Trade relations between China and the U.S. have strained markedly in the past few years, beginning with the trade war in 2018 under the Trump administration. Tariffs and other measures were intended to rectify the growing reality that China disproportionately benefits from the globalized trade system, thus challenging the United States as the world’s economic powerhouse. This economic success, coupled with China’s reluctance to assimilate into the U.S.-led order and adopt liberal institutions and values, has fueled growing geopolitical competition. Various popular theories, such as the notion that liberal reforms would inevitably arise in China through its integration with global markets, were incorrect. Rather, China has pursued an industrial policy and gained politico-economic strength by leveraging free-trade policies. The U.S. response has been to resurrect and bolster an industrial policy of its own to adapt to the new geopolitical environment that China has wrought.
Contrasting Approaches to Industrial Policy
In an article for Foreign Affairs, John M. Deutch and Ernest J. Moniz describe how a bipartisan shift in the United States towards industrial policy has come about as a result of the “Made in China 2025” report, released in 2015, which detailed Beijing’s plans to advance its domestic high-tech industry. While possessing a strong manufacturing industry for low-value goods, China’s high-tech industry is comparatively underdeveloped and has been (and remains to an extent) dominated by Western companies. Through state-funded R&D projects, China hopes to become a world leader in advanced sectors such as AI, green energy, and semiconductors. China’s plans to annually scale up its R&D spending may see it become the world’s largest spender on such, up from its current position as the twelfth largest spender globally, with R&D accounting for 2.55 percent of its GDP.
But why is R&D so important? The work of economist Mariana Mazzucato points out that many of the United States’ most important technological developments were accomplished through publicly-funded, state-backed support. Mazzucato writes that between 1971 and 2006, 88 percent of the most important innovations have been fully dependent on federal research support. Publicly funded research via agencies such as the Department of Defense, DARPA, and the National Science Foundation enabled the development of touchscreen technology, the Internet, SIRI, GPS, and even Google’s algorithm. Likewise, Elon Musk’s Tesla and SpaceX have received billions in government support. The United States has a long history of state intervention with successful results, although publicly these days it praises free market capitalism and small government, downplaying the key role the state has played. The successes that U.S. state-backed R&D projects have enjoyed are what China hopes to replicate for itself.
However, if the United States has always been this state-driven hub of innovation, why is industrial policy now occupying the forefront again?
For starters, America still operates in a laissez-faire economy with a variety of powerful corporate actors, all of whom operate according to their own profit incentives. Mazzucato describes this phenomenon—the “socialization of risk and privatization of rewards”—as a pitfall of U.S. policy, wherein the state invests significantly in research while failing to reap any of the benefits that ought to accompany this, such as higher employment, increased tax revenues, and increased exports of goods and services. Instead, these rewards are privatized and commercialized by corporate venture capitalists. Such individuals and institutions are experts at tax avoidance and evasion, and will further seek to maximize their profits through outsourcing/offshoring manufacturing, and engaging in unproductive behavior such as stock buybacks. The deleterious effects of offshoring production to China have already been demonstrated through mass intellectual property theft, which has enabled China to avoid these costly investments in R&D and subsidize the domestic deployment of stolen technology.
What follows from this is the observation that the U.S. state is simply less centralized when compared to the Chinese state. While there is a high amount of government intervention in the United States, the accrual of significant profits to private conglomerates and individuals, together with the freedom with which they are allowed to operate, contrasts with China’s approach of ubiquitous Chinese Communist Party coordination and the persecution of capitalist elites with divergent interests. The CCP is the locus of power in China, while the United States has a more dispersed system of both private and public interests.
U.S. politics is the constant vying for power of these separate groups, and these interests often clash with one another: what is most financially profitable for a conglomerate may endanger the national security interest that the intelligence community is tasked with defending. What occurred during the preceding years was that there were low geopolitical and security risks associated with China, meaning that, as Steve Blank states, “private equity and venture capital were the de facto decision-makers of U.S. industrial policy.” This resulted in lucrative collaboration with China, which has subsequently led to a rise in national security risks. This heightened level of risk has injected a dose of realism into international relations once again, which means that security trumps economics.
This is what the emergent new industrial policy aims to achieve. Techno-nationalism, as it is known, “is a new strain of mercantilist thinking that links technological innovation and capabilities directly to a nation’s national security, economic prosperity, and social stability.” It calls for greater state intervention to “intervene and guard against opportunistic or hostile state and non-state actors” as a response to “the West’s increasingly short-sighted laissez-faire model and China’s state-centric capitalism.”
The United States is being forced to reevaluate its laissez-faire attitudes and adopt a like-minded attitude toward the state’s role in the market. This, however, is not so much a copying of China’s industrial policy as it is a bolstering of policies that the United States has always embraced.
While Washington has pioneered its own version of state-sponsored innovation of new technologies through DARPA, the National Science Foundation, and the Department of Defense, it has not successfully safeguarded these technologies from being co-opted through intellectual property theft, nor has it developed a robust and necessary domestic manufacturing industry for implementing new technologies. When it comes to cheap consumer products—like the plastic toys and clothing produced in sweatshops—offshoring poses little security threat and IP theft hold little weight. Offshoring semiconductor chip production, on the other hand, poses an array of new problems. The emerging industrial policy of techno-nationalism therefore centers on the pivotal role of highly advanced technology and the national security threats posed to the country if this technology is mishandled.
In President Joe Biden’s recent State of the Union Address, he lamented the decline of the United States domestic manufacturing industry, declaring that America has “imported products and exported jobs.” He singles out the semiconductor industry in particular, stating that despite the that the United States invented chip technology, it now only produces 10 percent of the total global supply. Biden notes that supply chain disruptions have brought to the fore the disadvantages that overseas production entails. The president’s rhetoric notably echoes that of the 2016 Trump campaign, with this continuity demonstrating the necessity of such industrial policies. Biden’s comments also allude to the CHIPS and Science Act, which provides $52.7 billion in funding for domestic semiconductor manufacturing, workforce development, and R&D. The United States is also aiming to mobilize domestic competitors Nokia and Ericsson against Huawei. Moreover, just as China’s “Made in China 2025” policy document centers on developing advanced AI technology, so too does the U.S. aim to bolster its own while stifling China’s, leading to what may be described as a technological arms race.
This phenomenon is not limited to the United States, as we are also seeing Australia, a country that is very much embroiled in this emerging geopolitical rivalry, adopting a similar posture—evidenced by plans to develop an Australian DARPA, as well as an interest in cultivating its own semiconductor industry and rare earth mineral refineries.
What we may take away from this is that the era of free-reign globalization is gradually coming to a close. This new industrial policy is recentering this idea of “government putting a thumb on the scale, rather than just assuming that market outcomes are going to produce the maximum benefit.” The market is spurred by different incentives which have come to clash with those of national security and politics. Economists resented the trade tariffs first implemented under Donald Trump, yet they have remained in place following the end of his administration and expanded to even further restrictions and countermeasures. Wherever this leads, geopolitical necessities have cautioned many on the downsides of globalization and forced the state to once again pursue technologically-oriented industrial policies in order to correct course.
Jasper Hansen holds a Bachelor of Political Science from the Australian National University. His main interests include geopolitics, national security policy, and political theory.