The polarization of US China policy is well illustrated in Newsweek’s The Debate column, where a concerned Jimmy Carter Democrat named Julian Gresser fears that if trends persist, the USA and China will march into war and as an alternative he offers an ecotopic cities and East Asia regional network for shared prosperity that can create change through sustainable development bypassing central governments:
“We Can Have Peace in East Asia Through Regional Prosperity
Julian Gresser , adviser to China, Korea, Japan, the U.S. State Department in the Carter Administration, and the World Bank
On 6/20/23 at 6:00 AM EDT
China and the U.S. are now hurtling by design or inadvertence into war, with no offramp or effective mechanism to prevent it. The present danger is acute for four reasons.
The political and military leadership in both countries are framing the conflict as a struggle for world hegemony, with China seeking to shift the balance of power and the U.S. resisting it. The chances of an erratic act based on miscalculation are increasing. President Xi Jinping or his generals could decide to invade Taiwan, which could precipitate a nuclear response from the U.S.
A random event can easily trigger calamitous misinterpretation like we saw back in 2021, when a Starlink satellite came dangerously close to colliding with the Chinese Space Station. Chinese military strategists might well have construed this event as an intentional act of war by the U.S. military.
China and the U.S. can also be dragged into war by the ambitions and recklessness of other countries, in particular North Korea and Russia. Kim Jong Un abetted by both countries could lob a missile into Japanese territorial waters, which happened recently.
We will not solve these complex problems with the same kind of thinking that produced them. What is needed is new thinking, and new values.
Evolutionary values and new modes of action can increase the chances of our collective survival. One promising pathway is the Gaiapolis Strategy, inspired in part by Mayors for Peace. It is the original vision of Hiroshima Mayor Takeshi Araki to create a league of 10,000 cities by 2030 dedicated to preventing the next nuclear war. Mayors for Peace already engaged 8,200 member cities. The essential idea of Gaiapolis is to redefine urban and regional prosperity at the provincial, state, and local levels, which today is largely based on quantitative economic growth dominated by technology, to one that emphasizes enhanced quality of life and opportunity for all inhabitants.
Gaiapolis is based on a recognition of the benefits of local ownership, control, management, and financing of local and regional development. Gaiapolis cities and regions seek to deliver safe, green, resilient, energy efficient, inclusive, collaborative, and equitable habitats. They recognize and value wisdom, kindness, compassion, beauty, generosity, and altruism. They support the arts and culture, entertainment, sports, families, and play, and harmony with the natural world.
The U.S., Japan, South Korea, Taiwan, and China can all play a vital and creative role in ushering in this ecotopian vision.
For the past 30 years many cities in Asia, including Chinese cities, joined together in Gaiapolis‘ predecessor, Technopolis, which designed and implemented largely successful policies based on the premise that „strategic technologies“ can serve as catalysts of job creation and economic growth.
The Chinese government under Chair Deng Xiaoping pioneered the concept—along with Japanese Ministry of International Trade and Industry (MITI) planners—of special economic development zones to catalyze local innovation and creativity. There are already in place international networks of collaborating cities, including integral, resilient, green, and compassionate cities networks. And the conditions are ripe for a new U.S.-Japan Evolutionary Partnership which would bring massive Japanese investment, especially around optical fiber infrastructure, to California (NTT already established a research center in Sunnyvale), which together with Japan offers the world’s third largest market. The countries of the East Asia region also have a unique opportunity to collaborate with the U.S. in designing and fostering new applications for wisdom and ethical artificial intelligence.
The realization of great visions begins with baby steps. In East Asia today there is a cornucopia of entrepreneurial talent. But less well developed is philanthropic venture capital, basic business management skills, and understanding and support from central authorities for local innovation. Public interest evangelism in business is in its infancy. These and other practical impediments can be effectively addressed by new educational and training programs.
To prevent us from going over the nuclear precipice in the early 21st century, what is urgently demanded is a shift upward in basic values toward compassion, courage, discernment, and forbearance. Increasing the quality of life by an enduring prosperity for every inhabitant of cities and regions within East Asia and the U.S. is the best antidote to war. It is our imaginative choice.
Julian Gresser was co-chair of the Japan Industrial Policy Group at the U.S. State Department in the Carter administration, and has been an adviser to China, Korea, and the Prime Minister’s Office of Japan. His latest book is How the Leopard Changed Its Spots: Evolutionary Values for an Age in Crisis.
The views expressed in this article are the writer’s own.
The author worked in Jimmy Carter’s administration as an expert on China, Japan and Korea. Apparently there was the Technopolis project, a network of local actors and cities that wanted to promote technical and economic development at this level in East Asia, apparently China used to be a part of it since Deng. Now Gaiapolis seems to be the ecological city network variant, just like there are now networks of American cities and regions that, after Trump’s termination of the Paris Agreement, continued to promote climate protection and renewable energies including the New Green Deal without a central government level, Trump and Washington. Now he seems to think this is necessary under Biden as well. Apparently, Gresser hopes for a kind of peace through joint development, even without a federal government, if necessary. Sounds a little naïve and dodges the hard questions of power who is in charge of government, threatens to be a kind of niche eco-savvy man or maybe he hopes to get the power or to be able to circumvent it by setting a good example and model. Sounds like peace and change through development like before change through trade as it used to be. In addition, this initiative appears to be being promoted primarily by the USA and Japan in East Asia. The Chinese have their own BRI and Biden B3W and the EU Global Gateway, but apart from BRI you hear just as little about Technopolis and Gaiapolis. Projects that no one notices or that remain marginal and do not even serve as a development model. He also does not mention Biden’s New Silk Road B3W or the EU’s Global Gateway, nor the Chinese Silk Road BRI, in which such engagement ideologues as Kissinger want to participate in the hope of Brzezinski’s G2 and Chimerica.
Opposite to Biden and on a full confrontational course is Gabriela Rodriguez from American Compass, who hinks that derisking is too soft. No derisking and diversifying but decoupling. „A hard break from China“-from export controls, investment bans, termination of the Most Favorite Nation States to the ban for the culture industry and Hollywood on being active in China, to sports, everything should be banned.
“Time for a Hard Break From China | Opinion
Gabriela Rodriguez , Policy advisor, American Compass
On 6/21/23 at 10:09 AM EDT
For a fleeting moment in early 2023, the United States appeared to be getting serious about China. The Biden administration had imposed unprecedented export controls on semiconductor equipment, designed to curb China’s supercomputing capabilities and artificial intelligence development. An executive order regulating American investment into China was imminent. There was even a bipartisan push to ban TikTok.
A few months later, that momentum has dissolved into traditional Washington platitudes about international harmony, even as Beijing further strengthens its confrontational posture. The administration has extended the once-temporary exemptions it granted TSMC and Samsung to continue expanding chip production in China. The executive order on outbound investment controls has stalled indefinitely. Only Montana is taking action on TikTok.
In April, Secretary of the Treasury Janet Yellen delivered a perplexingly anachronistic speech at Johns Hopkins University, in which she envisioned „a growing China that plays by international rules“ and fosters „rising demand for U.S. products and services and more dynamic U.S. industries.“ One week later, National Security Advisor Jake Sullivan took the stage at the Brookings Institution to announce the administration’s strategy of „de-risking and diversifying, not decoupling,“ in which a „small yard and high fence“ would safeguard a narrow set of critical military technologies while otherwise permitting commerce to flourish.
This focus on a narrow set of national security concerns is inadequate and doomed to failure. The China challenge is not only, or even primarily, a question of national security. The fundamental problem is that America’s free-market economy is incompatible with China’s state-controlled one, just as American liberty and democracy are incompatible with the Chinese Communist Party’s (CCP) authoritarianism. Only a hard break with the People’s Republic of China (PRC) can protect America’s market from subversion. Separating our economies will be costly. But the alternative—accepting foreign control of assets and investments, dominance and supply chains, and influence over our institutions—will cost far more.
A new report from American Compass, „A Hard Break From China,“ explains how economic integration with China undermines America’s liberty and prosperity across three critical dimensions: investment, supply chains, and institutions. When it comes to investment, American capital flowing into China implicates American investors in the PRC’s human rights abuses, subsidizes development of its military capabilities, and subjects retirees and other savers to the risks of a poorly regulated and CCP-dominated market. When American firms invest directly in China, typically through state-mandated and -subsidized joint ventures, they transfer jobs and technology across the Pacific. In both cases, the PRC actively distorts market incentives to attract investment and then uses its leverage over the investors to force support for CCP priorities and propaganda. Flowing in the other direction, China-based capital is taking control of American corporations and real estate, establishing a foothold in the American market that current U.S. law is incapable of managing.
Beijing is pursuing an explicit economic agenda to establish technological superiority and dominate global supply chains through government subsidies, market access restrictions, and intellectual property theft. It complements this approach by suppressing worker power and consumer demand in its own market, generating an enormous trade surplus with the United States. The result has been to hollow out American productive capacity, transfer trillions of dollars in American assets into China, and leave us dependent on PRC-based production of everything from electronics to pharmaceuticals to solar panels.
The CCP uses its economic leverage in financial markets and supply chains to corrupt American institutions and undermine democratic norms. Capitalism encourages whatever activities will produce the greatest profit and, in America’s current relationship with China, the pursuit of profit often calls for kowtowing to the CCP. As a result, American movie studios and sports leagues self-censor in keeping with the CCP’s preferences, American universities partner with affiliates of the Chinese military, and American business leaders fall over themselves apologizing for any possible slight. Preventing such subversion in a free society is not easy. But policymakers should interdict the influence directly where they can.
Across all these dimensions, American policymakers must embrace bold, broad measures. U.S. law should prohibit PRC-based entities from acquiring and operating in the American market, American investors from funding PRC-based firms, and American firms from forming joint ventures in or transferring technology to China. Trade with China must be rebalanced by revoking its Most Favored Nation status and imposing tariffs. To protect American institutions, policymakers should prohibit flows of funds to and from PRC-based ones, including limiting PRC-based tuition revenue to universities. The logic of export controls should be extended to America’s cultural products: Hollywood studios should not be allowed to sell their moves in the Chinese market; singers should not be allowed to perform concerts there; athletes should not be allowed to market their sneakers.
For policymakers and analysts catechized in the tradition of globalization and conditioned to fear any inefficient overstepping in the market, a hard break from China may seem implausible. But where America’s very sovereignty is at stake, the goal must not be to ensure that the market continues working as well as possible but to dissolve one that does not work at all. A commitment to free markets entails doing whatever is necessary to ensure that the American market remains free.
Gabriela Rodriguez is a policy advisor at American Compass.
The views expressed in this article are the writer’s own.
It should be noted that she is not only expressing her own opinion, but that of the American Compass, a kind of avantgarde movement and pioneer of a new conservatism, which criticizes the free trade and globalization ideology including neoliberalism of the establishment Democrats and Republicans of big business and favours the promotion of the working class and the institutions of the state, strategic industries and families that have been hollowed out, that more industrial policies can restore and bring back good old America. The pioneer of American Compass is Oren Cass, who, as former campaign advisor to Mitt Romney, was supposed to formulate his China policy and then also conceptualized parts of Trump’s China policy both theoretically and practically and who wanted to be „flagship“ for Make America Great Again. As stated on the American Compass website:
Family, community, and industry provide the foundation for our nation’s liberty and prosperity
Conservative economics gives policymakers the tools to understand capitalism and harness its power for the benefit of American workers, their families and communities, and the national interest. It rejects the market fundamentalism of libertarians who see capitalism as nothing more than economic “freedom” and thus expect a policy agenda of tax cuts, deregulation, free trade, and union-busting to unleash the economy’s productive forces. It likewise rejects the instinctive hostility toward markets from progressives, who see government as the more effective mechanism for solving most problems.
