Economic Viewpoint with Danny Leipziger: Does the U.S. Need an Industrial Policy?

March 15, 2020

The idea that countries require an aggressive industrial policy to dramatically shift resources into promising new sectors that require investment has a long and controversial history. Much is made of the success of South Korea, not to mention China, which have both benefitted greatly from such policy interventions; however, there are many more failures than successes to point to with regard to picking winners. At a minimum, it requires very strong policy coordination, a clear and likely winnable strategy, and close collaboration between business and government. Very few countries have the prerequisites for success along these dimensions.

This said, it must also be acknowledged that all countries have some sort of industrial policy that provides incentives to certain areas of economic activity. Ironically, given its name, industrial policy can favor agriculture, through subsidies (in the U.S.) or protection (in Japan) or more likely strategic industries, such as aircraft (where the U. S., the EU and Brazil and Canada have all provided direct or indirect subsidies). Therefore, in a world in which no one is pure, why should industrial policy carry so much baggage, and more to the point, can the United States compete with China without an industrial policy?

China practices state capitalism, and does so very well, exploiting its size and its large and productive labor force, while connecting to global markets in a fashion that has propelled it to be the second largest economy on the planet. It has also forced joint ventures with foreign investors, encouraged technology theft, and provided a host of public interventions that have led many, not only the U. S. but, more importantly, the EU to object to its practices. But now the field has changed from manufacturing to the digital economy, to nano-technologies, to advanced robotics, big data and AI. These are areas where the U. S. has an established but shrinking competitive advantage, and some are now wondering whether it would make sense for the U. S. to adopt a more aggressive industrial policy. If so, how would it look and how would it work?

An interesting case involves the 5G network issue, where China, through Huawei, has the lead. It can easily be argued that Huawei has benefitted from cheap credit, from public R &D, and from a Made in China 2025 strategy that favors its products. The U. S. by comparison relies on its robust capital markets for venture capital, has a strong university-led innovation system and a large domestic market. One might therefore imagine that the U. S. would be a leader in this field, but it isn’t; the only competitors to Huawei are Scandinavian firms, perhaps too small to challenge their Chinese rival. Should the U. S. (perhaps because of the perceived security threat of China dominating its networks) have started a U.S.-led consortium to gain leadership in 5G?

America has, for example, used DARPA (its Defense Advanced Research Projects Agency), NASA and the National Institutes of Health to promote scientific and technological advances that then were successfully commercialized. What it hasn’t done is taken a heavy hand towards product development, provided direct subsidies or demanded a public stake in the future profits from this basic R&D. Perhaps this needs to change in light of the new Chinese realities.

What would stop the U. S. government from forming a consortium with several major corporations (e.g.  CISCO, Qualcomm, Intel and others) to meet the Huawei challenge? The price for the firms involved, who would be gaining a monopolistic hold on the U.S. market, would be to accept greater effective regulation of prices as well as to allow a public share in the venture, namely, to give the public sector a piece of the upside (perhaps to help finance future R&D in a constrained fiscal environment). In order to even contemplate this type of industrial policy, however, there would need to be a new concordat between business and government in which regulatory challenges, tax avoidance, and lobbying would be managed for the common good. This is of course a tall order in our politicized environment and is more easily achievable in single-party Singapore than in the American system.

Nevertheless, columnists such a Rana Faroohor in the Financial Times, have said that “America needs a coherent strategy to compete in a world with ascendant state capitalism” (Dec. 2, 2019). That state capitalism includes the Belt and Road Initiative as well as other state-sponsored activities that are carried out by the Chinese private sector under the guidance or direction of government. Whereas competition between the U.S. and Europe, as seen in the subsidies given to either Boeing or Airbus, catches the news, this is minor in comparison with the much larger threat to both democracies as they navigate the new technological world. It might well be preferable to collaborate and deal more effectively with state capitalism, and, in that context, perhaps industrial policy, however labelled and however implemented, needs to play a role. It could be part and parcel of an effective economic strategy for the future, and it thus merits conversation.

Danny Leipziger is the managing director of The Growth Dialogue and a professor of international business at the George Washington University School of Business (GWSB).