Industrial policy: sounds good, but unsound

INDUSTRIAL policy is all the rage in Western policy circles these days. In the US, the CHIPS and Science Act builds on the 2021 Innovation and Competition Act. Both bills begin with near identical text, as their goal is to support “semiconductor manufacturing, research and development, and supply chain security”. Under these initiatives, the federal government is authorised to spend over US$50bn in the next decade to finance the construction of new semiconductor chip factories in the US. A strong stipulation of the financing is that recipients of such funding will be barred from increasing their production of advanced chips in China.

The US is by no means alone in its bid. From the European Union to a number of economies in Asia, subsidies, tax incentives and public-private partnerships are on the menu to support domestic high-tech manufacturing. There are many precedents that are considered instructive, from China’s massive allocation to champion domestic industries in recent decades to Japan’s famed Ministry of International Trade and Industry in the 1960s for subsidising domestic research and development to build on foreign technologies.

But economic historians point out that the experience with industrial policy is mixed at best. Five decades ago, returns from Japan’s industrial policy interventions on textile and mining sectors were not promising, while even successful entrepreneurs who received public sector support complained about excessive government intervention. Also, as evidenced by successive episodes, whether with respect to Japan in the 1980s or the US presently, successful gains of market share by sectors or companies from abroad led to a chorus of protests from domestic competitors who then lobbied for their own quotas and subsidies, creating a cycle of trade friction and protectionism.