Conservatives value the unique ability of the free market to allocate resources efficiently and empower people to meet one another’s needs, to limit the power of a central government and place it instead in the hands of those best positioned to take care of their own interests, and to evolve over time in response to real-world conditions rather than at a bureaucrat’s whim. Markets are themselves institutions through which people develop informal codes and formal rules for cooperating and transacting more effectively. Humanity achieved greater progress in its living standards through just a few centuries of market-driven innovation and productivity than through all of history’s prior millennia.
But conservatives also recognize that markets have drawbacks and limitations. The free market can reduce people to consumers and relationships to transactions. It prioritizes efficiency over resilience, and individual self-interest over the common good. Under the right conditions, the pursuit of private profit powerfully advances the public interest, but such conditions are never assured. Free markets have assigned higher value to hedge fund management than job-creating entrepreneurship, and rewarded offshoring to China over investing in local communities.
Thus, in conservative economics, free markets are a means to an end, not an end unto themselves. They are necessary but not sufficient to the economy’s proper ends—not only rising consumption, but also expanding the nation’s productive capacity, preserving its institutions, and supporting its families. Capitalism has an unparalleled ability to generate widespread prosperity. But it succeeds only when competing firms pursue profit by investing in the productive use and fair compensation of labor, and when people are well-equipped to engage in the market as entrepreneurs and workers and in their communities as citizens. Public policy plays an indispensable role in maintaining those conditions.
At American Compass, we work to restore this conservative economic tradition, atop which our nation rose from colonial backwater to continent-spanning industrial colossus. We believe that conservative economics demands a focus on:
- Productive Markets: Policymakers must constrain destructive and speculative profit-seeking and channel both talent and investment toward productive pursuits that advance the nation’s liberty and prosperity. Read More
- Supportive Communities: Policymakers must foster the institutions that allow the market to deliver on its promise for workers, their families, and the nation. Read More
- Responsive Politics: Policymakers must focus on the outcomes that people define as most important through democratic politics, rather than merely accepting those deemed most efficient by market logic. Read More
We have explored in depth the application of conservative principles to economic theory and policymaking. The Return of Conservative Economics, published at National Review alongside the announcement of American Compass’s formation, contrasts market fundamentalism with a genuinely conservative approach to economics, while The New Conservatism, published one year later at Foreign Affairs, explains how and why the American right is moving from one toward the other.
Our inaugural collection, Rebooting the American System, makes the case for a robust national economic policy from the perspectives of history, theory, and practice. Wells King’s essay, Rediscovering a Genuine American System, describes the conservative economic tradition atop which America rose from colonial backwater to continent-spanning industrial colossus. Julius Krein’s essay, Planning for When the Market Cannot, highlights the many situations in which public investment can be necessary and effective. And Oren Cass’s essay, Removing the Blinders from Economic Policy, provides a practical framework for applying conservative economics to policymaking.
And each year in our annual report, Cass writes a Founder’s Letter assessing the state of the economic debate on the right. In 2020, Neoliberalism Falls Apart described the economic, social, and political trends that have rendered the old orthodoxy obsolete. In 2021, The Return of Political Economy outlined the challenges that conservative economics is uniquely suited to address, and was delivered as remarks at the Intercollegiate Studies Institute’s conference on The Future of Political Economy.
In a separate study, American Compass and its boss, Oren Cass, detail the measures being taken, which essentially coincide with Trump’s, Narvallo’s and Lightizer’s ideas and formulate them:
„A Hard Break from China
June 8, 2023
Protecting the American Market from Subversion by the CCP
3/9/2022 Oren Cass
The dream of a liberal, democratic China is decidedly dead, and U.S. policymakers are finally beginning to grapple with the reality of having an authoritarian adversary as a global peer. But this thinking remains dangerously underdeveloped and naïve, as reflected in recent speeches by Secretary of the Treasury Janet Yellen and National Security Advisor Jake Sullivan, in which they emphasize narrow concerns about military technology while expressing optimism that our two nations can remain integrated economically. Yellen still envisions “a growing China that plays by the rules” and fosters “rising demand for U.S. products and services and more dynamic U.S. industries,” while Sullivan advocated a policy of “de-risking and diversifying, not decoupling.”
The China challenge is not only, or even primarily, one of national security. It is that too, to be sure. But the fundamental problem is that America’s free market economy is incompatible with China’s state-controlled one, and American liberty and democracy are incompatible with Chinese communism. America must sever its economic relationship with China to protect its market from subversion by the Chinese Communist Party (CCP). Disentangling our economies will be costly, but the alternative of accepting CCP control of our assets and investments, dominance in our supply chains, and influence over our institutions will cost far more. This paper demonstrates how integration with China undermines American economic sovereignty across three critical dimensions and describes the unprecedented policy response necessary.
American capital flowing into China implicates American investors in the People’s Republic of China’s (PRC) human rights abuses, subsidizes development of its military capabilities, and subjects retirees and other savers to the risks of a poorly regulated and CCP-dominated market. When American firms invest directly in China, typically through state-mandated and -subsidized joint ventures, they transfer jobs and technology across the Pacific. In both cases, the PRC actively distorts market incentives to attract investment and then uses its leverage over the investors to force support for CCP priorities and propaganda. Flowing in the other direction, PRC-based capital is taking control of American corporations and real estate, establishing a foothold in the American market that current U.S. law is incapable of managing.
The United States should:
- Prohibit PRC-based entities from acquiring and operating in the American market, participating in American funds, and holding American real estate;
- Prohibit American firms from forming joint ventures in or transferring technology to China and American investors from providing capital to PRC-based firms; and
- Reject the premise of a bilateral investment treaty with China or any request for assistance to American firms in the Chinese legal system.
II. Supply Chains
The PRC has adopted an explicit economic agenda of government subsidies, market access restrictions, and intellectual property theft intended to establish technological superiority and secure control of key supply chains. It complements this approach by suppressing worker power and consumer demand, generating an enormous trade surplus with the United States that has hollowed out American productive capacity and led to the transfer of trillions of dollars in assets. Basic trade in goods and services can still benefit both countries so long as it occurs in a balanced manner, the American market is insulated from PRC distortions, and resilient supply chains operate beyond PRC control.
The United States should:
- Revoke China’s Most-Favored-Nation status and impose tariffs to disfavor Chinese supply chains in the American market;
- Develop the state capacity to monitor supply chain resilience and create industrial policies that rebuild American capabilities in critical sectors; and
- Foster economic conditions that channel capital toward the major long-term investments necessary to support domestic industry.
The CCP uses its economic leverage in financial markets and supply chains to corrupt American institutions and undermine democratic norms. Capitalism encourages whatever activities will produce the greatest profit and, in America’s current relationship with China, the pursuit of profit often calls for kowtowing to the CCP. As a result, American movie studios and sports leagues self-censor in keeping with the CCP’s preferences, American universities partner with affiliates of the Chinese military, and American business leaders fall over themselves apologizing for any possible slight. Preventing such subversion in a free society is not easy. Steps to limit economic interaction with China and thus the incentive for such behavior are most important. But policymakers can also act in some instances to interdict the influence directly.
The United States should:
- Ensure research integrity and security by prohibiting flows of funds between American institutions and PRC-based ones;
- Limit PRC-based tuition revenue to universities and access of Chinese nationals to American graduate programs in sensitive fields of study; and
- Renormalize free speech through cultural export controls that eliminate incentives for placating the CCP and public forums that reward honest discussion of its true nature.
The Appendix provides a list of significant and thoughtful bills addressing the U.S.-China relationship from the 116th–118th Congresses.
If there ever was a consensus in Washington on confronting the People’s Republic of China (PRC), it has already collapsed. President Joe Biden maintained the tariffs imposed by his predecessor, but in recent months his administration has sprinted back toward the naïve globalism that characterized American foreign policy at the start of this century. In April, Secretary of the Treasury Janet Yellen delivered a perplexingly anachronistic speech at Johns Hopkins University, in which she envisioned “a growing China that plays by the rules” and fosters “rising demand for U.S. products and services and more dynamic U.S. industries.” One week later, National Security Advisor Jake Sullivan took the stage at the Brookings Institution to announce the administration’s strategy of “de-risking and diversifying, not decoupling,” in which a “small yard and high fence” would safeguard a narrow set of critical military technologies while otherwise permitting commerce to flourish. As the American Enterprise Institute’s Danielle Pletka observed recently in Foreign Policy, the White House seems persuaded by dire warnings from spokesmen of the foreign policy establishment like Thomas Friedman, Fareed Zakaria, and Graham Allison that China must be accommodated.
Republicans seem generally to have coalesced behind support for “strategic decoupling.” But what that means, or how to achieve it, is anyone’s guess. Tariffs to disfavor Chinese imports remain controversial, as do Buy American provisions to favor domestic production, or industrial policies to boost domestic capacity. Opponents of the CHIPS and Science Actargued for stronger “guardrails” to prevent semiconductor companies from investing in China, but thus far the GOP majority in the House of Representatives has shown little interest in taking action that might obstruct the free flow of capital to America’s economic adversary.
Meanwhile, trade with China continues to grow. “Made in China 2025” (MIC2025) the ambitious program of the Chinese Communist Party (CCP) to capture vital global markets, proceeds apace. Semiconductor companies continue lobbying for more flexibility to invest in China and license their technology there. In late May, the COMAC C919 completed the first commercial flight by a Chinese jetliner—thanks to more than a decade of joint ventures and technology transfer imposed upon western companies that wanted a piece of the action. The federal government itself still permits its employees to invest retirement funds in sanctioned Chinese military companies and federal funds have been flowing to a variety of Chinese research programs—for instance, gain-of-function research at the Wuhan Institute of Virology, to take a random example. Even banning TikTok, a PRC-based mobile application of virtually no economic importance but enormous data-gathering and propaganda potential, has proved too difficult.
To its credit, the Biden administration has taken some important steps—most notably, export controls imposed last year on chip-making equipment that significantly handicapped the Chinese industry. But officials also seem deeply uncomfortable with the implications of such policy. Jay Shambaugh, undersecretary for international affairs at the Treasury Department, emphasized that “it is important for the U.S. to be clear [that] we do not seek to decouple from China or seek to limit China’s growth in any way” and that the actions are “not things we’re doing to benefit the U.S. economically vis-a-vis China.” When the PRC took its own action, banning Micron Technologies chips in some key sectors, Secretary of Commerce Gina Raimondo reacted with incongruous indignation that the United States “won’t tolerate” such “economic coercion.”
The PRC, by contrast, has made clear that it will use any tool at hand in its long-term struggle to displace the United States, from hacking federal personnel records to facilitating the flow of deadly fentanyl across our southern border. For the CCP, the conflict is a whole-of-society priority, demanding a level of state control and action that is barely conceivable to citizens of western democracies. As Robert O’Brien, National Security Advisor in the Trump administration, observed, the idea that “individuals are merely a means to be used toward the achievement of the ends of the collective nation state … remain[s] as fundamental to the Chinese Communist Party as the Constitution and the Bill of Rights do to us as Americans.”
This paper argues that the posture of U.S. policymakers, and the current contours of the decoupling debate, is inadequate to the nature of the challenge posed by economic relations with China. The China challenge is not only, or even primarily, one of national security. It is that too, to be sure. But the fundamental problem is that America’s free market economy is incompatible with China’s state-controlled one, and American liberty and democracy are incompatible with the CCP’s authoritarianism. Only a hard break from China will protect America’s market from subversion by the CCP. Separating our economies will be costly, but the alternative of accepting foreign control of our assets and investments, dominance in our supply chains, and influence over our institutions will cost far more.
