America’s Flailing Industrial Policy Can Take Lessons From China
Beijing’s experiences are a road map for both opportunities and traps.
April 11, 2024
By Bob Davis, a reporter who covered U.S.-China economic relations for decades for the Wall Street Journal.
An illustration on
industrial policy shows a factory worker in a hard hat looking over
three conveyer belts, one with the yellow stars of China, and the others
with white stars on blue conveyer belts for the U.S.
Foreign Policy illustration
The Biden White House has put together the most ambitious industrial
policy program in decades, hoping to revive strategic industries that
have withered at home because of foreign competition. The goal: to stay
ahead of China by pumping up the United States’ industrial and
technological might through a focus on clean energy and semiconductor
manufacturing.
But in its push to confront Beijing, Washington has ignored lessons
China learned through trial and lots of errors over its own decades of
industrial policy aimed at catching up with the West. As different as
the two countries’ political systems are, there’s still a lot Washington
could learn—if it wants to.
The U.S. has led since at least World War II in one area of
industrial policy: fostering new technologies. Federal dollars and
support, often via the Pentagon, played an essential role in developing
technologies that revolutionized the global economy, from jet aircraft
to supercomputers to communications satellites to the internet. But
since the early 1980s, when the United States started obsessing about
losing out to foreign competitors such as Japan, the government has
failed miserably in reshoring vital industries.
Not that the government hasn’t tried. Former U.S. President Ronald Reagan sought to revive domestic small-car manufacturing; George H.W. Bush targeted flat-screen televisions; Bill Clinton had another go at small cars; and Barack Obama pushed for solar panels. Donald Trump pressed for
telecommunications equipment. None succeeded, largely because offshore
manufacturing remains far less expensive than manufacturing at home,
even with subsidies.
That doesn’t mean the effort from President Joe Biden is doomed, but
it does point out the scope of the challenge—and the need to look at the
experiences of others. Although China has had its share of
industrial-policy flops, it has used government policy to build powerful
industries at home that outcompeted Western rivals in sectors as
diverse as textiles, tires, electronics manufacturing, solar energy,
wind power, batteries, and high-speed trains. Over the past 45 years,
those successes helped turn impoverished China into the world’s no. 2
economy.
“To the best of my knowledge, there were efforts to study Chinese
industrial policy” in the Biden White House, said Peter Harrell, the
White House’s former senior director for international economics. “But
the goal was to figure out how we can retaliate or mitigate the harm
from China rather than to see if there were positive lessons for us.”
First, a definition. Industrial policy is the use of government
policy to try to produce an outcome that’s different—hopefully, more
positive—than what the market alone is likely to produce. Essentially,
governments invest to develop industries or advance technologies that
underlie economic growth.
Comparing China’s industrial policies to America’s is difficult.
China has generally focused on catching up to the West, while the United
States has sought to stay ahead of the pack. China is steered by an
autocratic government headed by the all-powerful (but often invisible)
Communist Party. In Washington, power shifts between two parties that
have very different views of the role of government in the economy.
There is also no clear handbook explaining Chinese industrial policy.
It’s a confusing mixture of central control (but recalcitrant
localities), massive subsidies (but ferocious competition), and
protectionism (but courting foreign investment). But there are still
parts of the system the United States can learn from.
Hundreds of electric vechiles in long rows line the dock in a port. Behind them, a giant ship waits in dock to be loaded.
Hundreds of electric vehicles await export at the Port of Yantai, in China’s eastern Shandong province, on Jan. 10. AFP via Getty Images
China is the global subsidy champion. It dominates subsidy spending
the way the U.S. dominates global military spending. As a percentage of
GDP, China spent 12 times as much as the U.S. on subsidies in 2019, estimates
Scott Kennedy, a China scholar at the Center for Strategic and
International Studies (CSIS). Those subsidies included R&D dollars
and tax credits, cheap financing, cut-rate land prices, government
purchasing preferences, and various investment fund payouts.
