Special report | The new industrial policy

Many countries are seeing a revival of industrial policy

A previously discredited approach has found new believers

AS NATIONAL ECONOMIES and international trade were liberalised after the stagflation of the late 1970s, governments increasingly decided to allow corporate behaviour to follow commercial logic. Multinationals set up shop where it made most sense, allocating resources, outsourcing labour and automating factories to minimise costs and maximise profits. The reforms lifted hundreds of millions out of poverty even as they delivered fat returns for shareholders.

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But the less-state-is-better consensus is fraying. The crash of 2008, the loss of middle-class jobs to foreigners or robots and the climate crisis have led many to believe that markets cannot be trusted. Economists like Mariana Mazzucato, of University College London, believe that firms are losing the ability to innovate, weighing on future prosperity. National-security hawks on both sides of the Sino-Western divide fret about reliance on adversaries for critical resources, from semiconductors to pharmaceuticals. And Western bosses complain about “unfair competition” from China’s state-backed behemoths.

“We have been destroying our national champions while China has been nurturing its own,” laments Michael Pillsbury, who helped craft Donald Trump’s hawkish China policy. Siemens and Alstom cited the threat from CRRC, a Chinese trainmaker, to defend the planned merger of their rail divisions, which the European Commission blocked because it would hurt competition in the EU. “Before the ink was dry [on the commission’s decision] CRRC was signing contracts [with European railways],” fumes a former Siemens executive. “Do you have the right [these days] to avoid picking winners?” asks a Brussels lobbyist.

“Markets are good at allocating resources efficiently on a narrow understanding of efficient…What delivers highest returns to an individual investor is not necessarily in the economic interest of a nation,” says Oren Cass of American Compass, a right-leaning think-tank in Washington. Like Ms Mazzucato, who leans left, Mr Cass blames the innovation drought on governments abandoning their role as midwife to technological breakthroughs, as they were for the internet and biotechnology.

Remembering Apollo

In China, the answer to such concerns is simple: more state. Liu He, the vice-premier, has said that the country is moving into a new phase that prioritises social fairness and national security, not the growth-at-all-costs mentality of the past 30 years. Elsewhere, the model is often China. Some Western analysts point approvingly to its ability to set strategic missions and co-ordinate the public and private sectors. There is a sense that China has learned what America has forgotten since the Apollo programme.

Since the covid-19 pandemic, many countries have tried to emulate elements of the Chinese playbook. In Japan 57 Japanese companies will get around $500m in subsidies to invest at home. The country’s newish prime minister, Kishida Fumio, has created the job of economic-security minister, with a mandate to intervene in matters ranging from cybersecurity to chipmaking.

The EU has doubled down on a consortium to make batteries, earmarked some €160bn ($180bn) of its covid-19 recovery fund for digital innovations, especially chips, and, inspired by Ms Mazzucato, launched five “missions” (they include such diverse goals as to improve the lives of more than 3m people at risk of cancer, restore “our ocean and waters” and achieve 100 climate-neutral smart cities by 2030). Thierry Breton, the single-market commissioner and a former French finance minister, is dirigiste at heart. In October President Emmanuel Macron unveiled the “France 2030” programme, which will spend €30bn over five years on ten areas from the specific (small nuclear reactors, medicines) to the vague (cultural and creative content production).

In the same month Rishi Sunak, Britain’s Conservative chancellor, proposed to funnel billions to the private sector. Tax relief for research and development, nearly half of which firms claimed for work done outside Britain in 2019, will be “refocus[ed]…towards innovation in the UK”. One former senior official describes Boris Johnson’s Tory party as “neo-Gaullist, if anything”. One bank boss thinks “Britain is closest to Chinese thinking.”

In Washington the words “industrial policy”, once taboo lest the speaker seem a European socialist, reverberate in the White House, Congress, think-tanks and among K Street lobbyists. In one of his first acts as president, Joe Biden issued an executive order instructing government agencies to review supply chains, stretched to breaking point by the pandemic, to make them more “resilient”—which is to say more American. His signature $2trn Build Back Better climate and social-spending bill, which passed the House of Representatives only to be blocked in the Senate by the opposition of Joe Manchin, a Democratic senator from West Virginia, was peppered with business incentives.