* * *
Never in human history have nations with such different economic and political systems attempted economic integration. Before the modern era, neither the markets nor the technology existed to facilitate it. In the twentieth century, efforts at American engagement with Nazi Germany neither lasted long nor ended well. During the Cold War, integration was never permitted, or even seriously considered, by either side—the suggestion would have been regarded as plainly insane. PepsiCo’s opening of a Soviet bottling plant was front-page news in 1972 and represented, according to CEO Don Kendall, the “culmination of our work since that day 13 years ago” when Nikita Kruschev had been photographed at a trade fair sipping a Pepsi. Even then, rubles were not convertible to dollars, and so the Soviets paid for the bottling equipment with vodka. Not by coincidence did globalization gain steam only after the Berlin Wall fell.
Guiding the world’s sole superpower at the outset of globalization, American theorists and policymakers never considered the implications of integration with an authoritarian peer. Globalization meant the economic liberalization, political democratization, and cultural Americanization of the world. The United States set the rules for international institutions and called the tune for multinational corporations, most of which were American or else relied heavily on access to American technology and the American market. Under these conditions, economic entanglements were largely beneficial: opportunities to exert American leverage and impose American norms. Incursions in, and distortions of, one market by another were always some other nation’s concern.
From this lofty pedestal, the United States eagerly welcomed China into the international community in the late 1990s. At that time, China looked much like other developing nations. Its GDP was roughly one-tenth that of America’s, closer in scale to Brazil or South Korea. Per capita, it was one of the world’s poorest countries, ranked between Sri Lanka and Guyana. In a report titled “China’s Hollow Military,” scholars at the Brookings Institute concluded that “recent clamor over China’s strategic ambitions is greatly overblown. Most of the Chinese aims that run counter to U.S. interests are in fact not global or ideological.” American economists and policymakers from across the political spectrum, believing themselves to have arrived at “the end of history,” were unified in their confidence that permitting China’s ascension to the WTO and integrating it into the global economy would ensure its development as a constructive participant in an American-led world order.
China certainly developed—much faster than anyone had expected. But it did not liberalize. To the contrary, under the leadership of President Xi Jinping over the past decade, the CCP has become more authoritarian, and even genocidal; asserted greater control over the economy through state ownership, influence, and subsidy; and accelerated its aggressive industrial policy built on intellectual property theft and manipulation of foreign firms, with an explicit goal of weakening American industry and seizing global leadership. Through its “Military-Civil Fusion,” a strategy overseen personally by Xi, “the CCP is acquiring the intellectual property, key research, and technological advancements of the world’s citizens, researchers, scholars, and private industry in order to advance military aims,” warned the State Department. “Joint research institutions, academia, and private firms are all being exploited to build the PLA’s [People’s Liberation Army] future military systems—often without their knowledge or consent.”
As American defense officials and China experts observed last year in Foreign Affairs, the CCP produced “weeks of propaganda and publications” around the celebration of Karl Marx’s 200th birthday to “establish Xi as the designated heir to Marx, Lenin, Stalin, and Mao.” In a speech later that year, Xi “exhorted CCP cadres to remember their duty to ‘liberate all of humanity’ and serve as the ‘gravediggers of capitalism.’” A textbook for the PLA explains, “Xi Jinping has emphasized that our state’s ideology and social system are fundamentally incompatible with the West. Xi has said ‘This determines that our struggle and contest with Western countries is irreconcilable, so it will inevitably be long, complicated, and sometimes even very sharp.’” The book also recommends gaining “a grip on foreign government leaders and their business elites by encouraging our companies to invest in their local economies.”
The CCP’s political and economic model poses a far greater threat to American democratic capitalism than does its two-million-man army. Whether Lenin ever said that “the capitalists will sell us the rope with which we hang them,” he did write that they “will furnish credits which will serve us for the support of the Communist Party in their countries and, by supplying us materials and technical equipment which we lack, will restore our military industry necessary for our future attacks against our suppliers. To put it in other words, they will work on the preparation of their own suicide.” The vision may be nefarious, but the observation itself is purely descriptive—and quite accurate.
Capitalism operates on the assumption that economic actors in a free market pursuing their self-interest—namely, profit—will advance the public interest as well. This holds true only under certain conditions, when socially valuable activities like investment in technology development, capacity expansion, job creation, and productivity enhancement are the best path to profit. On one hand, when everyone plays by the same rules, government constrains unproductive behavior, and a strong social fabric supports workers and their families, the assumption does hold and the market can generate unparalleled prosperity. On the other hand, bring the capitalist market into contact with a state-controlled one, allow foreign policymakers to create conditions in which the most profitable activity is serving the foreign state in word and deed, and too many capitalists will gladly do just that.
Even were China to disarm tomorrow, credibly foreswearing any aspirations beyond its borders, its influence as an economic actor would remain deeply corrosive to American liberty and prosperity. Asking American firms and workers to compete with their Chinese counterparts grants CCP policymakers the power to shape American capital allocations and labor-market conditions from the far side of the Pacific. Allowing Chinese firms to access American capital markets subjects the American people’s savings to the whims of CCP regulators and leaves American financiers ham-handedlycomplicit in human rights abuses, while allowing Chinese capital access to American firms puts corporations under the control of a foreign government. And the more distortion China introduces on behalf of its producers, the greater the pressure on the U.S. government to respond in kind. Free markets, free trade: pick one.
Markets also transmit authoritarianism. If American firms are tasked with maximizing their profits, and the greatest profit can be had by kowtowing to the CCP, that is what American business leaders will do. “Most foreign business executives go to extreme lengths to avoid saying anything that could remotely antagonize the Chinese government,” explained the Wall Street Journal. Michael Bloomberg will apologize for Boris Johnson’s criticism of China at his conference (and ensure next year’s conference is more CCP-friendly). If a substantial share of moviegoers is in China, Hollywood will gladly apply the standards of CCP censors before releasing films in America. If universities rely on students from China paying full price to fund operations, they will admit students whose speech is monitored and punished, allow the promotion of CCP propaganda, tolerate espionage, and even silence protest that might cause offense. Free speech, free trade: pick one.
* * *
America is struggling to grapple with the enormity of its wrong turn. Had we known in 2000 what we know now about China’s future, we would not have conducted the reckless experiment of tightly coupling ourselves to a communist, authoritarian dictatorship that controls a market of 1.4 billion people. Our folly has produced an unprecedented situation that demands an unprecedented response—one that will take time and impose costs along the way.
Indeed, the goal of a hard break—protecting the American market from subversion by the CCP—requires greatest intervention precisely in those areas where it will be most expensive. Those supplies that are available only from China are the ones for which alternative sourcing must be found. Those investors most reliant on the Chinese market for their profits are the ones that must be forced to leave. Nearly every action that must be taken will fail the conventional cost-benefit analyses constructed by economists, which should not be surprising seeing as, under their definition and measurement of costs and benefits, America’s economic relationship with China has been a great success. Policymakers often perform poorly in these circumstances.
What’s required is a clear concept of and commitment to economic sovereignty, defined as America’s ability to decide for ourselves the parameters of economic activity in our domestic market. In a global economy, economic sovereignty is a crucial component of political and even territorial sovereignty and should take precedence over concerns of efficiency. Otherwise, we are susceptible to subversion by those who will sacrifice efficiency for control. In On China, Henry Kissinger relates how “a Han Dynasty minister described the ‘five baits’ with which he proposed to manage the mounted Xiongnu tribes to China’s northwestern frontier.” He quotes the minister’s plan:
To give them … elaborate clothes and carriages in order to corrupt their eyes, to give them fine food in order to corrupt their mouths, to give them music and women in order to corrupt their ears, to provide them with lofty buildings, granaries and slaves in order to corrupt their stomach… and, as for those who come to surrender, the emperor [should] show them favor by honoring them with an imperial reception party in which the emperor should personally serve them wine and food so as to corrupt their mind. These are what may be called the five baits.
In a capitalist economy, such bait is tempting, and each individual actor will usually be rational in taking it. Only a collective response, which requires public policy’s coordination, provides a bulwark.
A hard break must occur across three related dimensions of economic interaction: investment, supply chains, and institutions. Policymakers have begun engaging in each case, but generally with a narrow emphasis on the politically salient issue du jour. Investment concerns have focused on holdings of China-based entities in America’s public pension funds and China-based acquisition of American farmland. Supply chain concerns have focused on those products like semiconductors and personal protective equipment that experienced shortages during the COVID-19 pandemic. Institutional concerns have focused on revelations of CCP police stations operating in American cities and propaganda outlets on American campuses.
These issues are all concerning, and policymakers should address them. But they are best understood as illustrations of the broader incompatibility that makes a hard break necessary. Choosing high-salience issues and crafting specific bills in response will not work—at best it simply encourages both market actors and the CCP to find new paths to achieving the same ends. At worst it is directly counterproductive. A good example is the debate over “guardrails” to prevent investment in China by semiconductor manufacturers that accept federal subsidies through the CHIPS and Science Act. Congress wanted to prevent federal funds from reaching China, but the result is to make accepting those funds less attractive in the first place. If the goal is to prevent investment in China, the correct policy is a prohibition on investment in China, not a too-clever-by-half set of weakened constraints.
Conditioned to seek out “market failures” and craft tailored interventions that enhance economic efficiency, American policymakers must shift their mindset to one that prefers the blunt and the bold. The goal is not to make a “Chimerican” market work better; it is to obstruct and discourage operation of such a market altogether. Burdensome regulation that makes investment unattractive is a feature, not a bug, in that context.
In many cases, achieving the hard break will require entirely new policy frameworks and mechanisms, just as the international economy’s development did after World War II and the control of illicit finance did after 9/11. For instance, this paper refers frequently to PRC-based and CCP-affiliated entities. U.S. law will need to improve its capacity to determine who and what counts. Likewise, the paper proposes scrutiny of the participants in various investment vehicles that likely requires greater disclosure from financial institutions, and export controls on products and services difficult to monitor in the traditional manner. Such tools would be important for preserving economic sovereignty in the twenty-first century’s global market regardless; for executing a hard break from China, they will be indispensable.
The global market presents many other challenges, which this paper does not address. Globalization, with its unfettered flows of goods, capital, and people, would wreak havoc in the American market regardless of China. American Compass’s Regaining Our Balance collection and The Balancing Act policy paper analyze those issues in depth and provide a range of proposals for ensuring that trade and immigration work for American workers. Here, the question is how to deal with China, a nation whose authoritarian government and anti-market policies make it unfit for participation in any global order.
The problem of capital flows between the United States and China has a telling asymmetry. PRC-based ownership of American assets—real estate and corporate equity, in particular—presents significant challenges. American ownership of assets in China does, too. Common sense would suggest that if Americans were concerned about the CCP exercising control in the United States, they should conversely be delighted by the prospect of the United States exercising control in China. But this common sense makes the common mistake of assuming that the American and Chinese economic and political systems are similar, so that the implications of foreign ownership would be similar as well. Instead, the interaction of China’s state-controlled economy and the American free market makes capital flows and the entanglement of ownership undesirable for the United States in both directions.
Americans invest in China as private individuals and firms. They use any control that they can exercise, or data and technology that they can access, to advance their private interest—generally, without consideration of their nation’s interests. They subject themselves, meanwhile, to the control of an authoritarian government that has shown no compunction manipulating foreign investors and leveraging market access to advance its national interest. Firms have typically been required to enter the country through joint ventures with PRC-based entities, and transfer technology to them. If an American investor or firm were somehow to establish sufficient control to act contrary to the CCP’s interest in China, the CCP could simply expropriate the assets.
Consider the case of Apple, the world’s most valuable corporation, which has made enormous investments in Chinese supply chains and selling to Chinese consumers. In 2016, the PRC shut down the iBooks Store and iTunes Movies just six months after their launch and issued a patent ruling that put iPhone sales in jeopardy. According to reporting by The Information, Apple faced “threats that would have hobbled the company’s devices and services, including Apple Pay, iCloud and the App Store” and “executives were scrambling to salvage the company’s relationship with Chinese officials.” CEO Tim Cook visited the country and signed “a pledge to help Chinese manufacturers develop ‘the most advanced manufacturing technologies’” and “promised to use more components from Chinese suppliers in its devices, sign deals with Chinese software firms, collaborate on technology with Chinese universities and directly invest in Chinese tech companies.” The secret agreement committed Apple to $275 billion in investment over five years, an amount that would exceed Apple’s total revenue in China over the period.
