Industrial policy: Go ahead and call it a comeback

The policy that shall not be named Industrial policy refers to a range of government measures, like grants and research funding, designed to actively spur technology and promote key industries. Some call industrial policy “[the policy that shall not be named](.” Given that ominous moniker, it’s perhaps surprising that industrial policy is making a [comeback]( in the [US](—and more broadly, [the West](. While it never fully went away, industrial policy became toxic in some circles at the height of free-market economics. The US has a long history of industrial policy, going back to the days of [Alexander Hamilton](, who argued subsidies, import bans, and exemptions from duties could help promote infant industries. More recently, the government has used industrial policy broadly, [with varying degrees of success](. Federal involvement has directly shaped key American industries—including [Silicon Valley]( and [biotech](, and the [oil and gas shale boom]( of the past few decades—through government R&D funding, public contracts, and tax credits. Some economists argue it isn’t the government’s job to pick winners and losers. Others warned of politicians pushing policies that line their own pockets. Now, industrial policy is back, in large part thanks to the US-China strategic competition and the need for more sustainable energy. How will a new industrial policy era shape the global economy? Let’s find out. 🐦 [Tweet this!]( 🌐 [View this email on the web]( [Quartz Weekly Obsession] Industrial policy July 13, 2022 The policy that shall not be named --------------------------------------------------------------- Industrial policy refers to a range of government measures, like grants and research funding, designed to actively spur technology and promote key industries. Some call industrial policy “[the policy that shall not be named](.” Given that ominous moniker, it’s perhaps surprising that industrial policy is making a [comeback]( in the [US](—and more broadly, [the West](. While it never fully went away, industrial policy became toxic in some circles at the height of free-market economics. The US has a long history of industrial policy, going back to the days of [Alexander Hamilton](, who argued subsidies, import bans, and exemptions from duties could help promote infant industries. More recently, the government has used industrial policy broadly, [with varying degrees of success](. Federal involvement has directly shaped key American industries—including [Silicon Valley]( and [biotech](, and the [oil and gas shale boom]( of the past few decades—through government R&D funding, public contracts, and tax credits. Some economists argue it isn’t the government’s job to pick winners and losers. Others warned of politicians pushing policies that line their own pockets. Now, industrial policy is back, in large part thanks to the US-China strategic competition and the need for more sustainable energy. How will a new industrial policy era shape the global economy? Let’s find out. 🐦 [Tweet this!]( 🌐 [View this email on the web]( By the digits [30%:]( A tax rate imposed by the Tariff of 1816 in the US, on imports like umbrellas, salad oil, and carriages, to encourage people to buy American [1.73%:]( A conservative estimate of China’s GDP that was devoted to industrial policies in 2019, far higher than other major economies like the US (0.39%), Germany (0.41%), and Japan (0.5%) [$18 billion:]( Amount spent on Operation Warp Speed, the US government’s push to develop covid vaccine candidates [63%:]( China’s share of global solar panels production in 2019, an industry dominance it gained in large part [due to industrial policies]( [$6 billion:]( Amount allocated in US government funding under the Bipartisan Infrastructure Law to develop the domestic battery industry Quotable! “All of these dimensions are pushing the tidal wave of the return of industrial policy as something that can be mentioned, as something that can be named in policy circles.” —Economist [Alessio Terzi](, referring to the covid pandemic, energy transition, supply chain shocks, and geopolitical tensions as factors that have enabled industrial policy’s comeback Department of jargon Industrial policy includes a number of economic policy tools: 🏦 Grants and loans. These provide firms with financial support to, for example, train workers, develop technology, and fund capital expenditures. 💸 Subsidies. Company-specific or industry-wide subsidies can be used to boost production and revenue—but can also cause massive inefficiencies. 🛒 Long-term procurement. Purchase contracts from the government mean firms can reliably count on a big customer. 🧲 Preferential tax policies. Tax credits and tax breaks can be used as incentives for whole industries. The US, for example, is [considering tax credits]( for domestically produced [rare earth]( magnets. 