Over at the Wall Street Journal, Greg Ip has written a fantastic article analyzing the return of industrial policy in many Western countries. Prompted by the economic success of China, governments are increasingly directing resources to favored industries. The WSJ article does a great job at outlining the costs and benefits of such an industrial policy.
My general view is that these efforts rarely deliver the promised results. The success of China is not primarily due to industrial policy but to the set of market-opening policies that China put in place starting in the 1980s. In fact, a good argument could be made that China's efforts to direct resources to certain industries or activities has resulted in huge amounts of waste. The reason is that, as Greg Ip outlines, industrial policy allocates resources on the basis of politicians' perceived "strategic priorities" rather than on the basis of market signals. And politicians are not very good at picking the next big thing. Instead, they subsidize certain industries largely out of political expediency - things like "how many jobs will I get in my district". This can be a recipe for short-run electoral success, but it is rarely a recipe for long-run economic growth.
With that on the table, and with a presumption that many of you will disagree with the preceding paragraph, I am sure we can have a healthy debate in the comments section!
I agree on the comments above. I tend to think that while bringing manufacturing in-country may help eliminate some of the supply-chain bottleneck for components like semiconductors and batteries, the truth is that China owns so much of the process that it'll be hard for the US to be totally self-sufficient anyway. Everything from mining and refining raw materials, assembly, and packaging are done in China (or Chinese-owned mines in places like Africa) and for much cheaper than can be done here, so the US would have to heavily incentivize companies to retain a skilled workforce and keep those jobs here, it's just too expensive otherwise. It all seems very shortsighted and reactive. A proactive strategy to figure out the next critical tech would go a long way.
As an aside, this article references COMAC, China's attempt to launch a commercial aircraft on the scale of Boeing or Airbus, in the context of what used to be known as "Made in China 2025". China has been known to shortcut the expensive R&D process by stealing intellectual property, and many of the critical components in the COMAC C919 were stolen directly from US and European companies. The pessimist in me thinks that even if industrial policy here gains momentum, China's incentive to maintain control of the supply chain is so great that they'll throw all their resources at understanding what we're doing and how we're doing it, and then figure out how to make it cheaper and more efficient.
Link to an article about the COMAC C919
https://www.zdnet.com/article/building-chinas-comac-c919-airplane-involved-a-lot-of-hacking-report-says/
Posted by: Ryan Duncil | 08/04/2021 at 05:38 PM