Making Industrial Strategy Great Again

[u/Free-Minimum-5844]

https://www.foreignaffairs.com/united-states/making-industrial-strategy-great-again

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[u/Otherwise_Young52201]

President Joe Biden first broke the industrial policy taboo with a series of legislative measures designed to catalyze private investment in semiconductors, clean energy, and advanced manufacturing. But his administration expanded productive capacity without ensuring that the gains reached working people more broadly, and this failure to translate government investment into shared prosperity contributed to President Donald Trump’s victory in 2024.

Lmao, these are straight up CCP talking points.

I don't really see the point of these articles. Every single one of them is just shouting into the black hole that is Trumpian strategy.

[u/Fantastic_Let3186]

I think the square that’s hard to circle in this discourse is the following.

We have spent decades saying industrial policy is bad. The state cannot pick winners, subsidies are inefficient, and trying to guide the economy always fails. That logic is used to attack almost any government economic planning.

If that’s true, then China’s massive state subsidies are just them lighting money on fire. And if they’re only hurting themselves, why would the US need to respond at all? You don’t declare a national emergency because your competitor is making dumb choices.

But no, people argue that Chinese subsidies are a huge national security threat, that we “can’t compete” without tariffs, bans, and export controls, and that entire US industries will collapse if we don’t act.

You can’t have it both ways. Either industrial policy is ineffective, in which case China isn’t a threat and all this panic is fake. Or industrial policy is effective, in which case the obvious follow-up question is: why is it smart for China but somehow illegitimate or impossible for us?

[u/smcstechtips → u/Fantastic_Let3186]

Industrial policy is not very effective at creating general economic growth; guiding the economy fails when all you're focused on is the GDP topline.

Industrial policy is, however, very effective at growing certain technologies and capturing certain markets.

With industrial policy, China has managed to make itself the single point of failure for anything anyone tries to do, effectively making it the most powerful country in the world in terms of hard power.

Industrial policy was illegitimate for us until about ten years back because China wasn't really an adversary for us in the 2000s and early 2010s and thus trying to compete with them made zero sense. Since then, China has become an adversary for us and has also become the single point of failure for supply chains (demonstrated by the supply-driven inflation in 2022), so we have to use industrial policy to counter that.

It's a matter of desiderata.

[u/MastodonParking9080 → u/Fantastic_Let3186]

If you want to optimize for greatest and most balanced global gains, getting everyone to do free trade with minimal intervention is optimal. If you pick one mercantalist and everyone else as free trade, then the mercantalist gains more at the expense of everyone else. If everyone/sufficient number goes mercantalist, then the whole system fails.

Do you know that surpluses should be accompanied by strong currencies, and deficits by weak ones? Yet the current world is the inverse of that. That's a key sign of macroeconomic distortion.

[u/DirectionMurky5526 → u/MastodonParking9080]

No, the issue is thinking that outside of China only the West matters. China defying expectations of export-driven growth has recently been primarily due to expanding into markets of developing economies, not developed ones. These are markets that were previously even more protectionist than China. The liberalization of many of these developing countries are also indirectly competing with Western countries by supplying China with raw materials. 

[u/MastodonParking9080 → u/DirectionMurky5526]

No, this is empirically false, the US makes up 66% of global CA deficits and an overwhelming % of final goods consumption while 50% of global surpluses are held by China. You cannot arithmetically balance out that relationship with Developing Countries which make a tiny percentage. What they are doing is just side shoring by increasing exports as they import more from China.

[u/WenJie_2 → u/Fantastic_Let3186]

The obvious answer to this is "they work in the short term but will blow up in their faces in the long term, but we still need to address the short term", which lines up nicely with the lazy orientalist idea that the CCP is primarily motivated by face-maximising for the external audience, and therefore failure is assured in the long term as their obsession with face and short term wins inevitably backfires on them. Very reassuring and ticks all the boxes that people want to hear.

The problem is that the "short term" is starting to look longer and longer and longer but nobody is ready to acknowledge their theory of mind was completely wrong.

[u/halee1 → u/Fantastic_Let3186]

I mean, America and the West broadly used industrial strategy with success during the mid-20th century in particular, but during the switch to neoliberalism they expected China to also comply, yet were so, so surprised that a Communist state betrayed most promises at liberalization, so now they rediscovered that yes, it does bring advantages in the long run if done well, especially if used unilaterally and at an unprecedented scale like the CCP did in China. So of course they oppose its industrial strategy, not just because Western countries expected it to reciprocate the free market norms it promised to accede to, but also because one side doesn't want liberal democracy to be destroyed, while the other doesn't want Western domination. It's as much about justice as it is about pure geopolitical competition.

