Old ideas are like old clothes – wait long enough and they will be back in fashion. Thirty years ago, “industrial policy” was about as fashionable as a bowler hat. But now governments around the world, from Washington to Beijing and New Delhi to London, are rediscovering the joy of grants and singing the praises of economic self-sufficiency and “strategic” investment.
The importance of this development goes far beyond economics. The international adoption of free markets and globalization in the 1990s was accompanied by a drop in geopolitical tensions. The Cold War was over, and governments competed for investment rather than dominance.
Today, the resurgence of geopolitical rivalry is the driving force behind the new mode of state intervention in the economy. As trust wanes between the United States and China, each has started to trust the other for any vital commodity – be it semiconductors or rare earth minerals – as a dangerous vulnerability. Domestic production and security of supply are the new watchwords.
As the economic and industrial struggle intensifies, the United States banned exports of key technologies to China and pushed to repatriate supply chains. It is also moving towards the direct public funding semiconductor manufacturing. For its part, China has adopted a “dual circulation “ economic policy that emphasizes domestic demand and the achievement of “major breakthroughs in key technologies”. Xi Jinping’s government is tightening up too condition check on the technology sector.
The logic of an arms race sets in, as each party justifies its movement towards protectionism as a response to the actions of the other party. In Washington, USA-China Strategic Competition Law, who is currently going through Congress, accuses China of pursuing “state-run mercantilist economic policies” and industrial espionage. The announcement in 2015 of the “Made in China 2025“Industrial strategy is often cited as a turning point. In Beijing, by contrast, it is argued that a declining America has turned against globalization in an effort to block China’s rise to power. President Xi said the backlash against globalization in the West means China needs to become more autonomous.
The new emphasis on industrial strategy is not limited to the United States and China. In India, the government of Narendra Modi promotes a policy of Atmanirbhar bharat (Autonomous India), which encourages the domestic production of key products. The EU published an article on industrial strategy last year, which is part of a dynamic of strategic autonomy and less dependence on the outside world. Ursula von der Leyen, President of the European Commission, called for Europe to have “mastery and ownership of key technologies”.
Even a conservative administration in Britain is turning away from the laissez-faire economy championed by former Prime Minister Margaret Thatcher and seeking to protect strategic industries. The government is considering whether block the sale of Arm, a British chipmaker, to Nvidia, an American company. The UK government also bought a majority stake in a bankrupt satellite company, OneWeb.
Covid-19 has bolstered the fashion of industrial policy. National vaccine production is increasingly seen as a vital national interest. Even if they decry “vaccine nationalismElsewhere, many governments have decided to restrict exports and establish 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, the national security arguments for industrial policy are part of the larger backlash against globalization and free trade. Joe Biden’s rhetoric is downright protectionist. President proclaimed in Congress: “All the investments of the American employment plan will be guided by one principle: Buy American.”
In one item Last year, Jake Sullivan, Mr. Biden’s national security adviser, urged the security establishment to “move beyond the dominant neoliberal economic philosophy of the past 40 years” and accept that “industrial policy is deeply American ”. The United States, he argued, will continue to lose ground to China on key technologies such as 5G and solar panels, “if Washington continues to rely so much on research and development. of the private sector ”.
Many of these arguments will sound like common sense to voters. Protectionism and state intervention often do. But free market economists are appalled. Swaminathan Aiyar, a prominent commentator in India, to complain the return of failed ideas from the past, claiming that: “Self-sufficiency was what Nehru and Indira Gandhi tried in the 60s and 70s. It was a horrible and terrible flop. Adam Posen, president of the Peterson Institute for International Economics in Washington, recently decried “America’s Self-Destructing Economic Retreat,” arguing that policies to support selected industries or regions usually end in costly failure.
As tensions mount between China, the United States and other great powers, it is understandable that these countries are addressing 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.