Industrial Policy Today
A Q and A with authors of an important new book
I’ve been looking forward to this newsletter for weeks but wanted to hold back until after the election—and now the election results make it even more relevant. It’s a Q and A with the authors of a giant new forthcoming book on industrial policy: Industrial Policy for the United States, by Ian Fletcher and Marc Fasteau.
“Industrial policy” is one of the buzzwords in policy right now, but what does it mean, and how does “industrial policy” even work? Industrial Policy for the United States aims to answer those questions. At almost 1,000 pages long, this book has colossal ambitions: in addition to offering a global survey of different countries’ approaches to industrial policy, it focuses in depth on how American policymakers have tried for centuries to boost cutting-edge industries. Oh, and it also features many recommendations for policymakers today.
Fasteau has worked for decades in finance and insurance, and Fletcher has long been a proponent of thinking outside the framework of neoliberal economics. He authored the book Free Trade Doesn’t Work in 2010. Their collaborative effort in Industrial Policy for the United States is meant to plant a flag—to lay out a comprehensive case for why policymakers need to take industrial capacity seriously.
Industrial Policy for the United States has gotten plaudits from both sides of the aisle. Marco Rubio, who has been nominated by Donald Trump to be the next Secretary of State, says that it “lays the intellectual groundwork for [a new economic] consensus—one that would make for a stronger, more prosperous nation. It couldn’t come at a better time.” That’s high praise from someone who could very well soon be working at the top of U.S. foreign policy.
And make no mistake: industrial capacity has a tremendous bearing on foreign policy, as current defense shortages (or near-shortages) indicate. In the 20th century, the American manufacturing colossus was essential for the projection of U.S. power abroad. The weakening of manufacturing today invites major geopolitical risks.
Foreign policy also has implications for the way we think of the economics of industrial policy. As Fletcher and Fasteau observe in our conversation below, major U.S. trading partners already have industrial policies of their own, which inevitably affect the American market. In today’s globalized world, the issue is less whether to have an industrial policy and more who should set it.
Their conversation also highlights another important theme, which the book itself elaborates on: “Industrial policy” per se does not have to lead to a command-and-control economy. Many cutting-edge approaches to industrial policy in fact leverage the market.
As we enter a new political paradigm, Fletcher and Fasteau do the hard but important work of surveying ways policymakers have tried—and sometimes failed—to promote industrial capacity. The book is available for preorder now from Cambridge University Press and elsewhere.
Well, that’s enough from me. Onto the Q and A….
Q and A for Industrial Policy for the United States (late October 2024)
Ian, what prompted you to write this book? You have written or co-written multiple books criticizing the "free trade" paradigm. Would you say that this new industrial policy book is an extension of that earlier project? If so, how?
Ian Fletcher: While researching my first book, Free Trade Doesn’t Work, which came out in 2010, one of the questions I had to answer was, “If free trade isn’t the right formula for prosperity, then what is?” It’s not enough to say that free trade is bad without giving an actual positive alternative, i.e., some explanation of what sort of strategy a nation should be pursuing if it imposes tariffs and policies like that.
As I looked into what sort of economic policies nations like Japan and China had been using—when they took advantage of America’s free trade but didn’t practice it themselves—I discovered that they had all being using very active industrial policies. That is, they hadn’t been letting their economies develop in a laissez faire, hands-off fashion, but had deliberately said things like, “We’re going to get rich as a country by industrializing, by having a steel industry, an automobile industry, an electronics industry.” Examining industrial policy was thus the next logical step after criticizing free trade, so I did a lot of reading on the subject in the years after the book came out. As a result, I’d been thinking about the topic for a while when Marc approached me about writing a book together about it.
"Industrial policy" is one of the buzzwords of the current moment – and the subject of a lot of battles among policy wonks. What do you mean by "industrial policy"? Why would you say industrial policy is important for the present moment?
Marc Fasteau: Industrial policy is selective intervention in the economy by government in support of a country’s most important industries. We call these “advantageous” industries in our book. They are high value; can accelerate progress in many other many industries; are essential for national security; or employ significant numbers of people at good wages.
