To defeat China, America needs an industrial policy

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.

Free markets cannot be our guiding principle in industries where a competitor’s advantage is produced by having a bigger government subsidy, or by persuading our corporations to produce in their country, instead of ours, by giving them strong financial incentives

Another significant difference from the past is that in the modern world, science no longer gives the country that makes the scientific discovery an ongoing advantage.

The 1956 Nobel Prize in physics went to three Americans for the science that led to semiconductors. But in actually making semiconductors commercially, we were quickly overtaken by several other countries. The fact is, in the modern world there are many developed nations capable of understanding and reacting to scientific advances.

Many are now suggesting, as I did recently in The Hill, that to manage an effective industrial policy we need an ongoing government agency with the mission of helping the nation not only lead in science but also capture more of its benefits.

This would be a major step forward, but an effective industrial policy must also consider what corporations choose to do and where they choose to do it.

Today’s dominant corporate goal, with its focus on short-term profits for shareholders, can often cause a company to take its knowhow and technology in a vital industry to low-wage countries and teach them how to produce there. Or the company may move its technology overseas in response to foreign financial incentives. Either way, they are moving American jobs overseas and perhaps also creating a future competitor.

Corporate goals and their effects must be taken into account by our industrial policy if we are to defeat China’s attempt to dominate our economy.

Although it is not often discussed, it is a fact that corporate goals are changeable and can be changed. In our Daedulus article “The American Corporation,” economic historian Richard Sylla and I reviewed the changing goals of corporations as our country evolved from its earliest days to the present. There have been many profound changes. Here is one example.  

In 1981, the Business Roundtable, in its “Statement on Corporate Responsibilities,” stated that corporations should consider the effects their actions have on many groups. These included their shareholders, their communities, their employees and society at large. But by 1997, its “Statement on Corporate Governance” discussed only one goal, how corporations could best reward their shareholders. 

There are two ways our industrial policy can change corporate actions when change is needed. One approach is to accept the current corporate focus on shareholder return and provide protective tariffs, government subsidies and tax incentives for companies that produce in the U.S.

Another approach is to significantly modify corporate goals. How we can do that is described in our Daedulus article and in truncated form in my 2013 article “New Goals for American Corporations.”

It is likely that some combination of both approaches will be needed to give us an effective industrial policy. 

Carrying out the actions that are needed to defeat China’s attempt to dominate us will not be easy. There will be strong and well-funded opposition to needed changes from those who are benefitting from the present system. But, despite that opposition, we must act.

The economic and geopolitical future of our country is at stake.

Ralph E. Gomory is well-known for his mathematical research and technical leadership. He has been awarded the National Medal of Science. For 20 years he was responsible for IBM’s Research Division, and then for 18 years was the president of the Alfred P. Sloan Foundation.