The Biden tax credits and subsidies may reach $600 billion over a
number of years, according to a former Biden official. But Kennedy
doubts that will do much to close the gap with China, which he called
“an outlier that has no peers in the industrialized world.”
China scholars say the secret to China’s success isn’t just spending
but, surprisingly, competition. While the party and the central
government set industrial policy priorities, it’s up to localities to
implement the plans and finance most of the spending. On the local
level, competition is fierce, as local party officials jockey for
promotion by carrying out Beijing’s wishes.
Chang-Tai Hsieh, a University of Chicago economist, said that the
competition is rarely planned. The central government would rather try
to create state champions than unleash competition beyond its control.
But money floods into areas that Beijing designates as priorities
because they are seen as politically safe. “The secret sauce of China’s
industrial policy is competition among local governments,” he said. “In
city after city, officials are doing things that make no sense
(economically), but they want to please people in the party hierarchy.”
After electric vehicles (EVs) became a priority, some 400 companies
across the country jumped into different parts of the EV business by
2020, according to a CSIS study.
The same process occurred in solar energy, where competition at the
local level was so fierce that the price for solar panels plummeted, and
Chinese firms relied on government lenders to keep them afloat while
they turned to exports to pump up revenue.
All this created a juggernaut that forced foreign competitors out of
the market. China now produces three times as many solar panels as
global demand, the Financial Timesreported.
Last year, Chinese exports of solar panels, batteries, and EVs nearly
equaled its exports of steel and related items—an industry that has long
been awash in Chinese overproduction, said Ilaria Mazzocco, a CSIS researcher.A man in a suit gestures
as he talks with a woman in a dark jacket and pants. They walk with
three other men across a cement floor of a factory with a U.S. flag
behind them.
Matt Card
(center), the president of solar cell company Suniva, speaks to U.S.
Treasury Secretary Janet Yellen as she visits the Norcross, Georgia,
company on March 27. Christian Monterrosa/AFP via Getty Images
U.S. Treasury Secretary Janet Yellen said she pressed her Chinese
counterparts during a recent trip to China to end super-cheap exports of
clean-energy products. “Excess capacity poses risks not only to
American workers and firms and to the global economy, but also to
productivity and growth in the Chinese economy,” she said in a recent speech.
Chinese prices are so low, some U.S. domestic solar companies argue
that the subsidies in the Inflation Reduction Act (IRA) won’t be enough
to create an alternative to China. Chinese companies account for about
one-quarter of the new solar-panel production announced in the United
States since the IRA passed, putting them in line for as much as $1.4
billion in subsidies, the Wall Street Journalcalculated.
“There is great risk that the largest beneficiary of the IRA’s solar
energy tax credits may be China,” Mark Widmar, CEO of First Solar Inc.,
the largest U.S.-headquartered solar manufacturer, told a Senate committee.
Still, subsidies haven’t guaranteed success for China. Despite
spending many billions of dollars subsidizing semiconductor design and
manufacturing, China is at least five years behind the market leader,
Taiwan Semiconductor Manufacturing Co. (TSMC), in making advanced
computer chips, estimated Dan Wang, a technology analyst at Gavekal Dragonomics, a market research firm that focuses on China.
The flood of money also invites corruption. Last year, Zhao Weiguo,
whose Tsinghua Unigroup Inc. was a major recipient of chip grants, was
locked up after allegations by China’s anticorruption agency that he “took the state-owned company he managed as his private fiefdom.”
There are several lessons here for the United States. First,
subsidies alone aren’t sufficient to carry out industrial policy.
Second, competing with China in industries that it has prioritized is
enormously expensive and probably requires a level of protectionism that
the United States rarely provides.
Michael Carr, executive director of the Solar Energy Manufacturers
for America Coalition, a trade association of domestic firms, said the
government should look at the sugar industry as an example of what’s
needed. There, the U.S. accepts sugar to pay off loans when the price
falls below a certain level, supporting a bizarre system where sugar is
grown in Michigan, Minnesota, and other places that hardly boast a
Caribbean climate.