Americans investing in China met a worse fate with Didi, the ride-sharing service that raised $4.4 billion in a New York Stock Exchange IPO in 2021 valuing the company at more than $75 billion. Less than a week later, CCP regulators announced that the service posed a cybersecurity risk and banned it from app stores. Within a year, under a continuing regulatory assault, it had lost 90% of its value and was delisted from the NYSE.
China uses the leverage of market access to draw investment and technology out of the United States. For instance, the state-owned Commercial Aircraft Corporation of China (COMAC) required foreign firms supplying components for its first commercial airliner, the C919, to form joint ventures with PRC-based firms and transfer advanced technology to them. To gain access to the lucrative Chinese market, General Electric agreed to form a joint venture with the state-owned Aviation Industry Corporation of China (Avic) and share its “most sophisticated airplane electronics.” Avic also producesthe Chinese military’s most advanced aircraft.
PRC-based investment and ownership in the United States poses its own problems. Avic is an active acquirer in the United States as well. “Chinese firms have acquired at least 11 U.S. aviation companies, established three joint ventures, and signed five cooperation agreements since 2005,” according to a 2018 report from the U.S. Trade Representative, with Avic itself spending more than $3 billion on U.S. and European acquisitions since 2010. The state-owned Shanghai Pudong Science and Technology Investment Company (PDSTI), meanwhile, has found itself engaged in litigation over its gradual takeover of Icon Aircraft. PDSTI began amassing a stake in Icon in 2015, held a dominant share by 2017, and then began appointing executives and “laying plans to transfer Icon’s technology to China,” according to a group of American shareholders that filed suit. The U.S. government’s Committee on Foreign Investment in the United States (CFIUS) determined that there were “no unresolved national security concerns” and permitted the takeover.
PRC-based investors are also active as limited partners in American private equity and venture capital funds, where they have deployed nearly $10 billion over the past decade. This allows them to influence fund allocations and the behavior of recipient firms, while making few public disclosures of their participation. In a less obscure instance, China’s largest sovereign wealth fund, the China Investment Corporation (CIC), partnered with Goldman Sachs in 2017 to create a $5 billion “China-U.S. Industrial Cooperation Fund,” though it struggled to complete deals as economic tensions between the nations rose.
A final category of PRC-based ownership in the United States is real estate. This category of investment is lower in absolute terms but has attracted significant political attention, particularly in the cases of farmland and residential purchases. While PRC-based entities increased their acquisition of foreign farmland ten-fold from 2009 to 2018, China ranks 18th among foreign holders of agricultural land in the United States and accounts for less than 1% of total foreign ownership here. The presence of PRC-based entities in residential real estate is larger—China ranks first in purchases by dollar amount—but the $6.1 billion spent in 2022 accounted for about 10% of the $59 billion in foreign residential purchases during the year, which in turn was less than 3% of the $2.3 trillion spent on existing-home sales. While small, individual purchases warrant less concern, large purchases or those in sensitive areas (for instance, near military installations) raise many of the same issues as other forms of asset ownership.
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Several longstanding policies provide tools for sanctioning foreign adversaries and preventing acquisitions of American assets that threaten national security. These have been employed by the Trump and Biden administrations with increasing aggressiveness to curtail partnerships and investments that affect sensitive technologies or have the potential to buttress Chinese military development.
- Committee on Foreign Investment in the United States (CFIUS). The United States has an existing framework for restricting foreign purchases of American assets. CFIUS is an interagency committee authorized under the Defense Production Act to review “transactions” (broadly defined) that offer a foreign person substantial influence or control over an American business; non-controlling investments that nevertheless offer investors access to sensitive information in critical sectors; and real estate transactions in sensitive cases like ports of access or proximity to military facilities. Review “focuses solely on any genuine national security concerns raised by a covered transaction, not on other national interests.” Passive investments that result in a stake below 10% and do not offer the investor nonpublic information are exempt.
- Export Controls. The Commerce Department’s Bureau of Industry and Security (BIS) maintains an “Entity List” of foreign persons, organizations, and governments to which certain products cannot be exported without special licenses. The controls imposed on advanced semiconductor equipment by the Biden administration expanded the set of PRC-based companies on the Entity List and the set of products subject to license. Because entities and products are by default not listed, and licenses can be issued for listed entities, significant exports still occur—for instance, BIS released data in October 2021 indicating that, from November 2020 to April 2021, it had licensed more than $60 billion in exports to Huawei and $40 billion to China’s Semiconductor Manufacturing International Corporation (SMIC) while denying less than 1% of applications for them.
- Office of Foreign Asset Control. The Treasury Department imposes a wide range of financial sanctions that prohibit American investment in various foreign entities, including those listed on the Non-SDN Chinese Military-Industrial Complex Companies List (NS-CMIC List). However, as the Coalition for a Prosperous America has shown, this list includes only a small subset of those companies on the Entity List (1,167 on the Entity List compared with 68 on the NS-CMIC List, and only 14 appearing on both). American holdings of Chinese securities exceed $1 trillion, and those securities are embedded within countless mutual funds and index funds, including many offered through the federal government’s own Thrift Savings Plan (TSP).
- National Emergencies Act. In November 2020, President Donald Trump issued Executive Order 13959, declaring American financing of China’s military development to constitute a national emergency and prohibiting transactions in securities of Chinese military companies. On June 3, 2021, President Joe Biden issued Executive Order 13974, expanding the Trump order to additional companies involved in research, development, and surveillance. The Biden administration has indicated that it is in the process of developing broader investment prohibitions.
- Holding Foreign Companies Accountable Act. Enacted in 2020, this legislation led by Senator John Kennedy (R-LA) delists PRC-based firms from U.S. securities exchanges that fail to comply with Public Company Accounting Oversight Board’s audits for two (formerly three) consecutive years.
- CHIPS and Science Act “Guardrails.” With the advent of an American industrial policy aimed at boosting the domestic semiconductor industry came a set of “guardrails” prohibiting companies that accepted federal funding from making certain investments in China. The stringency of these restrictions was debated in Congress and ultimately loosened prior to passage of the legislation.
While tools like these have had substantial effect where employed, they respond to a narrowly defined problem of national security and seek to obstruct as few transactions as possible. Thus, they take free commerce as the default and exclude only specified entities, technologies, and transactions. This leaves most investment unconstrained and, as in the case of the various overlapping sanctions lists, fails to disqualify consistently even those organizations identified as threats or to disqualify many transactions with those organizations. This model is consistent with the Biden administration’s commitment to a “small yard” and “high fence,” but facilitates further entanglement of financial flows and ownership and thus further subversion of the American market.
Preventing CCP Control
To protect America’s economic sovereignty and counter CCP subversion, U.S. policymakers must prohibit capital flows, technologies transfers, and economic partnerships between the United States and China by default and permit them only in limited and clearly defined circumstances. Prohibiting American investment in China will protect American investors from the CCP’s market manipulation, prevent inadvertent strengthening of an adversary’s industrial base, and discourage technology transfer and offshoring. Prohibiting PRC-based investment in the United States will prevent CCP control of American assets and potential disruption in the American market.
1. Prevent PRC-Based Investment in America
The CFIUS framework, with its broad definitions of transaction and control, provides a useful starting point for broader investment restrictions. However, its model of scrutinizing only a limited set of transactions and then considering only their national security implications is inappropriate to the China context. U.S. law should define a class of “Disqualified Foreign Investors” (DFIs) that includes Chinese nationals who are not permanent U.S. residents, PRC-based entities, and any other entities that are affiliates of the CCP or subject to CCP control. It should then establish a presumptive prohibition on activities comparable to those that CFIUS might typically scrutinize.
- Policy: Prohibition on DFI Acquisitions. Expanding on the CFIUS framework, legislation should adopt the CFIUS definition of a “transaction” and prohibit all such transactions involving a DFI.
- Policy: Prohibition on DFI-Controlled Corporations. A DFI establishing new business operations in the American market poses all the same problems as one acquiring an existing business. Parallel to the expanded prohibition on transactions, U.S. law should prohibit DFIs from forming corporations or partnerships in the American market.
- Policy: Prohibition on DFI Participation in Limited Partnerships. A substantial share of capital raised each year in American markets takes the form of “unregistered securities” and other private funds in which limited partners pool capital—for instance, through venture capital and private equity funds. U.S. law should prohibit DFIs from acquiring such securities or participating as limited partners in such funds.
- Policy: Prohibition on DFI Real Estate Purchases. Recent disclosures of large-scale farmland purchases have prompted numerous proposals to restrict or ban foreign ownership of American farmland—or real estate generally. For instance, both Florida and Texas have recently pursued state laws that would ban any Chinese national from purchasing land in the state, which have proved overly broad in their effect even on legal, permanent U.S. residents. U.S. law should set a clear national standard, permitting legally present individuals of any nationality to purchase personal residences while prohibiting DFIs from acquiring properties with aggregate value above a reasonable threshold. CCP-connected billionaires purchasing hundreds of thousands of acres have the potential to subvert the American market and national security; individuals purchasing quarter-acre lots do not.
2. Prevent American Investment in China
U.S. law cannot exercise jurisdiction in China, which means that efforts to prevent American investments there must focus on constraining the investor’s actions while in the United States. The American firm or investor will always have the option of leaving and then proceeding to invest. Thus, prohibiting investment in China is best understood as forcing a choice between continuing to operate in the United States and doing business in China instead. If Elon Musk would prefer to leave the United States for China, rely on PRC-based capital markets, and subject himself and his assets to CCP control, he should be welcome to do so. What he should not be able to do is reap all the benefits of American democratic capitalism while also serving predominantly PRC-based stakeholders.
- Policy: Prohibition on Outbound Investments and Joint Ventures. American investors are already reconsidering their exposure to China given current geopolitical tensions and several proposals would create an outbound investment review mechanism, comparable to CFIUS, empowered to review and block transactions that present risk to American national security or economic resilience. But as noted above, case-by-case review subject to national security criteria are poorly tailored to the challenge. Legislation should prohibit Americans and U.S.-based entities from pursuing “transactions” as defined by CFIUS that entail the acquisition of equity, debt, or real estate in China. The prohibition should extend to joint ventures formed between American and PRC-based entities for conducting business in any jurisdiction.
- Policy: Entity List Harmonization. The federal government already maintains multiple lists denoting foreign entities to which goods, services, or capital cannot be provided. However, they are dispersed across different agencies, use different criteria, and overlap only partially. At least with respect to China, legislation should consolidate these lists to a single one managed jointly by the Defense, Treasury, and Commerce Departments that imposes the restrictions on exports and investment contemplated by each.
- Policy: Intellectual Property Sanctions. The United States and its allies already operate a sanctions regime for prohibiting the transfer of military technology to certain nations, called the Wassenaar Arrangement. U.S. law should apply this same framework to all technology transfer into China. The United States should pursue comparable commitments from allies but proceed regardless of their participation.
- Policy: Exclusion of PRC-Based Entities from American Listings. U.S. law should prohibit American stock exchanges from listing PRC-based entities and prohibit index funds and mutual funds listed on American exchanges or offered via tax-exempt retirement plans or public pension plans from including the foreign listings of such entities. The American Financial Markets Integrity and Security Act of 2021, introduced by Senator Marco Rubio and five cosponsors, would have applied such exclusions to PRC-based companies on some of the entity lists mentioned above. This framework helpfully identifies the types of capital market access that should be denied, but the law should apply to all PRC-based companies rather than relying on national security-focused criteria.
