In case you haven’t noticed, Washington has been in a frenzy about China lately. Lawmakers introduced more than 500 bills and resolutions mentioning it by name in the last Congress, a nearly fivefold increase from the 112th Congress a decade ago.
The backdrop for this event is the intensifying geopolitical rivalry. That’s why nearly one in five bills dealing with China last session also dealt with “national security,” and more than half dealt with “trade” or “technology.” But beyond the clear consensus that the United States is locked in fierce competition with China — and that America’s strength comes from its economic power, based on technological leadership — there is no unified strategy or principle of organizing evidence.
This makes a big difference: China is rapidly becoming a dominant economic and technological force by implementing a state-planned industrial strategy, and America is responding to… industrial policy confusion.
Consider two of the most consequential economic bills passed by the 117th Congress: the CHIPS and Science Act and the Inflation Reduction Act (IRA). Due to the scale of the bills, many analysts and commentators argue that Washington has entered a new era, abandoning neoliberal economic principles and adopting the long-standing idea of supply-side industrial policy. But in reality, the bills illustrate how little Washington understands about a competition-oriented industrial strategy and how far from adopting one.
Starting an IRA. Despite the heat of the commentary, this is not industrial policy but climate policy. As important as addressing climate change is, subsidizing clean energy production is irrelevant to meeting China’s challenge. China’s control over many clean energy sectors has little strategic impact on the United States. For example, if the Chinese Communist Party bans the export of solar panels, the effects will be negligible; let’s just burn natural gas to generate electricity.
Likewise, the science part of CHIPS and the Science Act is not really industry policy, it is science policy. The initial Endless Frontier Act, introduced by Sen. Chuck Schumer (DN.Y.) and Todd Young (R-Ind.), closer to an industrial policy because it is focused on applied research in key areas of technology critical to China’s staying ahead . But the House Science Committee shot down the final legislation. As a result, the lion’s share of money now goes to basic scientific research in universities and federal laboratories, which does little to help America compete economically against China. In fact, if investments produce knowledge or inventions with economic potential, they can also help China, as they are freely available in the public domain.
Even the part of the CHIPS Act that purports to be about the semiconductor industry is not industry policy, per se; it was a defense policy, because its core reason was to reduce US dependence on Taiwan for semiconductors. Without that rationale, CHIPS likely won’t pass. The same national defense rationale has shaped the Biden administration’s main techno-economic policy toward China: export controls on advanced chips and chip-making equipment. What about flat panels, robotics, electric vehicles, chemicals, drugs, aerospace, shipbuilding, and the many different dual-use industries that China plans to dominate through a combination of legitimate industrial policy and illegal predation? In general, national security ignores these industries.
Between the final legislative text that emerged from Congress and the way the administration chose to implement it, the CHIPS Act has become visibly diluted by progressive social policies more akin to the failed Build Back Better plan of the Democrats rather than competition policy. For example, semiconductor companies must build daycare centers, and other rules mandate union-building jobs, limit stock purchases, impose complex environmental rules, tack on “Buy American” provisions for inputs, and guaranteed opportunities for minority-owned, veteran-owned and women-owned businesses.
There are two main problems with shoehorning green-equity provisions like this into what should be China’s competition policies. The first is that the federal government has limited leverage over the economy. The extent to which it can provide subsidies is less than what other countries can provide as a share of GDP, especially China. Therefore, we cannot afford to siphon from the relatively modest funding of industrial policy to achieve the goals of green-equity.
The second problem is that doing so poisons the political well for future industrial policy. Many Republicans and some moderate Democrats are now likely to have second thoughts about supporting similar legislation given the precedent of green-equity politicization.
Washington must forge a consensus on what has become America’s most important techno-economic goal.
If it’s job creation, then funding social services and curbing competition policies with Buy America provisions would make sense — even if it’s hard to fathom near-record-low unemployment and high inflation. Similarly, if the goal is to advance “freedom” by reducing taxes and regulations – something that many conservatives seek – then rejecting industrial policy out of hand would make sense. Just go away and pray that China implodes or that the CCP becomes a benevolent hegemon. But both are unlikely outcomes.
The wiser course is to agree that the primary goal of America’s techno-economic policy is to ensure that China never overtakes us for leadership in advanced industry and that we maintain greater technological leverage in China than we have. Otherwise, the end game is not pretty: perhaps an economy focused on supplying China with minerals, food, college education, financial services, and tourism experiences.
In order to reach a consensus to meet the challenge of China with a common industrial strategy of the US, policymakers in Washington should look for inspiration, not in the rules of progressive, neoliberal, or conservative ideology, but in America’s long-forgotten tradition of national development first articulated by Treasury Secretary Alexander Hamilton in his 1791 “Report on Manufactures.”
Regarding the industrial independence of Britain, Hamilton wrote: “To bring about good changes, as soon as may be expedient, therefore requires the encouragement and support of the government.”
Our task now is to revive the Hamiltonian tradition in America to win China’s techno-economic competition. Later this month, the Information Technology and Innovation Foundation will host a conference with leading experts and policymakers to address that challenge. Please join us.
Robert D. Atkinson is the president of the Information Technology and Innovation Foundation (ITIF).
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