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It wasn’t long ago that industrial policy was a topic you could not discuss in policy circles. Those who advocated a national industrial policy for the U.S. were regarded as economic illiterates, incapable of understanding that market forces, left alone, are best for the nation.
But now Commerce Secretary Gina Raimondo is publicly discussing an American industrial policy aimed at economic leadership and national security, as are legislators from both parties. All this as if having an industrial policy was both natural and necessary.
What happened? Certainly in recent years much was written to explain why pure market forces may not give good outcomes in the modern world. (Here are three of my efforts in that direction. My congressional testimony, an article and a book.)
But despite all that was written, the faith in pure market forces was largely unshaken until the recent rise of China changed everything. A rapidly growing China, effectively using an aggressive industrial policy to advance its own industries, has fundamentally changed the situation. Today there are policymakers in both parties who are willing to go well beyond pure market forces to respond to the China economic challenge.
Industrial policy is supported now even among many who opposed it in the past. This is because they understand that the world economy has changed. The extent of that change is especially obvious if we look at how international trade has changed.
For many centuries, countries almost entirely traded what they were naturally good at. England was good at raising sheep and had lots of wool. England traded the cloth made from that wool with Portugal, a country whose climate allowed it to be a successful wine grower.
But today’s world is totally different. No country is born with a natural advantage in semiconductor production. China has made it obvious that in the modern world countries can become the cheapest producer of an important good by pouring major government subsidies into the companies that produce that good in their country.