3. Withdraw Investment Protections
The United States has Bilateral Investment Treaties (BITs) in force with more than 40 countries, helping to protect private American investments abroad. The Obama administration pursued a U.S.-China BIT with enthusiastic support from the Wall Street Journal editorial board, which saw CCP engagement in the project as evidence that “China’s new leader Xi Jinping will follow through on promises to restart economic reforms.” Early in the Trump administration, Secretary of the Treasury Steven Mnuchin said completing such a deal was still on the agenda.
- Policy: Withdrawal of Investment Protections. American diplomats often work to protect and advance the interests of American businesses operating in foreign countries. This should not be the case with China. To the contrary, American investors should understand that national policy discourages investment in China and no help will come if their interests there are threatened by the CCP. The United States should abandon pursuit of any BIT with China.
II. Supply Chains
In principle, traditional trade in manufactured goods could be the least concerning element of the U.S.-China economic relationship: America puts things on boats, China puts things on boats, the boats pass each other somewhere in the Pacific and get unloaded on the far side. But that form of trade, described by classical economists like Adam Smith and David Ricardo, bears little relationship to the imbalanced and distorted exchanges occurring between the two nations today. In 2022, the United States imported $537 billion in goods from China while exporting only $154 billion in return. For the most part, the PRC refuses to open the Chinese market to American exports and instead trades its own exports for American assets. This not only compounds the problems of investment and control, described above, but also hollows out American industry, as production for the American market moves offshore but no commensurate foreign demand emerges for what America might produce.
Nor is this hollowing out merely random, or concentrated in areas where China has a genuine “comparative advantage.” The CCP has pursued an explicit industrial strategy to capture critical supply chains and leadership in the most promising industries. As Ambassador Robert Lighthizer noted in his recent testimony before the House Select Committee on the Chinese Communist Party, “The Chinese economic system is designed to exploit foreign commerce to advance China’s geopolitical power.” The CCP has used subsidies, market-access barriers, and outright intellectual property theft and espionage to manipulate American firms, talent, and funding into developing China’s industrial capacity while undermining America’s own.
The CCP does not even bother to disguise the strategy. Its MIC2025 plan, launched in 2015, describes the goal of becoming the global leader in innovation and manufacturing by 2049, the CCP’s centennial. As the New York Timesreported, the plan “would provide large, low-interest loans from state-owned investment funds and development banks; assistance in buying foreign competitors; and extensive research subsidies.” Germany’s Mercator Institute warned that “Chinese high-tech investments need to be interpreted as building blocks of an overarching political program. … In the long run, China wants to obtain control over the most profitable segments of the global supply chains and production networks.” According to a report issued by Senator Marco Rubio, “The Chinese government is doing more than breaking the formal rules of trade: it is seeking, through state policy and the power of its domestic market, to dictate the real terms for how global trade will proceed, and to whose benefit.”
MIC2025 focuses on ten advanced industries, most of which the United States pioneered and historically dominated, including aerospace, robotics, energy and power generation, and agricultural machinery. China now controlsapproximately 90% of the global supply of inputs required to make generic antibiotics. Its subsidies for solar panels caused prices to plummet by 80% as it flooded global markets with below-cost products that allowed it to build domestic scale while suppressing investment elsewhere. China’s share of all solar panel manufacturing stages exceeds 80% and may reach 95%; the top ten solar panel suppliers are based there. This is one of many industries that the PRC supports through the dominant position that it has cultivated in rare earth elements, where China accounted for approximately 70% of global mine production in 2022. That same year, the United States accounted for 14%. These elements are used in advanced technologies like batteries, avionics, and energy machinery, often with defense applications. The PRC maintains export quotas and levies export taxes, advantaging domestic industry and incentivizing foreign entities to produce in China where inputs are cheaper.
Thus, trade with China presents a three-fold problem:
- Imbalanced Trade That Mortgages the Future. The PRC suppresses household consumption to increase investment, allowing it to trade cheap goods in exchange for assets. This builds China’s manufacturing capacity and expertise, while reducing American capacity and committing the American economy’s future produce to China.
- Loss of Strategic Leadership in Critical Industries. The PRC deploys industrial policy and mercantilism to warp market incentives, drawing American capacity to China in the most critical sectors like aerospace, energy, and health care. To participate there, American firms are forced to transfer technology to local entities through joint ventures.
- Dependence on an Adversary. Once dominance is established, the PRC uses its position to leverage further market distortions. As more components of supply chains become entrenched in China, moving related production becomes more attractive as well. The COVID-19 pandemic illustrated how supply chain shortages could cripple American industry and endanger American citizens. From washing machines, to clothing, to F-35 fighter jets, American supply chains are disturbingly reliant on China.
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Under President Donald Trump, the United States initiated efforts to move production out of China, insulating American producers from PRC distortions, and rebuilding domestic capacity. Where the United States imposed tariffs, for instance, imports fell dramatically.
- Section 301 Tariffs. Section 301 of the Trade Act of 1974 empowers the president to respond to unfair trade practices with tariffs. The Trump administration conducted a Section 301 assessment, revealing PRC abuses like forced technology transfer, licensing restrictions, and cyberattacks. Tariffs were imposed, primarily targeting products in strategic sectors, like cars, machinery, and chemicals. The tariffs remain largely in effect and have substantially suppressed imports from China of affected products. Trade with China has also been affected by global tariffs imposed by the Trump administration under Sections 201 (safeguards) and 232 (national security).
- Note: this report initially described the Section 201 and Section 232 tariffs mentioned above as antidumping and countervailing duties.
Under the Biden administration, the CHIPS and Science Act has demonstrated not only the potential for private industry to invest domestically when given the incentive, but also the high level of coordination required among federal, state, local, and private actors. Unfortunately, in other sectors like solar panels, the administration has doubled down on dependence.
- CHIPS and Science Act. Federal investment in the semiconductor industry has successfully attracted private investment throughout the technology ecosystem. Congress provided $54 billion in federal incentives for semiconductor manufacturing and R&D. As of January 2023, the value of U.S.-based, private-sector semiconductor projects underway, announced, or under consideration totaled over $260 billion through 2030. Investments range from fabrication plants (fabs) to semiconductor tool R&D facilities.
- Moratorium on Solar Panel Tariffs. In 2022, the Commerce Department found that the PRC was circumventing countervailing duties on solar products by shipping them to the United States via Cambodia, Malaysia, Thailand, and Vietnam (CMTV). This should have prompted imposition of tariffs on solar imports from those countries, however President Biden issued a two-year moratorium to ensure continued American access to cheap panels. Congress passed a bipartisan Congressional Review Act (CRA) resolution overturning the moratorium but this was vetoed by the president, allowing the illegal CMTV panels to continue entering the country unimpeded.
Attempts to excise CCP-controlled supply chains from the American market have been sporadic and inadequate. The CHIPS and Science Act encapsulates the challenge: Legislation took years to complete and the ambitious Endless Frontiers Act and United States Innovation and Competition Act (USICA) were eventually scaled down to investment in a single industry. Prior to passage, Congress then weakened restrictions on investment in China to accommodate industry demands for continued access.
Preventing CCP Dominance
To protect America’s economic sovereignty and counter CCP subversion, U.S. policymakers must rebalance trade flows, prevent CCP dominance in critical industries, and reinvigorate domestic production. Policy should rely upon the private sector to drive this effort by fostering the conditions for American enterprise to invest and innovate. American firms must develop talent, conduct research, and expand capacity. Federal, state, and local governments must channel private capital toward productive uses.
1. Disfavor Chinese Supply Chains
The PRC uses a range of trade abuses to distort global markets and establish a dominant position in strategic supply chains, strengthening the Chinese economy while weakening the American one and giving the CCP economic leverage. Trade that occurs under these conditions is neither efficient nor based in comparative advantage—to the contrary, it reflects decisions by the CCP to build advantages in strategic sectors. Such a trading relationship is not in America’s interest and should be disrupted by any means necessary. Trade with China can still be constructive, but only if distortions are countered and dominance prevented.
- Policy: Revocation of MFN Status. A World Trade Organization (WTO) member like the United States is expected to grant all other WTO members “Most-Favored-Nation” (MFN) status, meaning the most favorable trade terms that it offers to any country. As part of China’s ascension to the WTO, the U.S. Congress granted it this status, trusting that the WTO would hold the PRC accountable for adhering to its own commitments. This has not happened. The United States should reclaim its authority to dictate the terms of its trade with China by revoking its MFN status. The Ending Normal Trade Relations with China Act introduced by Senator Josh Hawley (R-MO) would do just that. Another approach, proposed by Senator Tom Cotton (R-AR) in the China Trade Relations Act, would force annual review of MFN status. The immediate effect of revoking MFN status would be to replace the near-zero tariffs for MFN trading partners in “column one” of the Harmonized Tariff Schedule (HTS) with the high tariffs of HTS “column two” that the United States charges to the few nations not granted MFN status.
- Policy: Additional Tariffs. The tariffs in HTS column two are not necessarily well tailored to the challenges posed by China. Ideally, Congress would update the column or create a new one specific to China. But if it does not, the president should also retain the Section 301 tariffs and countervailing duties first imposed during the Trump administration and consider continued use of those authorities to address further PRC distortions. The United States should also expand its use of Section 337 of the Trade Act of 1974, which provides additional authority to exclude altogether imports that benefit from stolen intellectual property and other forms of unfair competition.
- Policy: Anti-Monopoly Tariff. Existing antidumping tariffs and countervailing duties are designed to counter specific distortions in foreign markets. But for China in particular, policymakers should be concerned more generally with the CCP’s holistic strategy to achieve dominance in vital supply chains. A market power analysis comparable to that used for antitrust in the domestic context would be most appropriate, identifying situations where Chinese imports dominate a market. U.S. law should authorize the Commerce Department, in conjunction with the U.S. Trade Representative, to conduct such analyses itself or when prompted by complaints from domestic industry and to impose tariffs targeting those products until market share of Chinese imports falls to an acceptable level.
- Policy: Lower De Minimis Threshold. Current U.S. law allows shipments of “de minimis” value to enter the American market free from tariffs that might otherwise apply. The Trade Facilitation and Trade Enforcement Act of 2015 raised this de minimis threshold from $200 to $800, allowing enormous e-commerce retailers in China to ship nearly any consumer product duty-free into the American market—in 2022, nearly 500 million packages entered the United States from China under the exemption. The U.S. threshold is the world’s highest—the European Union maintains a de minimis threshold below $200; in China, the threshold is $8. U.S. law should apply a reduced threshold for imports from China—at least returning to the $200 threshold and perhaps reducing it to a genuinely de minimis amount or eliminating it entirely.
2. Structure Institutions for Industrial Policy
Preventing dependence on China also requires developing the capacity for domestic supply. The federal government has long eschewed this responsibility, which has left existing programs scattered across agencies, with uncoordinated funding and little competency in strategy or execution. The Biden administration’s recent attempt at studying supply chains and developing strategies yielded disparate reports from agencies with widely varying understandings of their roles and objectives.
- Policy: Consolidation of Functions and Strategies. Rebuilding domestic industrial capacity will require new institutional capacity within the federal government and a clear mandate for action. Legislation should establish a cabinet-level National Development Council (NDC) tasked with identifying and prioritizing challenges, setting clear goals, delivering practical and industry-specific roadmaps, and coordinating execution across agencies. The National Development Strategy and Coordination Act introduced by Senator Marco Rubio (R-FL) and Congressman Ro Khanna (D-CA) provides a useful model for establishing an interagency body tasked with creating a national development strategy.