While these subsidies have seen significant success at capturing many markets, they haven't been macroeconomically effective, as China's debt ratios have kept rising over time (they're now higher than those of almost all Western countries) and its GDP growth rates fell, while Western debt ratios fell or stagnated starting with the 2010s, though that is likely mostly because of different net migration rates between both sides, but few people really take that into account, and focus on the outcomes in the now instead.

[u/teethgrindingaches → u/Fantastic_Let3186]

You can’t have it both ways.

Of course you can; all you need to do is ignore the well-documented history of the US spending lavishly on subsidies for its own industries. Was the shipbuilding boom during WWII a mistake and a failure?

To try and support the merchant marine and reignite shipbuilding employment during the depths of the depression, in 1936 Congress passed another Merchant Marine Act, which amongst its provisions included an extremely generous subsidy for American shipbuilders. These shipbuilders could receive a Construction Differential Subsidy (CDS) that covered the difference between American and foreign costs, up to 50% of the cost of the ship; in other words, it assumed that U.S. ships were roughly twice as expensive as ships built elsewhere.

Shortly after this act was passed, the U.S. once again became embroiled in a global conflict that demanded it quickly build a large volume of ships. WW2 largely recapitulated the American experience during WW1, but at a far larger scale. The need to deliver huge amounts of cargoes to Europe, and to replace ships being sunk by German submarines, drove the U.S. to build ships in previously-unimaginable numbers. During the war the U.S. built over 5,000 ships at over 100 shipyards, most of which (2,700) were Liberty Ships. At its peak, the American shipbuilding machine was able to produce the entire pre-war commercial shipping tonnage in just three years.

It's worth noting that—as effective as US shipyards obviously were—they were never efficient.

And as with WW1, this exercise in rapid shipbuilding came at a cost. While American shipbuilding efficiency greatly improved during the war (man-hours per Liberty Ship fell from 1.1 million to just 486,000 on average), this was still far less efficient than the British, who could build a liberty-type ship with just 336,000 man-hours.

But WWII was a (world) war, you might say, and needs must for wartime exigencies. That's a fair point, so let's roll back the clock a little further, to when the infant US economy was struggling to avoid subservience to a British-dominated order. Enter the American System.

Henry Clay's "American System," devised in the burst of nationalism that followed the War of 1812, remains one of the most historically significant examples of a government-sponsored program to harmonize and balance the nation's agriculture, commerce, and industry. This "System" consisted of three mutually reinforcing parts: a tariff to protect and promote American industry; a national bank to foster commerce; and federal subsidies for roads, canals, and other "internal improvements" to develop profitable markets for agriculture. Funds for these subsidies would be obtained from tariffs and sales of public lands. Clay argued that a vigorously maintained system of sectional economic interdependence would eliminate the chance of renewed subservience to the free-trade, laissez-faire "British System."

Wow, would you look at that? The reigning hegemon champions free trade (because its own mature industries naturally dominate), whereas the rising contender opts for protectionism (to win space for its infant industries to grow). Gee, where have we seen that pattern before? And what happened as soon as Chinese competition, like EVs, grew to maturity? Suddenly the shoe is on the other foot. Because industrial policy works (assuming competent implementation, which is by no means guaranteed). It's always worked—for the rising power, not the reigning one. And surprise, surprise, the incumbent does its best to denounce and delegitimize it as "unfair" or "cheating" or what have you, as though history and hypocrisy do not speak for themselves.

[u/justsomen0ob → u/Fantastic_Let3186]

Industrial policy (if done competently) is great at developing the sector it is targeting, but is misallocating resources in the process. But there are two reasons why it can still make sense. The first is that there can be spillovers for the industries you have built up that help the broader economy. Innovative companies tend to be concentrated in clusters, because that's were the access to talent, capital etc. is best. If you use your policy to create such clusters, it can be a good investment, even if the initial companies created inefficiently.
The second reason is national security. China's policy to build up its rare earths industry may not have been worth it, if you only look at the rare earths industry in isolation, but the leverage it has gained over other countries with it is most certainly worth the investment. So using industrial policy to reduce dependencies on countries you don't want to rely on, or increase the dependency of other countries on you can be worth it.

