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Old ideas are like old clothes: wait long enough and they will be back in fashion. Thirty years ago, “industrial policy” was almost as fashionable as a chocolate hat. But now governments around the world, from Washington to Beijing and New Delhi to London, are rediscovering the joy of subsidies and singing the praises of economic self-sufficiency and “strategic” investment.
The importance of this development goes far beyond the economy. The international embrace of free markets and globalization in the 1990s went hand in hand with declining geopolitical tension. The Cold War was over and governments were competing to attract investment rather than dominate the territory.
Now, the resurgence of geopolitical rivalry is driving the new fashion for state intervention in the economy. As trust diminishes between the United States and China, so each has begun to see the other’s dependence on any commodity, whether semiconductor or rare earth minerals – as a dangerous vulnerability. Domestic production and security of supply are the new keywords.
As the economic and industrial struggle intensifies, the US has done so prohibited exports of key technologies to China and pushed to repatriate supply chains. It also moves towards live state funding semiconductor manufacturing. For its part, China has adopted a “double circulation ” an economic policy that emphasizes domestic demand and the achievement of “great advances in key technologies”. Xi Jinping’s government is also tightening state control on the technology sector.
The logic of an arms race is established, as each side justifies its movements towards protectionism in response to the actions of the other side. In Washington, USA-China Strategic Competition Act, currently making its way into Congress, it accuses China of pursuing “state-run mercantilist economic policies” and industrial espionage. The 2015 announcement of “Made in China 2025”Industrial strategy is often cited as a turning point. In Beijing, by contrast, it is argued that the fading United States has turned against globalization in an effort to block China’s rise. President Xi has said the backlash against globalization in the west means China needs to be more self-sufficient.
The new emphasis on industrial strategy is not limited to the US and China. In India, the government of Narendra Modi promotes a policy of Atmanirbhar bharat (self-sufficient India), which encourages domestic production of key commodities. The EU published a paper on industrial strategy last year, which is seen as part of a push towards strategic autonomy and less dependence on the outside world. Ursula von der Leyen, President of the European Commission, has done so he called for Europe to have “mastery and ownership of key technologies”.
Even a Conservative administration in Britain is moving away from the laissez-faire economy advocated by former Prime Minister Margaret Thatcher and seeking to protect strategic industries. The government is reviewing whether to do so block the sale of Arm, a UK chip maker, to Nvidia, an American company. The UK government has also bought a controlling stake in a bankrupt satellite business, OneWeb.
Covid-19 has reinforced the fashion of industrial policy. National vaccine production is increasingly seen as a vital national interest. Although they denounce “vaccine nationalismElsewhere, many governments have decided to restrict exports and build domestic suppliers. Lessons on national resilience learned from the pandemic can now be applied to other areas, from energy to food supply.
In the United States, national security arguments for industrial policy are intertwining the broader backlash against globalization and free trade. Joe Biden’s rhetoric is downright protectionist. The president proclaimed in Congress: “All investments in the American work plan will be guided by a principle: buy American.”
In a article last year, Jake Sullivan, Biden’s national security adviser, urged the security establishment to “overcome the prevailing neoliberal economic philosophy of the past 40 years” and accept that “industrial policy is deeply American.” He argued that the United States will continue to lose ground to China in key technologies such as 5G and solar panels, “if Washington continues to depend so much on private sector research and development.”
Many of these arguments will sound like common sense to voters. Protectionism and state intervention often do. But free market economists are scared. Swaminathan Aiyar, a leading commentator in India, he regrets the return of the failed ideas of the past, arguing that: “Self-sufficiency was what Nehru and Indira Gandhi tried in the 1960s and 1970s. It was a horrible and terrible failure. “Adam Posen, president of the Peterson Institute for International Economics in Washington, recently he denigrated “America’s Self-Defeating Economic Withdrawal,” arguing that policies aimed at favoring chosen industries or regions often end in costly failures.
As tensions between China, the US and other major powers increase, it is understandable that these countries analyze the security implications of key technologies. But politicians ’claims that industrial policy will also produce better-paying jobs and a more productive economy deserve to be treated with deep skepticism. Sometimes ideas go out of style for a reason.
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