For industrial policy to work, government must implement and coordinate its three major pillars: trade policy, technology development, and management of the currency’s exchange rate. So first, we need government support for new technologies through the entire innovation pipeline from pure science to salable products. Second, we need industry-specific and country-specific tariffs, so these industries don’t just get wiped out by subsidized foreign competition. And third, we need controls on international capital flows to end the overvaluation of the dollar—currently about 16%—which acts as a huge headwind against all US industries making tradable goods.
The first two of these policies already exist in some form—Trump’s tariffs and Biden’s CHIPS Act for example—but we are nowhere in addressing dollar overvaluation. As we describe in our book, we also need close coordination of these policies, so they are mutually reinforcing. Without this, they can and have worked at cross purposes.
Perhaps some of the most prominent criticisms of industrial policy come from a free-market direction. These critics argue that industrial policy is inefficient: that policymakers in Washington, DC do not have the foresight to understand how to allocate capital most efficiently. These critics also argue that industrial policy could promote a kind of corporate cronyism. What would you say to this line of criticism?
Ian Fletcher: I have a couple of answers here. First is that most of the industrial policy America needs is not going to be about government allocating capital investment in industry. A huge chunk of it is going to be about government allocating capital investment to key technologies, which is a very different thing. Government actually has a decent record when allocating money to developing technologies. Was it a mistake to fund development of the internet? Or the development of nuclear power, solar power, aviation, space launch, many key medications? The early stages of technology research are often too long-term or high-risk for the private sector to be interested.
Second, keeping government out of capital allocation decisions doesn’t result in the free market making these decisions, because all tradable product markets today are massively impacted by foreign industrial policies. If China subsidizes electric car production and the US doesn’t have a tariff on Chinese electric cars, then nobody’s going to be investing capital in producing them in the US. But if you have a tariff, like Biden just put on, they will, and this huge, highly productive, very valuable industry will take root in the US.
One of your principal arguments is that industrial policy has long been part of American policymaking. What would you say are the two or three most significant industrial-policy choices in American history?
Marc Fasteau: Steel railroad rails and aviation.
The US started importing steel rails from Britain in 1862, and until 1866 Britain had a monopoly of the US market. Following the Civil War, the US imposed tariffs and by 1877, almost 100 percent of steel rails were made domestically. Economists estimate that without this intervention, we would have continued to import steel rails until 1905—and the long-run price of rails would have been higher.
The US didn’t get to be the world’s greatest aerospace manufacturer by accident. In 1915, spurred by the immediate needs of WWI, Congress funded the National Advisory Committee on Aeronautics, which brokered a cross-licensing agreement that allowed aircraft, engine, and parts makers to access one another’s patents, so they could avoid hold-ups from patent disputes. Over the next decade, the federal government also supported civil and military aviation with technology research like wind tunnels, engine test stands, and flight-testing facilities. But national airlines were impossible without better planes, and manufacturers couldn’t develop better planes without someone paying the bills. The government’s solution was to have the Postmaster General contract with private airlines to carry airmail, creating demand ahead of the market and paving the way for an explosion of air travel in the mid-century.
What would you say about recent attempts at industrial policy, such as the CHIPS Act and the Inflation Reduction Act? Do you think these policy measures are going in the right direction, and how could they be improved?
Ian Fletcher: The US government is now going in the right direction, and not a moment too soon. I think we didn’t have a lot of time left before our industrial decline would have reached the point of no return, where recovering a serious industrial base would cease to be feasible. The tariffs imposed starting in 2018 kicked off that recovery, and the free-trade consensus collapsed quickly because the trade wars and economic catastrophes free-traders had long warned about didn’t happen. Biden continued to chip away at free-trade in two important ways—first, he kept most of Trump’s tariffs (and doubled down with more of his own). Second, he made the biggest push into civilian industrial policy since the Great Depression with the two bills you mentioned before and the Bipartisan Infrastructure Act.
Available evidence so far says, these bills are mostly working, if you ignore the partisan carping and various special interests trying to spin the situation one way or another. The US is targeting the ability to build the most advanced computer chips in the world. The threat of losing the US auto industry due to the transition to EVs has been voided by Biden’s 100% tariff on Chinese EVs.
The one thing the Biden administration hasn’t done, which I hope we get under either Harris or Trump, is to do these kinds of industrial policies not only for the sake of national security, public health, or environmental protection, but for economic prosperity. So far we’ve had bold action, but it’s always been for a non-economic reason.