You might expect Republicans, historically sceptical of government, to recoil. In the case of Build Back Better, they have done. Yet elsewhere a reinvigoration of American industry is one of the few areas where Democrats and Republicans agree. When a $25bn handout for semiconductor firms to make more advanced chips in America came up for a vote in the Senate in July 2020, 96 of the chamber’s 100 members voted in favour.

The chip provision has since grown into $52bn and been folded into the $250bn Innovation and Competition Act, which includes $80bn for research on artificial intelligence (AI), robotics and biotechnology, $23bn on space exploration and $10bn for tech hubs outside Silicon Valley. The Senate approved it by 68 votes to 32—a huge level of support by today’s standards (the House will now pick it up). Conservative senators like Josh Hawley, Marco Rubio, Tom Cotton and Ted Cruz talk of a manufacturing renaissance. “The right of centre is learning a new vocabulary,” observes Mr Cass. It sounds remarkably, well, French.

Western leaders justify this revived industrial policy in two ways. One is to do with preserving countries’ rightful place in the global pecking order. The second is about domestic economic development. Politicians often trot out both at once. Presenting his “France 2030” vision, Mr Macron spoke of “a fight that is both civilisational and a value creator”. No speech by Mr Johnson seems complete without a nod to “global Britain” or “levelling up”, a nebulous idea to improve the lot of new Tory voters in the Midlands and north. After Mr Biden signed the $1.2trn infrastructure bill, studded with goodies for American business, Nancy Pelosi, the House speaker, said: “These investments in working families are critical to delivering economic growth at home while ensuring our ability to outcompete China now and in the years ahead.”

On national-defence grounds, a dose of self-reliance may make sense. Advanced microchips are as critical to today’s warfighting as missiles. A large chunk of the world’s cutting-edge chips are manufactured in Taiwan, which is both an American ally (which troubles Beijing) and claimed by China (which worries Washington). Adversaries understandably covet at least some independent chipmaking capacity, just in case.

Like all insurance, this is expensive. For a narrow selection of critical resources the price is worth paying. But politicians tend to inflate the word “strategic” to cover cases where it is not. Mr Rubio thinks sugar counts. Mr Macron apparently believes cinema does.

The costs rise because, as a British business grandee notes, “Everyone has the same list of sexy stuff.” Peruse government plans and most feature AI, biotech, clean energy, semiconductors and quantum computing. “It is not efficient for everyone to have a wind industry,” jokes Jason Furman, Barack Obama’s former chief economist, now at Harvard. In the short run extra demand risks bidding up the cost of inputs. In the long term it could mean a supply glut. The “industrial-policy arms race” may turbocharge the boom-and-bust cycles that characterise capital-intensive industries, notably chipmaking, warns Scott Kennedy of the Centre for Strategic and International Studies, a think-tank.

Companies are following the industrial-policy debate with a mix of zeal and alarm

Some public money will also bankroll projects that the private sector would have developed on its own. Carmakers already prefer to make or procure bulky electric-car batteries near their factories, given how costly they are to ship. Technology firms have every reason to keep on perfecting AI because of its moneymaking potential.

China also shows that, as ever, much government cash can simply go down the drain. Some of its most innovative companies, including tech giants such as Alibaba and Tencent, have thrived at arm’s length from the state. Where the government has been actively involved, by contrast, the results look “varied and often unimpressive”, says Felix Oberholzer-Gee of Harvard Business School. The Chinese state has poured more than $70bn into developing a rival to Boeing and Airbus with only limited success so far. Its biggest chipmaker, SMIC, was years behind the cutting edge even before Mr Trump’s sanctions deprived it of the latest chipmaking technology. And for all the Western handwringing over superior Chinese AI skills, these are mostly confined to unsophisticated tasks such as image labelling.

To be fair, academic proponents of the “venture-capitalist state”, like Ms Mazzucato and Mr Cass, are not fans of wasteful pork-barrel spending. They would like governments to back genuinely out-there ideas ignored by the private sector, to set clear performance yardsticks and, critically, to be as ruthless as Silicon Valley at pulling the plug on failures. “You don’t need the ability to pick winners. You need the ability to let losers go,” says Dani Rodrik of Harvard, whose paper in 2004, “Industrial Policy for the 21st Century”, helped to seed new interest in the notion.