But most importantly, perhaps, China’s example shows the importance
of assuring that industrial policy encourages competition. “As we think
about industrial policy,” Harrell said, “we need to think about ensuring
our grant and tax subsidies don’t entrench a small number of companies
that become flabby incumbents.”
Brian Deese, Biden’s former director of the National Economic
Council, said that relying on tax credits more than cash subsidies, as
the Biden plan does, should encourage competition—and avoid China’s
pervasive overproduction. Before tax credits are awarded, investors must
assess a market, decide whether it’s profitable, and put down money.
The government isn’t making the decision; profit-driven companies are.
“Subsidies improve the return,” Deese said. “But ultimately, someone
has to put significant capital at risk. If there isn’t a return
capability, you’ll see less take-up.”
Perhaps, but it’s also possible that if investors don’t see enough
return, they will instead press Washington to boost the subsidies, a la
sugar. “Will they lobby for the government to be more generous? There’s a
risk,” Deese said.
Workers wearng masks
and hairnets sit at tables, with one stan
China’s industrial policy goals have shifted since its economy opened
to the world in the late 1970s. Initially, it used its huge, meagerly
paid workforce to lure textile, apparel, and electronics manufacturing
to China. Over the years, Beijing became more ambitious and now aims at
leadership in technologies of the future such as robotics,
semiconductors, clean energy, and artificial intelligence.
China focuses especially on what it calls “short board” technologies—areas where a Western blockade could cripple China, said
Barry Naughton, a University of California at San Diego economist.
Since the Trump years, for instance, China has focused on strengthening
its domestic semiconductor design and manufacturing equipment makers so
China’s computer industry can survive U.S.-led export controls.
Depending too heavily on industrial policy has downsides, too,
including sticking with projects that are clear losers far longer than
is sensible—including, for example, pouring money into a failed effort
to develop internationally competitive gasoline-powered cars, fuel
cells, and hydrogen power. Often, though, China has made necessary
adjustments despite setbacks. In the auto sector, gasoline-powered cars
are now out in China industrial policy plans; EVs are in. No one is
urging the U.S. to ape China’s fetish for five-year plans or a system
where the leader doesn’t have to worry about the next election, but
commitment and longer-range planning are American weaknesses—perhaps
inevitably in a democratic system.
Already, U.S. textile makers complain that the Biden administration
hasn’t made good on purchasing American-made face masks, gowns, and
other personal protective equipment, as required by a 2021 law initially
proposed during the pandemic, or funded the Defense Production Act
sufficiently to be of much use. U.S. companies geared up for the
promised orders, but federal agencies continue to buy cheaper Chinese
imports, said Kimberly Glas, president of the National Council of
Textile Organizations.
A White House official said the Department of Veterans Affairs has
identified 129 American-made items and has begun purchasing them, while
other agencies are starting to do the same. But Glas said her group’s
members haven’t seen any made-in-America orders.
Given America’s fractured politics, it’s also far from clear how much
of Biden’s clean-energy plans would survive a second Trump presidency.
Trump now rails against EVs as job losers, claiming
the auto industry is being “assassinated” by government policies
promoting the cars. And the IRA, which contains most of the subsidies
and tax incentives for clean energy, passed without a single Republican vote. The CHIPS and Science Act, which provides $39 billion in subsidies
as well as tax credits for semiconductor manufacturing, seems safer
because it had bipartisan support and it began as a proposal in the
Trump administration.
In the past, Republican administrations have put the kibosh on
Democratic industrial policy efforts. President George W. Bush, for
instance, quickly ended the Clinton administration effort to develop a super-efficient gas-powered car. Congressional Republicans cut back Obama programs to develop solar panels.
Deese figures that clean-energy subsidies would survive a change in
administration because of local politics. About 75 percent of the
clean-energy investments made after passage of the IRA have been in
Republican congressional districts. “There’s more continuity for the
basic proposition that we need to invest more in industrial capability,
and in a more energetic way,” he said.A man looking at his
phone is silhouetted against a building with a net-like, tech texture
overlaid with the Chinese national flag. A sign atop the building says:
"Intercontinental."