Your survey of various international approaches to industrial policy also notes some failures. When does industrial policy go wrong, in your opinion, and how could that inform policy debates today?
Marc Fasteau: Industrial policy fails when it’s too narrowly conceived. Neither tariffs nor domestic support for innovation are enough on their own. They must be combined with the other two pillars of industrial policy I mentioned. Similarly, you can’t just focus on high-tech industries without also addressing the supply chain of middle-tech industries, like steel and machine tools, on which they rely.
A one-size-fits-all approach doesn’t work: Industries need policies tailored to their specific needs. For example, hard-science-intensive manufacturing, such as new materials, advanced semiconductors, renewable energy systems, and large aircraft, requires more capital and longer-term support than something like software.
As you note in your book, industrial policy can often be decentralized, with regional clusters designed to build up local industries. Could you talk a bit about that and give an example or two of more localized industrial policy?
Ian Fletcher: National policies like tariffs are the most important, but there are also things that states and localities can do at the regional level to protect or grow advantageous industries. Our book includes successful case studies on the Greater Boston area for biotechnology and upstate New York for semiconductor manufacturing. In both, state governments identified specific industries to bet on and aligned policy and support to develop a critical mass of education, industry, and manufacturing—A/K/A “clusters.”
However, it takes decades to build a sustainable cluster that can survive competitive challenges from abroad. This is why, looking back, we see New York betting big on technology in the 1960s with the launch of a full-blown state university system. Likewise, Massachusetts had a huge head start in biotech because its universities were attracting billions of dollars in NIH and NSF grant money for research. Unfortunately, this means that anybody looking for quick industrial policy fixes for problems like poverty in Appalachia will have to prepare for a long game. There are no effective gimmicks in industrial policy.
Toward the end of the book, you survey some policy options regarding industrial policy. What would you say are some of the biggest opportunities for industrial policy right now—either policies that would have a high impact or policies that have a high likelihood of becoming enacted by policymakers?
Marc Fasteau: Bringing the value of the overvalued dollar down to the level that balances overall US trade would have the biggest impact. Right now, it is overvalued by at least 16% against a trade-weighted basket of currencies. It’s even worse against key countries like China, Korea, Japan, and Taiwan. For example, the overvaluation against the Yuan by 22% completely wipes out the effect of any US tariff on China up to 22%. Overvaluation also increases the prices of US imports to consumers in other countries, so it hurts American exports. Unfortunately, nobody right now, with the possible exception of Bob Lighthizer, who was Trump’s US Trade Representative, is even thinking about the dollar.
We need tariffs to protect mid-tech US industries because of the domestic investment and employment that they stimulate. They work. For example, Trump’s 25% tariff on almost all steel imports reduced steel imports by 24 percent, and the industry’s capacity utilization rose above the 80 percent it needs long-term viability. The American industry invested $16 billion, adding significant new US capacity, including 15 brand-new mills and other steel-making facilities at locations including Florida, Texas, and Arizona.
We should abolish the de minimis exemption in US customs law. This exempts imports of $800 or less from tariffs, taxes, and most other notifications and reviews. As a result, $130 billion a year of small parcel shipments per year enter tariff-free, mostly from China. This includes drugs and other contraband items. Thankfully, Congress is now looking into this problem.
We should also screen outbound investments in the development and production of militarily important products, including dual-use technologies, by geopolitical adversaries like China.
Conversely, what do you think are some of the big obstacles that industrial policy faces today? How could those obstacles be addressed?
Ian Fletcher: One really big problem in the US, though not in East Asia or Germanic Europe (the countries that follow German-style industrial policy), is that very few people in our government, in our universities, in our news media, understand what industrial policy is about. It’s still perceived as an emergency response to things like COVID, or the threat of losing the US auto industry, or the threat of not being able to make the most advanced chips and getting technologically overpowered by a hostile superpower. These are all ad-hoc responses in situations where the need is just so pressing that people’s ideological reluctance goes away. Conservatives stop complaining about government picking winners and liberals stop complaining about corporate welfare,
These things do need to get done, and if it takes a crisis to wake people up, so be it. But what we really need is to be doing industrial policy systematically, all the time, across many sectors of the US economy. Therefore, the public and the policymakers need a comprehensive idea, a theory of what industrial policy is, why it’s a good idea, and how the US can do it. Pragmatism works in the short run, but to do things long term at scale, you need a theory. In our book, we address this need by describing the underlying economics of industrial policy, its tools and elements and how to combine them coherently and comprehensively. In this, I believe, our book is unique.