- Policy: Industry-Specific Strategies. The years-long legislative process leading to passage of the CHIPS and Science Act and its semiconductor-focused industrial policy, followed immediately by challenges at every level of government and among industry participants, none of whom knew how to proceed with implementation, underscored the importance of a holistic and repeatable process for spurring private investment with public support. Legislation targeting vital sectors should adopt a replicable baseline model provided by the NDC that addresses workforce, regulatory, and supply-chain issues in a predictable manner from the start. For instance, in an initial stage for a given industry, the NDC should lead a supply-chain assessment that highlights existing gaps in development and provides a clear picture of existing private initiatives and federal, state, and local involvement.
- Policy: Development Bank. Private firms and investors in financial markets hesitate to take on ambitious industrial projects, citing high upfront costs, long time horizons, and uncertainty of returns. Even when firms are willing to engage in public-private partnerships, unnecessary bureaucratic barriers and naked politicization can make the public side an ineffective partner. U.S. law should establish a national development bank to finance long-term, capital-intensive projects vital to national economic and security priorities. The bank would attract private capital by using a federal equity commitment to reduce risk and increase returns for investors. Its capabilities should include direct debt issuance, credit and completion guarantees, equity lending, syndication authority, and technical assistance. Its policy mandate should focus on reshoring domestic manufacturing, strengthening the defense industrial base, modernizing the commercial maritime industry, expanding and securing critical infrastructure, and supporting strategies developed by the NDC. The Industrial Finance Corporation Act proposed by Senator Chris Coons (D-DE) provides an example of this kind of financing mechanism.
3. Accelerate Productive Investment
U.S. domestic business investment is in long-term decline, industrial output has stagnated, and productivity growth has turned negative. Public policy must play a vital role in reversing these trends by creating new demand for domestic production, supporting investment in innovation, and removing barriers to building.
- Policy: Local Content Requirements. U.S. law should stimulate demand for domestic production through imposition of local content requirements (LCRs), leaving the market to determine how best to fulfill that demand through investment and innovation. LCRs specify a percentage of domestic labor and components that a good must contain to be sold in the American market. The Make in America to Sell in America Act introduced by Senator Josh Hawley (R-MO) and Representative Claudia Tenney (R-NY) provides a useful model, establishing a 50% LCR for manufactured goods critical to national security or the protection of the domestic industrial base.
- Policy: Precompetitive Consortia. In precompetitive R&D consortia, firms in a given industry collaborate on development of a common technology platform, sharing the resulting intellectual property from which they can develop differentiated downstream products to compete against each other. The collaboration pools resources and expertise and provides a site at which public policy can constructively subsidize investment without “picking winners and losers.” U.S. law should clearly define the parameters of a Pre-Competitive R&D Consortium (PCC), provide matching public funds to any industry whose members establish a consortium within those parameters and commit their own capital, and exempt the consortium from antitrust prohibitions.
- Policy: NEPA Repeal. Current U.S. law discourages industrial development with lengthy environmental reviews and litigation that stall projects regardless of their economic importance and even when they pose no substantive threat to the environment. The main culprit is the National Environmental Policy Act (NEPA), which mandates years and thousands of pages of review for any project that involves the federal government and invites legal challenge of the review process. Various proposals, including some in the 118th Congress’s H.R. 1, the Lower Energy Costs Act, attempt to streamline NEPA processes or exempt certain types of projects. But the fundamental problem is the law itself, which offers no substantive environmental protection and simply adds procedural complexity—slowing development and creating opportunity for obstruction is its premise. Congress should repeal NEPA, encouraging America to build again.
The most overt instances of CCP influence-peddling and outright repression on American soil have begun to attract widespread attention. For instance, the PRC opened more than 100 “Confucius Institutes” on American college campuses beginning in 2004, offering credit-bearing coursework to American students under the tutelage of PRC officials subject to their country’s speech restrictions. These have been mostly shut down, though in many cases they appear to have undergone a rebranding and resurrection with the encouragement of university administrators eager for funding. The Justice Department recently filed charges against agents of the PRC for “establishing a secret police station in the middle of New York City.” At the same time, it charged 40 officers of China’s National Police with perpetrating “transnational repression schemes targeting U.S. residents whose political views and actions are disfavored by the PRC government.”
Such programs represent a fraction of the influence that the CCP exerts over American institutions, and in some respects the least troubling form, insofar as they can be identified and excised. More influential to American universities than funding for Confucius Institutes is the $1 billion in gifts and contracts received from PRC-based entities over the past decade, research partnerships with Chinese military institutions, and the tuition from more than 300,000 Chinese nationalsattending American universities and often paying full price. One university found itself so dependent on this revenue that it took out an insurance policy against any drop in enrollment of Chinese nationals. In another instance, a university president was goaded by an organization representing students from China into rebuking an effort to protest China’s human rights abuses. Students with family in China, and academics who need access there, increasingly self-censor.
Self-censorship has become pervasive in other institutions as well, yet it is almost impossible to either prove or prevent. Hollywood studios, for instance, adopt wholesale the standards of CCP censors in their own moviemaking, lest they lose access to the lucrative Chinese market. Americans are mostly oblivious to the reality that they are seeing only what the CCP will allow, except when the occasional misstep by a star or executive leads to groveling. Celebrity tough-guy John Cena posted an apology in Mandarin on Chinese social media after referring to Taiwan as a country while promoting a movie from “The Fast and the Furious” franchise. No harm done—the film went on to gross more than $100 million on its opening weekend in China.
The National Basketball Association’s (NBA) posture is especially contorted, as it attempts to pair a courageous and outspoken stance on social issues in America with absolute silence on abuses in China. When Houston Rockets general manager Daryl Morey tweeted support for Hong Kong protestors in 2019, the PRC responded by cancelling sponsorships and broadcasts of the NBA’s exhibition games in the country. The NBA then cancelled the players’ media availabilities, lest they have to answer any questions. LeBron James later criticized Morey, saying he “either was misinformed or not really educated on the situation” and that “many people could have been harmed, not only financially, but physically. Emotionally. Spiritually.” James also warned, “Yes, we do have freedom of speech, but there can be a lot of negative that comes with that, too.”
NBA Commissioner Adam Silver has been admirably frank about how these calculations work. “There are not a lot of fundamental protections afforded Chinese citizens that are afforded to American citizens,” he acknowledged. “And I … I don’t have a cut-and-dried response to that. … The fact is, we think by bringing the NBA to China and exposing the Chinese people to the NBA … it’s net incredibly positive for us to be engaged in that activity.”
Intel apologized for its efforts to comply with U.S. law and exclude slave labor from Xinjiang from its supply chains, emphasizing its commitment to “accelerating joint development with China.” Jamie Dimon, CEO of the world’s largest bank, apologized for making a joke that JPMorgan would outlast the CCP and then issued a second apology when the first was apparently deemed insufficient. Months earlier, JPMorgan had received the PRC’s approval to open the first fully foreign-owned brokerage in China. Michael Bloomberg, among the ten richest people in the world and owner of an immensely influential financial news network, apologized at his Bloomberg New Economy Forum in Singapore after former UK Prime Minister Boris Johnson delivered a speech critical of the Russian and Chinese regimes.
The presence of Bloomberg’s conference in Singapore was notable because it marked a shift in venue from his intended location—Beijing—where he had partnered with a Chinese think tank controlled by CCP leaders to create a rival to the World Economic Forum’s Davos conference. He is not the only billionaire hoping to leverage China’s ascendance for his personal brand. Stephen Schwarzman, CEO of the Blackstone Group, partnered with Tsinghua University to create the “Schwarzman Scholars” program, intended to rival the Rhodes Scholarship. CCP officials help select the Chinese participants. Daniel A. Bell, founding chair professor of the program, took to the New York Times opinion page to describeChina’s political system as “Chinese-style democratic meritocracy.” One gets the idea, and cannot help recalling the fifth bait. For those who come to surrender, the emperor should show them favor by honoring them with an imperial reception party in which the emperor should personally serve them wine and food so as to corrupt their mind.
Perhaps Schwarzman will succeed in establishing Beijing as the most prestigious place for top American students to study, perhaps he will fail. Rooting for his success is fellow finance billionaire Ray Dalio, whose name adorns the program’s auditorium. In late 2021, following reports that Dalio’s Bridgewater Associates had raised more than $1 billion for new investments in China, he defended his work there by dismissing China’s human rights issues as “behav[ing] like a strict parent” and pleading that he “can’t be an expert in those types of things.”
The New York Times summarizes the situation well: “American institutions may have to make their own choice: Reject censorship or maintain access to China. Right now, desire for access is winning.”
* * *
The threat posed by CCP entanglement with American institutions extends far beyond particular examples of groveling apologies issued or compromised programs established. Each apology should serve primarily as a reminder that for every honest but errant comment uttered, hundreds more truths presumably go unspoken. Any aspiring academic, investor, or public figure must ask himself from the start what he stands to gain or lose by acting in ways contrary to the CCP’s interests.
The American culture of free speech and inquiry is built upon an assumption that no actor in the system will possess the power to coerce or manipulate individual citizens—and the one that does, the government, will be constrained by law and custom from doing so. China alters that calculus. An open society cannot tolerate the imposition of authoritarian incentives and penalties from afar, and must be insulated from them. As China becomes richer, the draw of access to its market will only become stronger. As it becomes more technologically advanced, the ability of PRC-based entities to engage directly with Americans will only increase.
To date, policymakers have done little to address this challenge. A range of bills aim to curb PRC access to the American higher education system, mostly for purposes of protecting sensitive American intellectual property. Others require disclosure of PRC funding. The Safeguarding American Innovation Act, introduced by Senator Rob Portman (R-OH) in 2021 with a large and bipartisan group of cosponsors, would have substantially increased oversight and control of federally funded research projects and disclosure of foreign funding. The legislation was initially included in the CHIPS and Science Act but was stripped at the last minute under heavy pressure from universities, which had long opposed such safeguards.
One notable policy that has taken effect is Proclamation 10043, issued by President Trump in 2020, which prevents Chinese nationals with a connection to the CCP’s “Military-Civil Fusion” (MCF) strategy from receiving F or J visas for graduate study or research in the United States. The pervasive nature of MCF, overseen personally by President Xi, leaves the proclamation covering many of the most prominent PRC-based universities and companies and most STEM-related fields of study, potentially excluding a substantial share of visa candidates. The Biden administration has retained the policy, leading to the refusal of nearly 2,000 visas in 2021 and frustration from American universities with its breadth and ambiguity.
Preventing CCP Influence
In many respects, the most important steps for preventing excessive CCP influence in American institutions are those described above, for protecting America’s economic sovereignty and preventing CCP subversion of the American market. If American firms are not dependent on PRC-based supply chains, not raising money from the PRC, and not subjecting themselves to its jurisdiction, American business leaders and investors will have far less reason to care what the CCP wants them to think, say, or do. But this still leaves special cases where further intervention is both possible and necessary.
1. Ensure Research Integrity and Security
American research institutions, whether operated by government, within academic institutions, or as tax-exempt nonprofits, are less susceptible to market logic and more properly targeted by public policy. They rely on public funding or subsidy and are expected to operate in the public interest. These institutions should not partner with the CCP and must accept processes and controls designed to ensure the integrity and security of their work.
- Policy: Prohibition on PRC Funding of American Research. U.S. law should prohibit American universities, research institutions, and nonprofit organizations from accepting funding from PRC agencies or PRC-based entities. Any university or institution found to accept such funding should lose its federal funding and any tax-exempt status. Employees of such institutions should not be permitted to accept gifts, honoraria, or reimbursement from PRC-based entities in conjunction with travel to China.
- Policy: Prohibition on American Funding of PRC Research. The question of whether the National Institutes of Health funded gain-of-function research at the Wuhan Institute of Virology that led to the COVID-19 pandemic obscures the more basic question of why the federal government would fund the Wuhan Institute of Virology at all. U.S. law should prohibit federal and state agencies, universities and research institutions receiving federal funding, and nonprofit organizations from entering partnerships with or providing funding to PRC-based entities.