In practice, political incentives make governments, even China’s, worse at withdrawing support from duds than at identifying the next big thing. The Apollo model may be ill-suited to today’s complex challenges. Ms Mazzucato herself concedes that sending the man to the Moon was primarily a technical problem. Decarbonising Europe or vaccinating America involve an awful lot of tricky social engineering, as well as the physical kind.

Even some proponents of industrial policy doubt that the goals of boosting innovation and creating lots of well-paying jobs complement each other. If your goal is to cure cancer, you should invest in an existing biotech hub like Boston not a provincial town, says Mr Furman. And if it is to shore up the middle class, there are better ways to do it. “Technological change means that promotion of manufacturing is not going to do much for employment and inclusion,” says Mr Rodrik. He points to South Korea and Japan, where the share of manufacturing in GDP has risen at constant prices even as the share of manufacturing employment has kept falling, owing to automation. According to Ro Khanna, a Democratic congressman, the goals of fostering inclusion and jobs on one hand and national assets on the other “won’t be harmoniously aligned. That would be wishful thinking.” That he helped to craft the innovation-hub provisions in the $250bn Senate innovation bill shows how politically attractive bundling them together is.

Winners and losers

Companies are following the industrial-policy debate with a mix of zeal and alarm. Less favoured firms or sectors grumble about being left out. A Brussels lobbyist criticises the EU battery consortium for “going much too radically in one direction” by focusing on lithium-ion technology, which is useful in some areas like passenger electric cars but less so in others. What about fuel cells, which may be better suited for heavy transport, or more efficient combustion engines as a bridge to a cleaner future, he asks. Britain’s creative industry looks longingly at Mr Macron’s pampering of French filmmakers. Some British airlines, which unlike their European peers were left out of pandemic relief support, feel “buggered”, says the business grandee.

Neil Bradley, at the US Chamber of Commerce, has no qualms about industrial policy that backs basic research or improves security and diversity of supply chains. But he is wary of “using government policy to manipulate the market”. “You can see hints of it in discussions of onshoring and reshoring,” he says. “The middle-class foreign-policy or worker-centric trade policy is basically protectionism,” says Hank Paulson, a former Goldman Sachs boss and treasury secretary under George W. Bush and founder of the Paulson Institute for Sino-American business relations. Both Republicans and Democrats “want to tell business what to do”, he sighs.

Companies which may benefit from government largesse are naturally more enthusiastic. Pat Gelsinger, boss of Intel, welcomed the news of impending semiconductor splurges with congratulatory tweets. The American giant is one of the first in line to receive a handout at home as well as in Europe, which lacks advanced chipmakers of its own. The 500 or so corporate members of the European battery consortium are hardly complaining about too much EU cash.

Even beneficiaries air gripes, however. A well-connected lobbyist in Washington reports that carmaking clients are furious about the union-labour and local-content requirements for EV subsidies in the infrastructure package. Wind-power developers have lashed out at “Buy American” provisions attached to tax credits. Elon Musk, boss of Tesla, has also panned Mr Biden’s EV subsidies. An American chip entrepreneur, T.J. Rodgers, has argued against subsidies to his sector, noting that in 1987 the Sematech consortium began spending $500m in government funds “that did zero for the industry”. “‘Free government money’ induces horribly inefficient spending and undeserved payouts to executives and shareholders,” he writes. Mr Gelsinger dislikes the flipside of being part of a sensitive industry—being barred by his government from selling products to China. “If Chinese customers want more chips from the US, we should say yes,” he suggests.

A consultant close to Mr Johnson reports that some British bosses are wondering how becoming wards of one government will go down in other capitals. Becoming too cosy with the state can leave you nobbled elsewhere. More chief executives face this dilemma today than in the heyday of industrial policy 40 years ago, when companies were less multinational and multinationals less global. The ultimate choice will differ from boardroom to boardroom. But one consultant has a warning to those business leaders who lap up the largesse: “Be careful what you wish for.”

This article appeared in the Special report section of the print edition under the headline "Return to picking winners"

Beware the bossy state

From the January 13th 2022 edition

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