The U.S. Can’t Compete With China By Copying Its Industrial Policy
The United States should embrace the bottom-up economic dynamism that made it—and continues to make it—the most innovative and entrepreneurial nation in the world.
Earlier this month, the House passed a $350 billion initiative known as the COMPETES Act, which was widely promoted as a bill aimed at increasing semiconductor chip production and boosting U.S. competitiveness with China.
The initiative was largely sold as a much-needed national security effort to counter the threat of economic competition with China. In reality, less than 15 percent of the funding in the 2,912-page bill will go toward manufacturing semiconductors. The rest will go to corporate subsidies, pie-in-the-sky industrial planning, expensive environmental initiatives, welfare for union workers, and creating even more barriers to free trade.
With record levels of public debt, 7 percent inflation, and an ongoing supply chain crisis, the last thing the United States needs is $350 billion in additional government spending and more price-hiking protectionism.
First of all, even though the semiconductor industry is already booming without taxpayer support, the bill directs a whopping $52 billion to semiconductor manufacturers in an effort to boost production. In fact, as Scott Lincicome recently noted, chip manufacturing capacity, real output, and capital expenditures in the United States have grown substantially over the years.
IBM, the national champion in chip manufacturing, significantly increased free cash flow in 2020 and is currently in the process of opening two new chip factories. The business continues to be highly profitable. Meanwhile, Samsung is investing in a second Texas facility and TSMC is opening a new plant in Arizona. The United States contributes 39 percent of the total value of the global semiconductor supply chain, according to a Georgetown University study. Allied nations collectively contribute 53 percent, and China contributes a measly 6 percent. That’s hardly “competing” with the United States.
In short, the U.S. chip manufacturing market doesn’t need a taxpayer bailout. Despite the largely overblown concern about chip shortages, the United States’ free market system is up to the task. Our environment of permissionless innovation continues to attract investments and meet market demand.
The industrial policy initiative laid out in the bill includes several measures that resemble the Green New Deal. $8 billion is being allocated to the UN Green Climate Fund, billions of dollars are to be funneled to solar manufacturing, and there is even a vast section of the text dedicated to seafood and coral reef conservation.
Labor provisions within the bill include changes to card-check policies for workers that are tantamount to forcing workers into joining unions. Other pro-union aspects of the legislation include a massive expansion of the Trade Adjustment Assistance (TAA) program in order to include public sector workers.
The TAA program is a failed welfare program aimed at paying cash benefits, healthcare benefits, and child allowances to workers laid off “due to trade.” The program exists despite the fact that the net effect of trade with China on jobs and wages is actually positive for American workers.
In addition to expanding welfare programs to alleviate the supposed costs of trade, the legislation contains additional protectionist provisions. The proposed legislation would exclude countries such as Vietnam and China from the de minimis threshold, meaning imported goods under $800 in value would be subject to duties and fees.
At the same time, the legislation does nothing to renew the Trade Promotion Authority (TPA), an authority granted to Congress that allows the governing body to establish free trade agreements efficiently. By excluding the TPA, this legislation effectively kills the chances of any new trade deals being signed for the next seven years. These anti-trade provisions will worsen our already dire supply chain bottlenecks.
A close examination of the COMPETES Act reveals what it really is: a shift away from bottom-up economic dynamism in favor of top-down industrial policy whereby the state picks winners and losers. This is bad news in light of the immense power of interest groups to steer policy and the government’s famously inefficient efforts to divert resources to successful industries.
Industrial policy fails wherever it’s tried. It has failed even in Japan, a country that’s often upheld as a success story by advocates of industrial policy. Japan’s industrial planning ministry actively discouraged Honda from entering the automobile industry and discouraged Sony from entering the consumer electronics business—sectors in which they’ve come to thrive. The top-down approach of industrial policy is deeply destructive. In 1985, economist Don Lavoie noted how the idea behind industrial policy was to replace the decentralized decision-making process of the market with centralized decision-making by government agencies. The institutional shift from bottom-up to top-down leads to serious, unchecked abuses of power that harm economic well-being, morality, liberty, and human dignity.
If the United States is to remain competitive in the global market, it shouldn’t be attempting to mimic China through big government industrial policy. We should embrace the bottom-up economic dynamism that made us—and continues to make us—the most innovative and entrepreneurial nation in the world.
Jack Salmon is a Young Voice contributor and writer on economics. His commentary has featured in a variety of outlets, including The Hill, Business Insider, RealClearPolicy, and Dallas Morning News. Follow him on Twitter: @JackSalmon.