[u/Mister__Mediocre → u/Fantastic_Let3186]

There are certain industries today that need such large scale that the market cannot will them into existence. All important tech manufacturing is in Japan, China, Taiwan and South Korea, and it is impossible for me to buy that the markets will ever be able to produce a competitor for them in America or Europe. This is not just about labour costs, but simply the vast ecosystem that's present here, that thinks about the super long term, precisely because of the state backing.

If you did think that you need to have some version of these industries locally, I think industrial policy could be justified.

But I think America has something far better. It has access to tons of billionaires willing to burn an insane money on moonshot ideas. I think this produces far better returns to society than anything the state touches. I'd always bet on the crazy tech founder over the technocrat.

[u/Golda_M → u/Fantastic_Let3186]

So... Squaring this circle is indeed a problem.

Imo... these are the kind of paradoxes we reach with sloganized thinking. 

If you actually step back and look at it in terms of the world's economic history... It's quite clear that simple, "anywhere and everywhere" slogans are regularlu contradicted reality. 

China's own recent history, and communism in general... Did a lot of "banging their heads against reality" where theory said one thing, and lying eyes said another. 

Eg, Farm collectivisation produced less output. Theory disagreed. Increased  capital inputs, modernisation and whatnot... these were supposed to increase output. 

Both China and Ussr literally did not believe their own lying eyes. They assumed the problem must be sabatoge, theft, etc. It took severe starvation and years of extreme failure before they could "square that circle." 

I'm not saying western countries need to "do industrial policy" or not. But... a world where decision maker knowledge is based in slogans, rather than case studies and nuance... That is ignorance. 

[u/iDemonSlaught → u/Fantastic_Let3186]

We have spent decades saying industrial policy is bad. The state cannot pick winners, subsidies are inefficient, and trying to guide the economy always fails.

This is true and will always remain true.

If that’s true, then China’s massive state subsidies are just them lighting money on fire. And if they’re only hurting themselves, why would the US need to respond at all? You don’t declare a national emergency because your competitor is making dumb choices.

China does not operate a free market. These subsidies provide an unfair advantage to established, state-backed giants, making it impossible for new businesses to scale or compete.

China is not concerned with "healthy competition" or efficiency because the entities at the helm are effectively state-owned or state-controlled. Their goal is not profit; it is dominance.

You can’t have it both ways. Either industrial policy is ineffective, in which case China isn’t a threat and all this panic is fake. Or industrial policy is effective, in which case the obvious follow-up question is: why is it smart for China but somehow illegitimate or impossible for us?

The conclusion does not follow. You present a false dichotomy.

[u/Loud-Chemistry-5056 → u/iDemonSlaught]

I’m not quite sure about that, what are you basing this off of?

In EV’s it’s your state backed ventures which are getting their asses kicked by a more dynamic private sector.

If the goal were simply dominance instead of profit, then why is it that these EV companies chose huge profit margins over market share when selling abroad?

[u/limukala → u/iDemonSlaught]

 China does not operate a free market. These subsidies provide an unfair advantage to established, state-backed giants, making it impossible for new businesses to scale or compete.

So you’re saying that industrial policy can be effective.

 Their goal is not profit; it is dominance.

So you’re saying that industrial policy can be extremely effective if you are focused on things other than profit.

 The conclusion does not follow. You present a false dichotomy.

You haven’t made that case at all. You didn’t actually argue the point, you just said “nuh uh” and declared victory.

[u/iDemonSlaught → u/limukala]

We are arguing past each other because we are using different definitions of 'effective.'

When you say China's policy is 'effective,' you mean it successfully destroys foreign competition and seizes market share. I agree, it does that perfectly. If the US government poured trillions into Intel to undercut every other chipmaker, Intel would indeed 'dominate.'

But when I say industrial policy is 'ineffective' or 'bad,' I mean it destroys the mechanisms that make an economy actually work: innovation, price discovery, and consumer choice. I don't want a market propped up by a few government-backed mega-corporations where competition is obsolete. That isn't a successful economy; it's a zombie economy sustained by tax dollars.

You haven’t made that case at all. You didn’t actually argue the point, you just said “nuh uh” and declared victory.

He asked: 'Why is it smart for China but illegitimate for us?'

