and domestic jobs.
Why did this shift occur? One element is the supply shock caused by COVID-related disruptions and the realization that, both for national-security and economic-security reasons, we needed to bring a lot of this production home.
A related factor is the belated acknowledgment of the economic threat that China presents, both to the U.S. national interest and the entire global system. Xi Jinping has made Biden’s job easier by acting with increasing belligerence on the geopolitical as well as the economic front, destroying Hong Kong’s civic autonomy, making explicit military threats to Taiwan, and enforcing an extreme COVID lockdown policy, further curtailing supply chains reliant on China.
It became impossible for any serious person in either party to argue that China was not a menace. Indeed, some key Republicans have taken a harder line on China and industrial policy than many Democrats. Were it not for China, we would not have had the bipartisan support for the economic nationalism in the CHIPS Act.
Several surprising legislative victories explicitly target vital technologies and industries, and spend public money on a scale unknown since World War II.
A third element was a long-overdue ideological shift in the Democratic Party, especially its presidential wing. Before Biden, economic advisers to Democratic presidents were free-traders, counseling that the nature and location of production was the proper business of the market, not the state. With Biden, voices long in the wilderness on industrial targeting, such as the labor movement, the Roosevelt Institute, and the Economic Policy Institute, have had the heady experience of actually influencing and making policy.
The Prospect has detailed the many opportunities contained in the Inflation Reduction Act and the CHIPS Act. The most recent policy advance, reflected in executive actions, is the order dramatically toughening export controls directed at China.
The new rules forbid domestic or foreign companies that do business with the U.S. from exporting advanced chips or algorithms to China. This especially blocks China’s efforts to gain leadership in artificial intelligence.
The restrictions also ban exports of design software and chipmaking equipment; they prohibit the world’s leading fabs, including Taiwan’s TSMC and South Korea’s Samsung, from selling advanced semiconductors to China.
This ongoing set of policy shifts is reflected not just by progressives serving in government but in not-so-progressive senior officials who have become champions of industrial policy. National Security Adviser Jake Sullivan, who did not begin as a China hawk, has become one. Brian Deese, the other senior official coordinating industrial-policy initiatives, has become a champion of them.
U.S. Trade Representative Katherine Tai, formerly something of an outlier as a China hawk, has been emboldened to speak out even more forcefully. Speaking at a Roosevelt Institute conference, Tai declared that free-trade deals resulted in “fragile supply chains, de-industrialization, offshoring, and the decimation of manufacturing communities.” She added that trade policy has failed to address China’s massive “non-transparent, state-directed industrial dominance policies,” and that “markets even rewarded them.”
Tai concluded: “To get this right, trade has got to be about more than just unfettered liberalization, cheap goods, and maximizing efficiencies. Now, we have not sworn off market opening, liberalization, and efficiency. But it cannot come at the cost of further weakening our supply chains, exacerbating high-risk reliances, decimating our manufacturing communities, and destroying our planet.”
No other U.S. trade rep has spoken in these terms. Trump was bellicose on China, but offered no complementary industrial policy.
Perhaps the most interesting case is Commerce Secretary Gina Raimondo. Her background and instincts are those of a corporate Democrat. But Raimondo, who would like to be president, is also among the shrewdest politicians in Biden’s Cabinet.
Raimondo began as an opponent of tough export controls, which are administered by her department. This stance reflected corporate and Wall Street efforts to keep doing business with China. But when Biden opted for much more stringent policies, Raimondo got with the program.
Much of the industrial policy represented in the IRA and the CHIPS and Science Act is lodged at the Commerce Department. If these policies can demonstrate some successes between now and 2024, Raimondo views them as her ticket to the White House.
Labor was properly skeptical of Raimondo. But she has lately had regular conversations with key labor leaders. If she is not regarded as an ally, she is now viewed as someone willing to listen.
Raimondo’s shift is not a total reversal. She’s a corporate Democrat, and there is more than one way to be corporate. The massive spending of the recent legislation is mainly in the form of subsidies to U.S. corporations. And if we are not careful, it will represent one more form of federal giveaways that serve corporate interests more than national interest.
And this raises the staggering practical challenge of implementing all these bold policies.
One issue is coordination. All these policies have a large number of moving parts. The several elements of our industrial policy are finally consistent in theory; but will they be in practice?
There is no industrial-policy czar. Making sure that all the pieces fit together will be a heavy lift. Ronnie Chatterji, a talented young economist whom we profiled in 2020, has been appointed White House coordinator for CHIPS, but he is junior to the top Biden officials.
Despite some staged meetings, it’s not clear who is in the room where it happens. The practical policies will be coordinated by people at the deputy or assistant secretary level and the National Economic Council under Deese.
Another challenge is the sheer scale. The $10 to $12 billion for R&D in the CHIPS Act is to be directed by the National Institute of Standards and Technology, whose entire current budget is about $1 billion.
There is also the problem of permitting and project approval. It’s one thing for DARPA to function as a kind of venture capitalist. When the federal government is directly subsidizing creation of major new factories, it runs into hurdles by state and local government, as well as federally required environmental reviews, as detailed in this report by CSIS. The government has created a “permitting dashboard” for infrastructure projects.
These problems are not insuperable. The National Institutes of Health and National Science Foundation manage to spend tens of billions of dollars through well-established and relatively efficient peer-review protocols. The Pentagon wastes a ton of money but does subsidize new defense-related technologies. Operation Warp Speed demonstrates how government can get the private sector to quickly develop new technologies by throwing vast amounts of money at private entrepreneurs and accepting windfall profits. It is far from a role model for industrial policy. In an effort this far-reaching, there will be missteps—and plenty of naysayers.
For now, key Republicans have supported these industrial-policy initiatives, mainly as China policy. But if they take back one house, we can expect all manner of fishing expeditions to excoriate these signature Biden initiatives. When Solyndra, heavily subsidized by the Energy Department, went broke in 2011 (mainly because of predatory competition from China), Republicans were scathing on the folly of economic planning.
There is also the challenge of coordinating Made in America initiatives with allies. It’s one thing to have a policy of economic nationalism directed against China. It’s more complicated to give preference to domestic production over, say, French or German imports. Using supply chain rationales, some in the administration have spoken of “nearshoring”—devising supply networks from close allies whom we can trust. But that idea is at odds with the specific goal of making things in America. It rankles allies and also violates trade commitments.
Finally, there is the undertow of the conventional wisdom, as epitomized by the always reliable Tom Friedman. Last Thursday, following an interview with a tough-talking Raimondo, Friedman wrote a column warning, “The U.S. is now in conflict with Russia and China at the same time. Grandma always said, ‘Never fight Russia and China at the same time.’ So did Henry Kissinger.”
Great, but what would Friedman have us do? Roll over?
On Friday, in a polite rebuke to Friedman without mentioning him by name, fellow Times columnist and longtime free-trader Paul Krugman wrote, “Recent events have undermined the sunny view of globalization that long dominated Western policy. It’s now apparent that despite global integration, there are still dangerous bad actors out there—and interdependence sometimes empowers these bad actors … I can’t fault the Biden administration for its turn toward toughness—genuine toughness, not the macho preening of its predecessor.”
Krugman: 1; Friedman: 0. But none of this will be easy. Biden is attempting to wage the moral equivalent of war, without anything like FDR’s emergency wartime powers, much less a united country.
