What the U.S. can learn from China’s Industrial Policy Mistakes – and Successes

China’s attempts to support specific industries have been a mixed bag.

By guest author Nathalian Taplin from the Wall Street Journal.

For years “industrial policy”—encouraging the growth of specific industries with government help—was a dirty word in the U.S. Now it is one of the few things many Democrats and Republicans agree on. Separate bills moving through the U.S. Congress with bipartisan support would lift federal spending on research and development, science education, and on grants for semiconductor plants by as much as $250 billion.

The reason for this sudden outbreak of bipartisanship is no secret: rising concerns over Chinese competition. A separate roughly $1 trillion bipartisan infrastructure bill is being sold along similar lines.

There is little doubt the U.S. needs more public spending on infrastructure, R&D and on training the next generation of American programmers and engineers. Supporting strategic industries with tax incentives or other means can be helpful, too, as Taiwan and South Korea have demonstrated in semiconductors. But the U.S. should avoid the trap of trying to pick winning firms directly—and of pairing state support with protectionism. In China that policy combination has often led to poor outcomes: overcapacity and low-quality firms feeding off state subsidies, rather than real technology champions.

U.S. infrastructure itself is in a dreadful state. Simply fixing all of America’s roads and bridges—to say nothing of new investment in broadband or more resilient power supply—would cost around 3.5 % of gross domestic product, according to an October 2020 note from the International Monetary Fund.

Higher public spending on R&D and science education—for instance, through support for community colleges—is even more important. In part that is because the private sector has, since the end of the Cold War, financed the lion’s share of R&D spending in the U.S.

In 2017 private-sector R&D accounted for about 1.8 % of GDP, against just 0.7 % from the government. Moreover the combination of an aging, slower-growing workforce in the U.S. and rising tensions with China is poised to hit American companies on both costs and revenue. It is therefore essential, if the U.S. wants to stay ahead, for the government to start spending more on science itself, as well as doing what it can to keep company costs in check by supporting science education and skilled immigration.

Where things get fuzzier is on the question of directly supporting industries like semiconductors. What the experiences of both China and places like South Korea show is that government money can help—but it is also essential not to shield companies from competition.

China’s experience with electric vehicles is instructive. Beijing initially focused on directly trying to build up national champions by giving EV buyers big taxpayer-funded rebates for domestically produced vehicles, as well as forcing all Chinese auto companies to invest in EV production and buy local batteries.