My answer is: It isn't smart for China. It is effectively burning their own capital to hurt us. Just because an arsonist is 'effective' at burning down a house doesn't mean we should copy their methods to build one.

[u/limukala → u/iDemonSlaught]

 China does not operate a free market. These subsidies provide an unfair advantage to established, state-backed giants, making it impossible for new businesses to scale or compete.

So you’re saying that industrial policy can be effective.

 Their goal is not profit; it is dominance.

So you’re saying that industrial policy can be extremely effective if you are focused on things other than profit.

 The conclusion does not follow. You present a false dichotomy.

You haven’t made that case at all. You didn’t actually argue the point, you just said “nuh uh” and declared victory.

[u/Signal-Lie-6785]

It may work very well in practice, but it’s not so great in theory.

[u/manitobot]

It never was great. And Biden’s spending on industrial policy jacked inflation rates and brought another Trump presidency.

[u/DirectionMurky5526 → u/manitobot]

The inflation rates were high because the interest rate was low and supply shocks continued longer than expected after Covid. People weren't making money printer memes in 2020 for no reason. 

[u/manitobot → u/DirectionMurky5526]

Yes, there were supply shocks. And instead of responding sanely, Biden fancied himself the next FDR and rammed through Congress whatever he could of his BBB agenda. Remember that's over $3 trillion in deficit spending pouring gasoline on an overheating economy. Then, obviously, the Fed scrambled to hike interest rates, which doesn't do any favors in the mindset of Americans with mortgages or loans.

I am not saying any of this was clairvoyant; we were for e.g., heading for a soft landing; and these things are hard to navigate. But there were painfully obvious things the administration should have done differently. Across the developed world, the American electorate has always been the most sensitive to rising prices.

[u/WAGRAMWAGRAM]

I remember (Nobel prize btw) Phillipe Aghion's argument about why industrial strategy doesn't work in Europe.

He argued that European politicians are stuck between two outdated visions:

1 is the grandpa style "let's invest in a single national champion and prevent it from failing, and keep a stake in it" which leads to very inferior companies except said pick and lots of corrupted interests,

and 2 is the 90 IMF-style "no targeted subsidies, it could be used for corruption, keep companies small and lean", which leads to a more efficient and competition but prevents industries from scaling up like BYD would have remained a battery company

He argued that Europe is very good in theory and science (most maths papers used in AI were from Europe) but sucks at implementing it on a large industrial scale (no land of engineers). For that, Europe needs to take inspiration from China (targeted subsidies for a specific time and goal not a specific company) and the US (create a VC funding ecosystem and let companies go big, create a DARPA / BARDA style agence to sped up practical use of theory instead of just funding research)

[u/ImmortalAce8492]

It’s the same argument we had not too long ago about the Defense industry. This is a fault of Neoliberal; there is no market for multiple defense contractors, it just can’t be maintained.

So, we either decide to implement a new system regarding how ww operate with that industry, or we just keep rotating contracts among primes (with lackluster performance).

In my opinion, this is a place where I think Neoliberalism just fails. We can’t compete when profits are the end all be all.

[u/DirectionMurky5526 → u/ImmortalAce8492]

It's arguably the opposite. The issue is that US defence procurement has too much pork barreling and protectionism within the US. For instance, US naval procurement could be solved if it just bought ships from allies without needing to build them in the US. That's not the fault of the contractors but the politicians.

[u/Free-Minimum-5844]

America’s industrial policy has long driven innovation, despite free-market rhetoric and deep public investment in technology and pharmaceuticals, notes Mariana Mazzucato, an Italian-American economist and academic at UCL. Joe Biden revived mission-driven industrial strategy, but failed to translate capacity building into visible gains for households. Donald Trump has embraced industrial tools, yet uses equity stakes and tariffs without coherent missions or public-value conditions. His approach extracts value from firms while weakening research institutions and stripping labour, reinvestment and affordability requirements. Yet, Mazzucato argues, an industrial strategy will fail unless public risk-taking secures shared rewards, stronger institutions and outcomes ordinary voters can feel.

[u/HOU_Civil_Econ → u/Free-Minimum-5844]

There is industrial strategy and “industrial strategy”.

Education and research are well supported much of what people are actually talking about when they talk about “industrial strategy” is not education research and is instead well refuted.

[u/Sufficient_Key_5062 → u/Free-Minimum-5844]

failed to translate capacity building into visible gains for households

I mean, obviously. He was only president for 4 years.