Industrial policy, same old policy

Competition with China will define the decades to come, and Congress wants to step in. Alas, it’s a bad start with the nearly 1,500-page Senate Innovation and Competition Act that won’t help. neither innovation nor competitiveness.

The bill contains useful provisions that merit separate consideration, such as economic sanctions against Chinese entities related to cyber and intellectual property theft and officials implicated in human rights violations, and l repeal of the extinction of the Global Magnitsky Act of 2022.

But bipartisan support for the bill has less to do with China than with its boom in congressional spending and parish politics. “Everyone knows this thing is going to pass, so every lobbyist wants to add whatever they can,” Representative Ro Khanna, the bill’s main sponsor in the House, said refreshingly. This is how industrial policy still works in practice.


Start with the $ 54 billion for the US semiconductor industry, which doesn’t really need it. Computer chip manufacturing, as opposed to design, has been commoditized due to economies of scale, with Samsung,

Taiwan Semiconductor Manufacturing (TSMC) and Intel dominate manufacturing.

While the United States accounts for 12% of chip manufacturing, US companies dominate in design equipment (52%) and chip manufacturing (50%). This is where the United States has a comparative advantage and China is lagging behind by leaps and bounds. Credit US spending on semiconductor research and development by private companies.

A legitimate concern is that Beijing will attempt to take control of Taiwan, which represents around 20% of global capacity. The Trump administration has previously worked with TSMC to build a new plant in Arizona. The defense of Taiwan requires more weapons for island democracy and better US naval deterrence. Yet Biden’s budget includes a cut in actual U.S. defense spending.

The biggest problem is the political strings that still attach to industrial policy. Firms on their own will allocate capital to its most productive use, but government grants will direct investment where policy directs. Majority Leader Chuck Schumer has already promised the bill will bring chipmaking to upstate New York. Trade Secretary Gina Raimondo, these are your orders.

The bill also includes some $ 120 billion for advanced technology research and would roughly double the annual budget of the National Science Foundation (NSF). More spending on basic research, especially defense technologies, could help as adversaries militarize robotics and artificial intelligence. But much of the money in the Senate bill would go into applied research which is usually funded by the private sector.

Grants to institutions would also be awarded on the basis of identity and geographic policy. The bill would create a new technology and innovation directorate and a separate main diversity office at NSF to ensure funds are distributed fairly and create jobs across the country. But effective research is about ideas, not jobs.

Some grants would be used specifically to expand research on the sexual harassment of “vulnerable groups” in science, technology, engineering and mathematics (STEM) and “alternatives to power dynamics and hierarchical and dependent relationships in academia”. China must tremble on this.

One of the best ideas in the bill is to award scholarships to undergraduate and graduate students studying artificial intelligence in return for future public service. But institutions would only be eligible if they attract “a diverse and non-traditional student body.” Could too many Asian students disqualify a school?

Many Republicans are supporting the bill because they believe the United States must emulate the Beijing-ruled capital to defeat Beijing. But the strength of the United States has always been its capitalist system, which encourages private investment and innovation through market competition, strong intellectual property rights and, yes, profits. This is how the United States transcended the challenge of Japan in the 80s and 90s.

US companies have nearly doubled their R&D spending over the past decade (see graph opposite) and lead in most areas of high technology. China’s strategy has long been to subsidize inefficient state-owned companies and national champions like Huawei, which has crippled smaller potential competitors.


America’s biggest competitive disadvantage is its bankrupt K-12 schools, which are controlled by teacher unions and progressives who want to bring down math education, as Williamson Evers described in these pages la last week. Higher education has been a strength in America, but meritocracy is eroding there too. In the meantime, Democrats want to weaken pharmaceutical intellectual property and increase capital gains and corporate taxes, which would reduce investment.

China’s challenge demands a better response than the one the United States has assembled to date. But the industrial policy of this bill will waste taxpayers’ money and divert private capital for less efficient purposes. America cannot surpass China by imitating it.

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About Perry Perrie

Perry Perrie

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