- Policy: Safeguarding American Innovation. The Safeguarding American Innovation Act would have taken important steps toward monitoring and controlling the access of foreign students and researchers to American technology and data and should become law.
2. Protect the Academy
America can benefit when students from China attend American universities. But the control that the CCP exercises over those students, and the revenue they bring, also poses a unique threat of subverting the schools they attend. In sensitive fields where the PRC has made industrial espionage and intellectual property theft a priority, participation by students and researchers from China will often have costs that outweigh benefits and should by default be prohibited.
- Policy: Tuition Cap. In keeping with the prohibition on acceptance of PRC funds at research universities, described above, U.S. law should prohibit colleges and universities that receive federal funding from collecting more in tuition and fees from any Chinese national holding an F-1 student visa than the average amount collected from American citizens and permanent residents enrolled in the same program of study. Universities should not gain a financial advantage from admitting Chinese nationals instead of other candidates.
- Policy: Study in Sensitive Fields. Proclamation 10043, supported by both the Trump and Biden administrations, provides an effective framework for disconnecting the CCP from programs in American academic institutions that could advance its agenda. That policy should be codified in legislation and its scope clarified through listing of the institutions that “implement or support MCF” and the relevant fields of study. Relevant fields should include not only those in STEM with the potential to advance CCP military strength, but also ones in business, law, economics, and public policy where subversion of American values is central to the CCP’s ideological program. In parallel, U.S. law should expand eligibility for the permanent EB-2 visa (“an employment-based, second preference visa if you are a member of the professions holding an advanced degree or its equivalent, or a person who has exceptional ability”) to graduate students and researchers affected by 10043 or subsequent law who can demonstrate independence from the CCP and an intention to move permanently to the United States.
3. Re-Normalize Free Speech
The PRC has created strong financial incentives for influential Americans to promote CCP propaganda, or at least remain silent about the truth. The United States cannot outbid the PRC in the matter or prohibit certain viewpoints and compel others, nor should it want to. What policymakers can do is lower the economic stakes by foreclosing profits in China regardless of what one says and raise the reputational stakes by creating a high-profile forum that embarrasses people who toe the CCP line.
- Policy: Cultural Export Controls. For a unique set of cultural exports, “the people are the product.” U.S. law should designate a class of products and services where the creation of intellectual property, performances, or products is connected to the participation of specific individuals such as actors, singers, athletes, or other entertainers. U.S. law should prohibit revenue-generating exports of such products and services and licensing of associated brands and content to China—including films, musical recordings, broadcasts of sporting events, personalized footwear and apparel lines, and live performances. In many cases, free, unauthorized, or pirated versions of these products will still circulate in China, but this is a feature of the law. While American producers will lose the incentive to kowtow to CCP censors, some American cultural influence and soft power will still reach the Chinese market and create demand within China for greater openness to the free world.
- Policy: Select Committee on the Chinese Communist Party. The select committee convened by the House of Representatives is already playing a valuable role in highlighting the challenge posed by the CCP. While the committee has thus far declined to seek public testimony from prominent business and cultural leaders, a high-profile congressional committee is an ideal forum in which to place America’s public figures on the record about their own experiences with the CCP and their perspectives on its policies. The CEO of the Walt Disney Company and the commissioner of the NBA, for instance, would both make excellent witnesses, as would Stephen Schwarzman and Michael Bloomberg. The American public deserves to hear their testimony under oath. The Committee should hold regular hearings for this purpose, placing all public figures on notice that they are accountable for their views and values. These would not be “gotcha” hearings or “witch hunts”; to the contrary, witnesses could expect to earn widespread praise simply for describing what they have actually experienced and what they actually believe. Those who chose to speak honestly would fatally undermine the CCP’s efforts to cow Americans into silence. Those who might choose to remain silent, or simply lie, would at least face much higher reputational costs for doing so.
IV. The Rest of the World
U.S.-China relations do not operate in a vacuum. U.S. allies are themselves entangled with China economically and have thus far shown less interest than the United States in doing anything about it. The PRC is also making a full-court press to establish strong and often coercive economic relationships with developing nations. U.S. diplomats fear that if forced to choose a side, many countries will choose China’s. American business leaders fear that if they are isolated from the Chinese market while European and Asian competitors are not, they will lose a source of both cheap inputs and profitable sales that is vital to remaining globally competitive.
One implication of these challenges is that the United States must decide the extent to which it will tolerate third parties acting as intermediaries that leave it exposed to China. Here, the three dimensions of economic sovereignty provide a useful guide. For institutions, where people themselves are at issue, intermediaries are of least concern. If Chinese nationals and American nationals are both conducting research at a German university, for instance, American interests are barely implicated.
Supply chains raise a greater concern, as goods are more fungible than people. If America imports a product from several foreign countries, all of which themselves are dependent on China for a critical input, America would in a sense remain dependent itself. But China’s dominance would be mitigated because it would be difficult to exercise; rather than simply manipulate or cut off the American market, the PRC would have to apply its action across all its exports—a more difficult and costly move. Still, in crafting its own strategy, the United States should scrutinize where the PRC might have underlying dominance in a global market and use both tariffs and domestic development to prompt the creation of alternative sources.
The United States should also seek to build a broader partnership of allied countries willing to make similar commitments in their own supply chains and on issues like technology transfer and research funding. Participants in such a trading bloc should have preferential access to the American market—or, more precisely, they should retain the preferential access that the Untied States currently grants almost universally. Nations declining to join should face worse terms of trade, and nations committing fully to the Chinese sphere should face the same treatment as China. Developing countries in Latin America represent a notable case where China has made an especially aggressive push that the United States has an especially strong geopolitical interest in countering. A new strategy for engaging the region, focused on providing investment and trade preferences to support the massive near-shoring that a hard break with China would trigger, could succeed where other recent American efforts have failed.
Investment poses the greatest challenge, because financial flows most easily reshape themselves around any obstacles they encounter. A “Disqualified Foreign Investor” from China may not be able to invest in America, but what about a London-based fund whose partners happen to be CCP members? U.S. law will have to be strictest on this question, continually refining the DFI definition as necessary to prohibit inbound investment from any entity whose controlling owners are PRC-based. Fortunately, these “edge cases” will represent only a sliver of the economic interactions addressed by a hard break and cannot themselves threaten America’s economic sovereignty. These cases are also among the easiest to deter: U.S. law should force divestment and impose penalties retroactively where PRC-based involvement comes to light, making subterfuge an unattractive risk. One might construct an opaque holding structure to execute a transaction unnoticed, but if and when it did become noticed (as it likely would, if the CCP attempted to leverage it) the control and any benefit would quickly be lost.
Investment flows from other nations into China are of much less concern. All things equal, as a matter of superpower competition, the United States would prefer that less capital flow to China. Agreements among nations prohibiting it should be a key element of the potential trading bloc described above. But investment by other nations in China would not interfere with America’s goals in pursuing a hard break; rather, it would be their own loss.
The business community should receive a similar answer regarding its own fears. Firms that currently rely on the Chinese market will have to look elsewhere, but policymakers should not accept their complaints that this will put them at a disadvantage. Betting on China is a losing bet, as many firms are already discovering. While profits from that market could hypothetically fund investment and innovation elsewhere, there’s little evidence that this happens in practice. To the contrary, America’s industrial crown jewels—companies like Intel, Boeing, and General Electric—all delivered far better performance before they abandoned their American-engineering-led models for offshoring, financialization, and high shareholders returns coupled with declining technological prowess. Being forced out of China is the best thing that can happen to American business; staying in may well lead to catastrophe for the nations and firms unwilling to make the difficult decisions now.
A resolute United States that shows a clear commitment to action has the potential to build a coalition of market economies that prefers acting together to proceeding on the present trajectory. Not all will go, or go as far, but this should not slow the United States in making its own hard break. For a nation with America’s power and scale, there is no difficult game theory problem when it comes to China, no collective action problem or prisoner’s dilemma; only the straightforward choice between protecting our economic and political system or enabling its irrevocable corruption.
For policymakers and analysts catechized in the tradition of globalization and conditioned to fear any inefficient overstepping in the market, a hard break from China may seem implausible. But where economic sovereignty is at stake, the goal is not to ensure that the market continues working as well as possible but rather to dissolve one that does not and cannot work at all. A commitment to free markets entails doing whatever is necessary to ensure that the American market remains free.
Anyone inclined to assert indignantly that “you can’t do that” should take note that the United States just did. In response to Russia’s invasion of Ukraine, the United States revoked Russia’s MFN status and imposed aggressive sanctionsdesigned to separate Russia from the international economic system. This was the hardest of breaks and was supported most strongly by those most vocally enthusiastic about global engagement and a rules-based international order. Whether the United States should take action on a similar scale against China is not a question of legality or capacity, but of values and will.
China Legislation, 116th–118th Congresses
The glaring problems in the U.S.-China relationship have prompted a wide range of legislative proposals in recent years, attempting to address in piecemeal fashion many of the issues raised in this paper. While the full list runs into the hundreds of bills, this appendix highlights some of the most significant and thoughtful efforts, from which frameworks and legislative language might be drawn in composing a more comprehensive agenda.
Preventing PRC-Based Investment in America
- Chinese Communist Party Influence Transparency Act: Requires agents of PRC-based business entities to register under the Foreign Agents Registration Act.
- H.R. 1092 – To place temporary restrictions on acquisitions by the People’s Republic of China, and for other purposes: Requires CFIUS to review acquisitions by PRC-based entities of American assets deemed critical to national security, critical infrastructure, or of cultural significance; would sunset at end of COVID-19 economic impact.
- Transparency for Malign Chinese Investments in Global Port Infrastructure Act: Directs the Director of National Intelligence to report to Congress on PRC-based investment in global port infrastructure since 2012.
- SPACE Act: Prohibits purchase of telecom equipment from PRC-based entities by American space companies; strengthens space company ownership standards; prohibits Commerce Department and NASA funding for PRC-based entities; directs the Secretaries of Defense, Commerce, and Treasury to report annually to Congress on foreign investment in American space activities.
- This Land Is Our Land Act: Prohibits PRC-based and CCP-affiliated entities from purchasing farmland in America.
Preventing American Investment in China
- Protecting American Capital Act of 2023: Directs the Treasury Department to report annually to Congress on American investments in China since 2008, including investments routed through a jurisdiction outside the United States.
- American Financial Markets Integrity and Security Act: Prohibits listing of Chinese military companies on American exchanges; directs the Office of Commercial and Economic Analysis of the Air Force to report to Congress on the strategic implications of American capital flowing to China.
- Federal Acquisition and Contracting Transparency Act: Requires disclosure by federal contractors of contracts with PRC-based entities; directs the General Services Administration to maintain a public database of said information.
- Time to Choose Act: Prohibits the federal government from entering contracts with management, scientific, and technical consulting firms simultaneously contracting with covered foreign entities, including CCP- and PRC-affiliated entities.
- Turn OFF THE TAP Act: Prohibits federal agencies from entering contracts with or funding Chinese military companies, entities on the Treasury Department’s SDN List and Non-SDN Chinese Military-Industrial Complex Companies List, the Commerce Department’s Entity List, and the FCC’s Section 2 List.
II. Supply Chains
Disfavoring Chinese Supply Chains
- American Security Drone Act of 2023: Restricts federal procurement of drones made in China for five years; directs the Office of Management and Budget to coordinate with relevant agencies to develop a government-wide drone procurement policy; directs the Defense Department to report to Congress on the drone supply chain, including existing deficiencies and plans to mitigate them.
- Bring American Companies Home Act: Allows expensing of costs associated with reshoring from China to the United States.
- Ending China’s Developing Nation Status Act: Changes China’s status from “developing nation” to “developed nation” and commits the United States to implementing that change of status in international bodies.