A man looks at his phone near a giant image of the Chinese national flag on a building in Beijing on Oct. 23, 2017. Greg Baker/AFP via Getty Images
There’s no way the United States will ever come close to the control
that the Chinese leadership has over the economy—should it ever want to.
China has a parallel system where small Communist Party leadership
groups oversee a massive government planning system that is awash in
lobbying by different agencies and state-owned firms to get their
priorities approved.
The U.S. approach to industrial policy is splintered among different
agencies, without any body such as China’s National Development and
Reform Commission—the successor to the state planning agency—to pull
things together. The Commerce Department runs the semiconductor program,
while the Energy Department, Treasury, Internal Revenue Service, and
other agencies have a say in clean-energy incentives, and the Pentagon
manages other programs involving chips and communications technology. An
obscure White House agency, the Office of Science and Technology Policy
(OSTP), could be tapped to play a coordinating role, but it rarely has
much influence.
To coordinate oversight of industrial policy, the White House had to
name Jason Matheny, a prominent technologist, to three different jobs
simultaneously: deputy assistant to the president for technology and
national security, National Security Council (NSC) coordinator for
technology and national security, and OSTP deputy director for national
security. With national security increasingly dependent on technological
advances, the White House wanted
to ensure its policies were “in sync,” Matheny said. After he left in
2022 to become president of Rand Corp., a defense think tank, his jobs
were split among several people.
“There’s no one who sees the whole picture,” said Christine Turner, a
former Obama NSC official, now at the political consulting firm
Boundary Stone Partners. “We don’t have a cabinet-level person in charge
of pulling all the strings for making industry policy work across the
board.” Over the years, there have been proposals
to make the Commerce secretary or a new competitiveness agency the
industrial policy czar, , but they have gone nowhere because of
rivalries among cabinet agencies and congressional committees.
A White House official countered that the U.S. system has its plusses
because it requires so many different agencies to have a stake in the
industrial policy effort. “It’s a whole-of-government approach,” the
official said, which is coordinated by White House deputy chief of staff
Natalie Quillian.
U.S. President Joe
Biden, wearing a suit and tie and sunglasses, smiles as he waves in
front of a heavy machinery outside a factory. A secret service agent is
seen out of focus at right as is a U.S. flag behind him.
U.S. President Joe Biden visits the new Intel semiconductor plant in Johnstown, Ohio, on Sept. 9, 2022.Andrew Spear/Getty Images
In one way, the United States has begun to ape how China approaches
industrial policy. For years, the U.S. sought to present itself as a
free-market model for Beijing, figuring that China would see the
advantages of following the U.S. economic model and would fear a cut-off
of trade if it remained protectionist. No longer. Now, Washington is
just as likely as Beijing to cite “reciprocity” as a reason for taking
actions to pump up domestic industry and disadvantage its rival.
When Biden announced a proposal for an executive order that could ban
Chinese EVs from the U.S. because they transmit data that could be
scooped up by Chinese agencies, he was clear about his thinking. “China
imposes restrictions on American autos and other foreign autos operating
in China,” the president said. “Why should connected vehicles from China be allowed to operate in our country without safeguards?”
Probably the toughest issue for Washington presented by the China
example is how heavily to lean into protectionism like this. A crucial
part of China’s success has been walling off its huge domestic market in
areas such as telecommunications manufacturing. That gave Huawei
Technologies Co. and ZTE Corp. a guaranteed revenue base to pay for the
R&D and automation necessary to compete internationally. China
repeated the formula in internet services, allowing Baidu to grow free
from competition from Google and others.
But China has also encouraged foreign investment in many industries.
It has used joint ventures, regulations, review committees—and outright
theft—to learn technology secrets it could exploit. Examples are legion.