Industrial Policy for the United States is an impressively wide-ranging survey of industrial policy. What figures (either in the past or today) have been particularly important for you in thinking about this policy area?
Marc Fasteau: Some books were absolutely instrumental in developing our ideas. One was In Praise of Hard Industries by Eamonn Fingleton on the need for manufacturing in the US. The Origin of Wealth by Eric D. Beinhocker contributed to my thinking about what constitutes a valuable industry. Makers and Takers by Rana Foroohar made it clear that what’s good for Wall Street isn’t necessarily what’s good for the rest of the economy. John Gray’s False Dawn showed why unchecked globalism, including free trade and unregulated markets, is both inequitable and destabilizing.
But the book that really got me to understand the problems with US trade policy was Ralph E. Gomory and William J. Baumol’s Global Trade and Conflicting National Interests. It proved, using mathematical modeling, that trade is often win-lose, rather than always being win-win as mainstream economics assumes. It illuminated the many cracks in free-trade’s intellectual mythology and led me to look at the protectionist policies that had worked very well. in America’s early history and in other countries.
[And a bonus question, added after the presidential election.]
Donald Trump's decisive victory in the presidential election has sent shockwaves through the American political landscape. Essential for a strong Republican result on November 5 was improved performance among working-class voters. In light of those political circumstances, what do you think about the chances of industrial policy in a second Trump administration? Are there any areas for industrial policy that you think could bring Republicans and Democrats together?
Ian Fletcher: That is the $64,000 question right now, because you've got a number of totally opposite dynamics in play. Counting against the likelihood of an expansion of industrial policy in Trump's second term is that fact that Trump did almost nothing to advance industrial policy outside of tariffs, which are a big part of what America needs but by no means sufficient on their own. He even tried to defund key industrial policy programs like Manufacturing USA and the Manufacturing Extension Partnership, which are just terrific programs, though very underfunded, making clear that he simply didn't understand a lot of what industrial policy is about. And he's said nothing since his first term indicating that he's learned since. Counting in favor of an expansion of industrial policy is the fact that the Biden administration's huge push into this area, with programs like the CHIPS Act, the Inflation Reduction Act, and the Bipartisan Infrastructure Act, is now significantly entrenched "on the ground" all over the country. It's going to be really hard for the new administration to tell the semiconductor companies, for example, that they're just going to cancel all the subsidies they were promised. It would cause absolute chaos for the industry and a huge revolt from every Republican congressman whose district is getting some of this new investment, these new jobs. It would also be a pretty blatant disaster from a national security point of view, because the need for domestic production of the most advanced computer chips has only grown more obvious since Trump's first term. The whole AI explosion that started in 2021 has raised the possibility of adversaries having AI-enabled superweapons, robots, that we wouldn't be able to build. And it's hard for any Republican president, even one with quasi-isolationist rhetoric like Trump, to turn away from national security. On a more abstract level, there's the fact that once you accept the basic economic premises underlying protectionism, which Trump has, those same premises will lead you, just by their own logic, to industrial policy. For example, the whole idea that some industries are worth protecting: If that's true, why aren't we doing everything else we could do to help these industries? And if it's such a big deal that China is stealing our technology -- which was the officially stated justification for the first round of Trump's China tariffs -- then why isn't the Federal government doing more to grow more technologies here in the US? All these pieces fit together, and the push-and-pull of events is going to force Trump to either embrace these elements of industrial policy, one after another, unless he's determined to be willfully irrational on the issue. Which I kind of doubt, given that this administration seems (from early indications) to be drawing in much more serious policy thinkers than Trump I, and you also now have entire sections of the federal bureaucracy, like the CHIPS Act unit in the Commerce Department, that are now very active on industrial policy and understand all these things increasingly well.
Some other related links:
An American Compass interview with Ian Fletcher and Marc Fasteau.
Fasteau and Fletcher on tariffs in Compact.
David P. Goldman on Industrial Policy for the United States.
Stephen Miran on supply-side reforms to promote industrial capacity.
David Adler and William Bonvillian on high-tech production at home.
Marco Rubio on “industrial policy, right and wrong.”
And one more time: Industrial Policy for the United States.