Time for the West to Embrace Chinese Industrial Policy, Not Eliminate it

Yves here. We’ve pointed out that the US does have an industrial policy, even if it comes out by default through which groups manage to extract the most subsidies. Favored sectors include housing, the defense-surveillance complex, financial services, higher education, oil and gas, and niche interests like sugar. So the umbrage about China (and Japan and the Asian tigers) being deliberate about it and getting better results is perverse.

By Marshall Auerback, a market analyst and commentator. Originally published at Triple Crisis

Robert Atkinson of the Information Technology and Innovation Foundation has just written a very compelling analysis of China’s national industrial policy, especially in relation to the exponential growth of its telecommunications industry. Some of the key findings of the paper, “How China’s Mercantilist Policies Have Undermined Global Innovation in the Telecom Equipment Industry” are as follows:

  • Without unfair, mercantilist Chinese government policies and programs for its telecom giants, China would lack a globally competitive telecom equipment industry. Neither Huawei, nor ZTE, would have more than minor market shares, even in China.
  • Chinese market-share gains have come at the expense of innovative telecom equipment providers in other countries. By artificially taking market share from more innovative companies, the latter have had less revenue to invest in cutting-edge R&D.
  • Beijing’s policies dramatically limit foreign access to China’s huge telecom markets, providing them with a guaranteed source of revenue to attack foreign competitors.

The analysis is characterized by an implicit bias against Chinese mercantilism, a bias that many champions of free trade naturally share. While reflecting those preferences to a degree, Atkinson’s report does offer a recognition that China’s state-driven capitalist model has played a significant role in driving industrial development and innovation (while also contending that such protectionism and heavy-state subsidies have had the negative byproduct of inhibiting innovation in western economies that have eschewed such practices).

And it is a model that is not unique to China. Economist and market practitioner Bill Janeway observed that state-driven innovation have been “put to repeated and successful use: by Japan beginning in the last decades of the nineteenth century, then by the emergent Asian Tigers in the second half of the twentieth century and now by China.” In another analysis illustrating the key role the state plays in driving industrialization, authors Ben Landau-Taylor and Oberon Dixon-Luinenberg argue, “The great strength of capitalist societies is that industrialists like Henry Ford or Jeff Bezos can transform single industries within an existing economic framework, but the economic framework itself is too large to be remade with the resources of any individual or corporation. Only the state can coordinate many different industries to produce a transformation at the scale of industrialization.”

This does not simply mean using the government to mindlessly pick winners and losers (the common complaint directed against national industrial policy).  To the contrary, the East Asian tigers used the market as a feedback mechanism to adduce likely areas for future growth, and then using that cumulative information to transfer state resources away from unproductive toward productive uses. In the case of South Korea, for example, this took the form of conglomerates such as Samsung starting in basic industries such as agriculture and textiles in the 1960s, rapidly progressing via government direction to more advanced industries, such cell phones, computers, and semiconductors, where it remains among the global leaders today.  So too has China emulated these policies to a degree and generated a corresponding quantum leap in living standards over the past 50 years.

By contrast, the crisis of 2008 (and the current pandemically-induced global depression) have highlighted even greater deficiencies in the western market fundamentalist model:  a policy matrix featuring free trade, deregulation, widespread privatization (and a corresponding diminution of the role of the state), and fiscal austerity, all of which contributed to a vast rise in inequality, asset bubbles, wage stagnation, and a vast industrial shell that has contributed to significant economic insecurity for vast swathes of the population.

These problems are nowhere close to being resolved today and, indeed, have been exacerbated by the COVID-19 pandemic.

It is becoming increasingly hard to make the case that a minimalist state which simply acts as an umpire for “the creation of efficient, rent-free markets coupled with efficient, corruption-free public sectors is even close to being a necessary or sufficient condition for a dynamic capitalist economy.”  That was an observation made almost two decades ago by Professor Robert Wade in his seminal work, “Governing the Market” and it is no less pertinent today.

Instead of simply sending “a clear message to China that, going forward, systemic innovation mercantilism that hinders global technological innovation will no longer be tolerated”, as Atkinson suggests, a better option might be to turn those very policies against China by restricting Beijing’s access to western markets, while simultaneously deploying the state as an active player to help foster western innovation and higher quality growth (which will also create the benefit of correspondingly greater economic security).

To a degree, this is already happening:  the Trump Administration is now forcing the world’s biggest chip maker – Taiwan’s TSMC – to stop taking fresh orders from Chinese mobile leader Huawei. But this is not enough. Even if Trump sustains a tough line against Huawei, this will mean little, if not combined with a more constructive national developmentalist strategy in which the state plays an active role, not merely serving as a neutral bystander for the market.

Washington need not mindlessly copy Beijing’s more coercive model but, rather, could well achieve similar outcomes via state-led purchases and subsidies. The Defense Department could play a key role here as it has in the past.  The key takeaway raised by Atkinson’s excellent study, however, is that the status quo is untenable. America’s market fundamentalist model is under enormous stress and failing to produce anything close to a socially sustainable economy. The U.S. has not turned into an industrial shell overnight; it is the product of decades of malign neglect. Hence, it will take many years before the current deficiencies are fixed. As the philosopher Lao Tzu argued: “The journey of a thousand miles begins with one step.” Absent these initial steps, national redevelopment will remain a pipedream.

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