As a condition for doing business in China, Japanese and European
bullet-train makers transferred
knowhow to China’s Railways Ministry and Chinese companies. Soon,
Chinese companies became powerful competitors. When China was developing
its EV market, foreign carmakers were required to buy batteries from
local firms to help them upgrade. Meanwhile, Chinese-owned Volvo Car
Group could buy more advanced batteries from Korea, so it could compete better in EVs.
The Trump administration tried its hand at protecting the U.S. market
by imposing tariffs on three-quarters of everything China shipped to
the U.S. But that didn’t have much impact as Chinese companies rejiggered
their supply chain so they could ship to the U.S. via operations in
Vietnam and Mexico. Biden retained the tariffs and doubled down on
protection by making it nearly impossible for Chinese firms to pass
national security reviews to buy U.S. companies, say lawyers involved in
the reviews. Chinese investment in the U.S. plummeted from $54 billion
in 2016 to about $1.5 billion in 2022, according to Rhodium Group, a
market research firm. Even a deal where Ford would license advanced
battery technology from China’s Contemporary Amperex Technology Co., so
it could better compete in EVs, drew flak from Congress and Virginia’s governor.
The bias against foreign investment applies only to China and a
handful of other adversaries. U.S. industrial policy plans generally
lean heavily on foreign investment. The CHIPS Act subsidies for
semiconductor manufacturers largely began
as a way to convince Taiwan-based TSMC to build an advanced factory in
this country. Recently, the administration approved a $6.6 billion grant
to TSMC to support a TSMC investment of $65 billion in three new
Arizona chip factories, although work on the projects is behind
schedule. That is in addition to grants to Intel Corp and other
U.S.-owned manufacturers.
When it comes to China, the U.S. approach is ambivalent. With the
administration pushing to increase solar installations, new
Chinese-owned solar panel factories in the U.S. could be eligible
for tax credits. But Chinese battery makers and chip companies
generally aren’t. There the U.S. is looking to shut out Chinese firms
and count on American ones to leapfrog them in technology.
Kennedy, the CSIS China expert, said that Chinese investment is
needed in areas like batteries, EVs, and other green technologies where
Chinese firms are the leaders in the same way that Chinese firms
upgraded by learning from American market leaders.
“We have an approach of heads-you-win, tails-we-lose,” Kennedy said.
“If we’re ahead technologically, we don’t want Chinese investment
because we don’t want to give technology to them. If we’re behind, we
feel that they are a national security risk, or we don’t want to be
dependent on China.”
Rather than a blanket ban on Chinese firms receiving investment
incentives, an approach that weighs risks and rewards makes more sense.
That’s the technique the Chinese use. When China wanted to encourage
Tesla to build a plant in Shanghai as a way to boost its high-end EV capacity, it provided a range of tax breaks and cut-rate financing.
Similarly, encouraging Chinese investment in batteries, where the
U.S. is clearly a laggard, would mean entitling Chinese companies
producing here to the same breaks non-Chinese companies receive. In
solar, all companies—Chinese or non-Chinese—producing in the U.S. should
get more benefits if the materials they use come from non-Chinese
sources, as a way to diversify the supply chain.
The United States could also try another approach that China has used
so successfully—demanding access to technology in exchange for approval
of investments in the U.S. The problems facing TikTok in the U.S.,
where the House passed
a measure to ban the app unless it is sold to U.S.-friendly buyers,
should be read as a signal to Beijing. Essentially, the measure requires
the technology underlying TikTok be shifted to Western control.
Technology exchanges could be the price China pays for doing business
in the U.S. “There’s an irony here,” said Michael Davidson, a
University of California at San Diego energy expert. “The U.S. has long
complained about Chinese protectionist policies that forced technology
transfer. We have a chance to reverse that and get technology from China
on favorable terms.”
Using pressure tactics of this kind could be tough in a democratic
system where the aggrieved have access to top lawyers and an independent
judiciary. Still, Americans would do well to study the Chinese
experience for ideas about what will work and what won’t.