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Op-Ed

America’s Return to Industrial Policy

(A SpaceX Falcon 9 rocket carrying the company’s Crew Dragon spacecraft is launched on NASA’s SpaceX Demo-2 mission to the International Space Station/NASA/Joel Kowsky)

Clearly, industrial policy—the deliberate and coordinated governmental support of industries—is coming back, even if it is not clear yet where it will end up.”

President Joe Biden, despite disagreeing with former President Donald Trump on most issues, kept his predecessor’s tariffs. Indeed, he doubled down on them, most recently with the prohibitive 100% tariff on Chinese electric cars. Previously, with the CHIPS Act, the Bipartisan Infrastructure Act, and the (misnamed) Inflation Reduction Act (IRA), President Biden imposed the largest domestic, civilian industrial policy initiatives since the Great Depression. Clearly, industrial policy—the deliberate and coordinated governmental support of industries—is coming back, even if it is not clear yet where it will end up. 

In our opinion, the return of industrial policy is a very good thing. Industrial policy is what grew the American economy from a backwater colony to a global economic superpower, and, if coordinated properly, it is what will allow us to compete successfully with global competitors in China, Korea, and elsewhere. We need new initiatives like the CHIPS Act to support innovation and retention of advantageous industries such as computer chips, semiconductors, and nanotech. We also need trade and tariff policies to protect these fledgling industries from imports and to pressure foreign governments to reduce the obstacles they place on American exports. In these fractious, politically embittered times, industrial policy is emerging as a unique issue that not only bridges the partisan gap but also has the potential to help heal the country from political extremism by reducing some of the economic discontent that causes it.

Make no mistake: Despite what some people say, the decline of America’s industries, especially manufacturing, is very real. From 1998 to 2010, 6 million manufacturing jobs disappeared. Many–3.5 million between 1991 and 2019 alone–are estimated to have been lost due to imports. (That is where tariffs come in.)

In 2023, the United States’ trade deficit in goods exceeded $1 trillion, about 4% of GDP. The United States runs an annual $200 billion plus deficit in Advanced Technology Products, the very industries in which we were the innovators. In 2022, the share of manufactured goods sold in the United States that is made here sank to a record low of 66%.

So, what are we supposed to do about all this? In most of the rest of the rich, technologically sophisticated, developed world, the answer would be regarded as obvious: industrial policy. What this means is the deliberate governmental support of industries, the productive core of the economy. 

Industrial policy includes, first, broad approaches that assist all industries, such as exchange rate management and tax breaks for research and development (R&D). Second, policies are needed that target particular industries or technologies, such as tariffs, subsidies, government procurement, export controls, and technological research done or funded by government. The United States’ space industry, for example, has benefitted from all of these things; and far from being a cosseted laggard, it dominates in global competition.

Such policies can work: Some foreign nations that employ them, such as Germany and Japan, have done better at holding onto valuable industries, including their manufacturing, than the United States. Meanwhile, China and other low-wage nations are using proactive industrial policies to establish strong new positions in key industries, taking them away from the United States. Japan did this with consumer electronics in the 1970s; China is trying to do it with automobiles as we speak.

The flagship program here is Made in China 2025 (MIC 2025). This was announced in 2015, setting forth Beijing’s plan to become the world’s leading manufacturer and innovator by 2049. The program’s long-term objective is to make China technologically independent. Among other things, MIC 2025 aims to create 40 national innovation centers in 10 sectors, including smart transportation, information technology, artificial intelligence, industrial robots, and aerospace. 

The ongoing success in the United States of industries, such as aircraft manufacturing, that have enjoyed industrial policy support shows that the United States can do this, too. And the emergence of private-sector space launch in the United States, nurtured by industrial policy, shows that we can, in fact, create entire new industries this way. SpaceX and Boeing benefit from the vast military-oriented industrial policies the United States has for aerospace. SpaceX is technologically supported by the National Aeronautics and Space Administration (NASA) and shielded by law from foreign competition for national-security reasons.

The United States already has de facto industrial policies, including federal science funding, tax credits for R&D, subsidized loans for everything from exports to housing to college, and occasional bailouts for  sectors and firms. We also have industry-specific industrial policies for defense, pharmaceuticals, space, green energy, and agriculture. 

But these policies generally aim at non-economic objectives. Industrial policy programs whose primary purpose is deliberately economic, such as Manufacturing USA and the Manufacturing Extension Partnership, are effective but far too small. For decades, the United States has failed to recognize that the problems of its industries require an integrated, continuing response. 

Thankfully, over the past 15 years, industrial policy has been filtering back into our policy space, mostly unawares. The 2008-10 auto bailout was a classic act of industrial policy. President Biden’s programs, combined with their explicitly pro-industrial policy rationales, were a big step forward. The IRA included Buy American requirements with only limited exemptions. CHIPS incentivizes American and foreign firms to build advanced chip factories in the United States.

These Acts embodied a number of key principles. First, that economic and technological leadership in civilian, not just defense, industries are critical to national security. Second, making things, not just inventing them, is required for prosperity. Third, that large-scale government investment is needed to support American manufacturing in high technology and other economically important industries.

Will our competitors retaliate if we continue to implement industrial policy and new tariffs? Of course. But this isn’t a reason to stop the progress we’re making. The observed fact is that this does not get out of control in a “trade war,” and given that they already restrict our trade with hidden non-tariff barriers and that they are more likely to have a trade surplus to lose, we will come out ahead even if they do try to strike back.

The United States does not need, and politically would not accept, a large new government agency for industrial policies. But it does need a reasonably coherent set of policies, coordinated at the highest levels of government. To succeed, these policies must support new programs to support manufacturing and innovation; institute controls on international capital flows to bring the dollar down to a value that zeroes out the trade deficit; create new tariffs that protect industries that are economically important or strategically necessary for military or public health reasons; and deny economic and geopolitical adversaries key technologies developed by the United States and its allies. The alternative is inexorable economic decline and its attendant political chaos.

Marc Fasteau is a vice-chair of the Coalition for a Prosperous America (CPA). Before founding an insurance company acquired by Progressive, he was a partner at Dillon Read & Co., a New York investment bank, and previously a congressional economic staffer. He is a graduate of Harvard College and Harvard Law School, where he was on the Law Review. He lives in New York City.

Ian Fletcher is on CPA’s Advisory Board. He is the author of Free Trade Doesn’t Work and coauthor of The Conservative Case against Free Trade. He has been senior economist at the Coalition, a research fellow at the US Business and Industry Council, an economist in private practice, and an IT consultant. He was educated at Columbia University and the University of Chicago. He lives in San Francisco.

Together, they have authored Industrial Policy for the United States: Winning the Competition for Good Jobs and High-Value Industries.

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