Thoughts on the Industrial Policy Debate

On July 26, AEI held an in-depth event on the CHIPS and Science Act and US semiconductor policy. The event included conversations with Secretary of Commerce Gina M. Raimondo and Sen. Todd Young (R-IN), and a panel discussion with highly knowledgeable experts. The panel explored the security implications of the semiconductor sector and threats from Beijing. Near the end of the panel discussion, I intervened to praise the panel’s deep knowledge, but I also urged the audience to listen to the hour-long discussion of industrial policy that took place the day before across the street at the Peterson Institute for International Economics. The two discussants were Lawrence H. Summers and Robert B. Zoellick, who both served in leading positions in US and international economic institutions. They delivered strong critiques of the Biden administration’s industrial technology policy, which centers on raising the US’s productive capacity. What follows are thoughts on industrial policy and its relevance to the AEI event.

First, Chris Miller—moderator of the panel and author of the definitive analysis of the semiconductor, Chip War: The Fight for the World’s Most Critical Technology (Scribner, 2022)—queried, “Is industrial policy the right framework for understanding the discussion we’re having? I think there’s a lot of people in this room who might question that phrase as being relevant.”

That is a fair point. But given the Biden administration’s policy, the debate over semiconductors cannot be cabined within only a national security context. Administration officials have repeatedly argued the semiconductor policy in the CHIPS and Science Act is a model for other technologies. As US Trade Representative Katherine Tai asserted, the US must “keep replicating this [CHIPS and Science Act effort] for other industries.” Further, in a speech touted as definitive for Biden’s international economic policy, National Security Adviser Jake Sullivan posited a “new Washington consensus” that eschews “oversimplified market efficiency” theories and espouses “a modern industrial and innovation strategy.”  Under the new strategy, the administration will identify “specific sectors that are foundational to economic growth” and also meet national security priorities in cases wherein the private sector is not “poised to make the investments needed to secure our national ambitions.”

Most, though not all, industrial policy skeptics readily consider there are exceptions for national security. In this case, Summers and I do support CHIPS and Science Act funding for new US-based semiconductor plants, given Taiwan’s perilous national security situation and its hosting of 90 percent of advanced chip manufacturing. (For a view that does not accept the national security exception, see an analysis by leading international economist Anne O. Kruger.) However, Summers and Zoellick urged listeners to scrutinize and be skeptical of “Pentagon-style economics,” which pave the way for targeted subsidies.

Summers and Zoellick also warned of the strong connection between subsidy and protection. Zoellick noted that congressional voices are already questioning some US public subsidies, given the number of foreign firms that benefit from electric vehicle and battery subsidies in the Inflation Reduction Act. And the president continually touts his more restrictive changes to the already protectionist Buy America regulations.

So, what is industrial policy? As Greg Ip of the Wall Street Journal recently laid out, industrial policy has many definitions and versions, with politicians particularly advancing myriad policy candidates with different definitions for public intervention and support. However, Summers advanced an approach that I find serviceable. He posited support for a broad-based “industrial strategy,” advancing examples that produced economic and social gains like the trans-pacific railroad, the land grant colleges of the 19th century, and the national highway project under President Dwight Eisenhower. And he contrasted these expansive programs against Biden’s narrow policy which consists of a “patchwork of subsidies nationally oriented toward manufacturing.” Manufacturing-driven industrial policy is “profoundly misguided.”

To review, the speakers and panelists at the AEI CHIPS Act event made a strong, informed national security case for federal intervention in the semiconductor industry. As for the broader debate over industrial policy largesse, a (skeptical) jury is still out.