👇 Below-market credit. Access to cheap lending gives favored firms a borrowing advantage. This is likely one of China’s [biggest industrial policy tools by value]( (pdf). 🚦 Export controls. Governments might [ban or limit the export]( of raw materials to protect domestic resources for national security reasons, and to promote more downstream processing and manufacturing. 🚢 Import tariffs. These can be used to protect domestic industries from competition. And non-tariff policies can have a similar effect; [one could argue]( that China’s Great Firewall shielded domestic startups from competition while allowing some foreign ideas to filter through. Charted Public spending on research and development (R&D) is a big part of industrial policy, as are incentives to promote private sector R&D. Though China has made big strides in recent years, its R&D expenditure (private and public combined) still lags behind that of the US, Germany, and Japan. [A line chart showing research and development expenditure as a share of GDP. China's has grown the most since 2000, but Japan and Germany are still at the top.] Giphy Perfect recipe Why industrial policy can be hard to get right --------------------------------------------------------------- Determining which tools to use, when, and at what scale, can make the difference between good industrial policy that advances tech and makes a country more competitive, and bad industrial policy that is both wasteful and market-distorting. As Harvard economist Dani Rodrik [put it]( in 2010: “The real question about industrial policy is not whether it should be practiced, but how.” So what makes good industrial policy? [Gary Clyde Hufbauer](, a researcher at the Peterson Institute for International Economics (PIIE), says success is advancing the technological frontier, and doing so at a reasonable cost. He points to [Operation Warp Speed](, which saw the US government pour billions into covid vaccine development. Successful policies often focus on spurring research and development, Hufbauer said. On the flip side, bad industrial policy includes opaque subsidies and high trade barriers. But often, it’s hard to predict what will make good or bad industrial policy, says [Myrto Kalouptsidi](, assistant professor of economics at Harvard. Her research into the [Chinese shipbuilding industry]( (pdf) illustrates this. The Chinese government started out by using broad subsidies to spur investment, production, and firm entry. After 2008, subsidies were much more targeted toward productive firms—and were much more effective in raising output and revenue, says Kalouptsidi. Giphy Pop quiz US president Ronald Reagan had an industrial policy called… Pythagorean HeadlockAristotle InitiativeProject SocratesCaptain Plato and the Industries Correct. The goal was to enable a physicist to figure out why the US was falling behind other countries, economically. Incorrect. That would be a cool name, though. If your inbox doesn’t support this quiz, find the solution at bottom of email. take me down this 🐰 hole! Learning on the job --------------------------------------------------------------- Technology and knowledge transfers can drive economic growth. China has long used its industrial policy to convince or compel foreign companies to share technology and know-how with domestic firms. Overseas acquisitions can also be a way of acquiring advanced technology. The US is catching on to this tactic. Recently, the executive director of a US battery manufacturing trade group called for [the country to copy]( China’s playbook of exchanging market access for technology. Giphy Poll Should governments wield industrial policy? [Click here to vote]( Yes, governments need to nudge the economy’s direction!No, it’s better left to the market!I don’t know, y’all! My brain feels scrambled! 💬 let's talk! In last week’s poll about [Miami Vice](, 53% of you said your favorite piece of fashion from the show is a crisp white suit, but 41% of you are all about the neon undershirt. 🤔 [What did you think of today’s email?](mailto:obsession%2Bfeedback@qz.com?cc=&subject=Thoughts%20about%20industrial%20policy%20&body=) 💡 [What should we obsess over next?](mailto:obsession%2Bideas@qz.com?cc=&subject=Obsess%20over%20this%20next.&body=) 🎲 [Show me a random Obsession]( Today’s email was written by [Mary Hui]( (wants to befriend more policy wonks), edited by [Morgan Haefner]( (appreciates a good industrial aesthetic), and produced by [Julia Malleck]( (enjoys good policy). [facebook]([twitter]([external-link]( The correct answer to the quiz is Project Socrates. Enjoying the Quartz Weekly Obsession? [Send this link]( to a friend! Want to advertise in the Quartz Weekly Obsession? Send us an email at ads@qz.com. Not enjoying it? No worries. [Click here]( to unsubscribe. 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