Structuring Institutions for Industrial Policy
- BRIDGE Act: Directs the State Department to report to Congress on China’s Belt and Road Initiative (BRI), and existing U.S. efforts to counter it; directs the State Department to submit to Congress a plan to counter BRI, in coordination with the Secretary of Commerce and other relevant agencies.
- Industrial Finance Corporation Act: Establishes within the executive branch the Industrial Finance Corporation, to provide support for manufacturing and supply chains in critical industries.
- Federal Infrastructure Bank Act: Establishes the Federal Infrastructure Bank to fund construction or maintenance of infrastructure projects in the United States.
- National Development Strategy and Coordination Act: Establishes an Interagency Committee for the Coordination of National Development Financing Programs within the Executive Office of the President; directs the Committee to develop a national strategy to address vulnerabilities in the domestic supply chains of critical industries, strengthen American industrial and manufacturing capabilities, and support targeted job growth and economic development.
- Protecting our Pharmaceutical Supply Chain from China Act: Directs the Department of Health and Human Services to create a registry of drugs produced outside the United States; phases out purchase by federal programs of drugs with active ingredients manufactured by China; mandates country of origin labeling; allows tax expensing for domestic pharmaceutical and medical device property placed in service between 2020 and 2026.
- Strengthening America’s Supply Chain and National Security Act: Directs the Defense Department to report to Congress on its reliance on Chinese-made pharmaceuticals, with assessment of supply chain resilience, recommendations to end procurement from China by 2025, and recommendations to diversify pharmaceutical procurement generally.
Industry: Critical Minerals
- ONSHORE Manufacturing Act: Directs the Department of Energy to create programs for financing domestic rare earth mineral facilities and developing the rare earth workforce; directs the Secretary of the Treasury to establish the Minerals Security Partnership Fund to finance rare earth supply chains; directs the President to submit a plan of action to Congress on deploying the Defense Production Act to enhance domestic rare earth production.
- American Critical Mineral Independence Act: Directs the Critical Minerals Subcommittee of the National Science and Technology Council to coordinate American critical mineral supply chains; directs the National Science Foundation and the Department of Energy to fund critical mineral research programs; includes a variety of measures to expand the domestic exploration, development, and processing of critical minerals.
- Critical Mineral Independence Act: Directs the Defense Department to report to Congress on the critical mineral supply chain and enact a strategy to ensure that the supply chain for the National Defense Stockpile is based in the United States and allied countries by 2027.
- RE-Coop 21st Century Manufacturing Act: Directs the Commerce Department to establish a privately funded Thorium-Bearing Rare Earth Refinery Cooperative to create a fully integrated domestic rare earth value chain.
- Keep China Out of Solar Energy Act: Prohibits federal procurement of Chinese solar panels and requires a federal study of domestic solar panel production.
Accelerating Productive Investment
- Make in America to Sell in America Act of 2021: Requires the Commerce and Defense Departments to create a list of finished and intermediate goods whose production is critical to the domestic industrial base or national security; mandates that listed items contain at least 50% domestic value content.
III. American Institutions
Ensuring Research Integrity and Security
- Preventing PLA Acquisition of United States Technology Act: Prohibits federal agencies and American companies and universities that receive federal assistance from engaging in certain research or technical exchanges with PRC-based entities of concern; requires all recipients of federal assistance to annually report to the Defense Department their engagement with PRC-based entities of concern.
- Stop Funding Our Adversaries Act: Prohibits federal funding of research in China.
- Chinese Research Funds Accounting Act: Directs the Government Accountability Office to conduct a study on federal funding to PRC-based entities within the past five years.
- Safeguarding American Innovation Act: Increases oversight and control of federally funded research projects and disclosure of foreign funding.
- FOIA Fix Act: Prohibits Chinese, Russian, North Korean, Iranian, Cuban, Syrian, and Venezuelan persons or entities from obtaining U.S. government records via the Freedom of Information Act.
- Think Tank Transparency Act: Requires think tanks to submit disclosure reports to the Attorney General on any foreign sources of funding.
- Disclosing Foreign Influence Lobbying Act: Amends the Lobbying Disclosure Act of 1995 to require lobbyists to identify any connection with a foreign government or political party that plans, supervises, directs, or controls any effort of that lobbyist, regardless of those entities’ financial contributions to the lobbying effort.
Protecting the Academy
- Preventing Malign Chinese Influence on Academic Institutions: Requires universities to disclose contracts or gifts over $5,000 received from PRC-based entities.
- Dump Investments in Troublesome Communist Holdings Act (DITCH) Act: Denies tax exemptions to organizations that hold any interest in a disqualified PRC-based company or fail to transmit required annual reports on time.
- End College CCP Act: Prohibits universities that have contractual partnerships with PRC-based entities from receiving federal funds.
- Countering China’s Theft of American Research and Innovation Act: Modifies provisions related to reviewing visa applications for risks, including illicit transfer of sensitive research from American institutions.
- Protect Our Universities Act: Establishes a task force (including representatives from the Director of National Intelligence and the Defense, Education, Energy, and Justice Departments) within the Department of Education to address espionage at universities; creates a sensitive research projects list and bars Chinese, North Korean, Russian, and Iranian nationals from participating in such projects without express approval from the Director of National Intelligence.
- SECURE CAMPUS Act: Prohibits Chinese nationals from receiving Schedule F or J visas for study in STEM fields; prohibits federal funding for research in STEM fields by Chinese nationals or participants in PRC talent recruitment programs; requires participants in such talent recruitment programs to register under the Foreign Agents Registration Act; directs the State Department to publish an annual list of PRC foreign talent recruitment programs
American Compass also vehemently advocates industrial policy and subsidies and tax breaks for strategic industries, similar to Trump or now Biden with his Inflation Reduction Act, also defends Airbus against Boeing as a successful model against free traders, neoliberals, economic liberals, who often work with libertarians which he hates most:
“How Airbus Took Flight
The success of the aerospace company evidences strong returns on strategic industrial investment.
One hallmark of any fundamentalism is the habit of refashioning past events into imaginary histories that validate unchallengeable truths, preserving internal coherence in a narrative that drifts ever further from reality. For the high priests of free trade, the strong track record of trade barriers and industrial policy in spurring economic development, both in America and around the world, has long been an awkward subject best unstudied. But as they lose ground in the public debate, that strategic silence is now giving way to embarrassing revisionism.
The latest absurdity comes from Adam Posen, president of the Peterson Institute for International Economics, in his Foreign Policy cover story on “America’s Zero-Sum Economics.” Rejecting a strategy of subsidizing strategic industries, Posen points to “the long-running conflict between Airbus and Boeing.” In his telling, foolish government intervention in both the United States and Europe, as “these two giant economies subsidiz[ed] their respective champions,” which were “deemed too strategically important to fail,” has led to “limited innovation” and “substandard production” that “put both the underlying system and many of their customers at risk of devastation.”
The aircraft industry’s real lesson for policymakers is nearly the opposite.
After World War II, American firms dominated the aircraft manufacturing sector, propelled by industrial strength, management expertise, and a robust engineering talent pool. Europe trailed behind, with national champions specializing in shorter-range aircraft. By 1970, the U.S. aerospace industry’s revenue was almost six times that of Europe. In response, European governments founded Airbus to reduce dependence on American manufacturers and develop their own industrial capacity and workforce.
From the start, Airbus was a state-backed enterprise, receiving government direction in its strategy and financial support in the form of R&D funding, infrastructure expansion, equity infusions, and loans. Total launch aid subsidies eventually exceeded $22 billion. This government assistance kept Airbus afloat until it made its first operating profit in 1990, 20 years after its launch.
As Airbus grew, shareholder-controlled Boeing failed to recognize its European competitor as a legitimate threat. Airbus’s initial market-share gains came at the expense of McDonnell Douglas (MCD), which merged with Boeing in 1997. The merger boosted Boeing’s global market share to 70 percent, but MCD’s financialized corporate culture supplanted Boeing’s long-running emphasis on engineering excellence. In his book Boeing Versus Airbus, journalist John Newhouse documented that several years after the merger, a longtime Boeing engineer lamented that MCD’s “predatory, autocratic culture has displaced Boeing’s old problem-solving culture.” As a result, Boeing shifted its focus from creating new products to maximizing gains for shareholders.
In contrast, Airbus remained committed to its core purpose: bolstering the European aerospace industry. It invested heavily in aircraft innovation, pioneering composite materials and a digital fly-by-wire system that became the industry standard. Faced with high labor costs and obstacles to layoffs, Airbus adopted automated machinery more quickly and invested in worker training and development. In his book Flying Blind, Bloomberg journalist Peter Robison notes that a mid-1990s Boeing analysis found Airbus enjoyed a 12 percent to 15 percent advantage in production costs.
Airbus’s triumph culminated in 2003 when it surpassed Boeing’s market share and held the top spot for nine consecutive years.
The success of Airbus presents American policymakers with invaluable lessons for future industrial investments. First, the Airbus story demonstrates that policymakers can successfully identify critical industries primed for public investment. European politicians and bureaucrats correctly identified aerospace as a critical sector and executed a long-term strategy for building technical and commercial leadership. Second, government support can foster competitive firms. Airbus’s ascent to be the global leader in sales, quality, and innovation stands as a testament to a successful government-led initiative to boost a specific sector.
Finally, the diverging paths of Airbus and Boeing reveal that shareholder primacy does not always yield the most competitive or innovative firms. Boeing, in its quest for short-term shareholder returns, reduced R&D spending and outsourced aggressively. Although this approach generated record profits, it resulted in a loss of market share to Airbus and a struggle with production and safety issues. Airbus, meanwhile, built a European supply chain, kept workers employed, and fostered an entire European aerospace industry—all while catching and passing Boeing from a standing start.
After design flaws led to the tragic crash of two 737 MAX aircraft within five months in 2018-19, Boeing was forced to ground the planes for nearly two years. Repeated quality-control with its 787 Dreamliner, meanwhile, led to multiple FAA-ordered delivery halts from 2021 to 2023. During the pandemic-disrupted years of 2020 and 2021, Airbus continued to average approximately 588 deliveries per year, while Boeing managed barely about 248. When Adam Posen lamentsthat “supply chains in aircraft manufacturing have become highly fragile, as evident in production problems long before the COVID-19 pandemic,” this is precisely half true.
In an era where shareholder value often trumps other considerations, the Airbus story serves as a potent reminder that there is more to success than simply chasing short-term profits. By strategically investing in research and development, fostering a skilled workforce, and focusing on the long term, Airbus refutes claims that state-backed enterprises cannot match the performance of private corporations. At the end of 2022, Airbus beat Boeing for the fourth year in a row.
As the United States faces mounting global competition, the need for strategic industrial investment is only growing. Policymakers must identify sectors critical to national security, economic resilience, and technological advancement, and provide targeted support to nurture innovation. This kind of public investment has the potential not only to level the playing field but to create globally competitive domestic industries, just as Airbus did for European aerospace.
About The Author
Gabriela Rodriguez is a policy advisor at American Compass and author of a new case study, “Airbus’s Industrial Flight Plan.”
This “conservative economic policy”/”conservative economics” encounters two types of criticism. On the one hand, on the part of economic liberals and libertarians like the CATO Institute, for whom the industrial policy ideas of Oren Cass and The American Compass are worth a long basic article, which first of all asks what is meant by industrial policy, since it is understood here in different ways, people are talking past each other or want to spread another agenda under it, as it also makes clear from numerous examples that there is also a lot of technological and economic development without industrial policy, Airbus is only a much-cited exceptional example and, on top of that, China’s industrial policy is not so productive and innovative in the area of its still dominant State-owned companies are less productive than China’s private companies and therefore Chimese-style industrial policy was not preferable and suitable as an answer and counter-model for the USA.
„Questioning Industrial Policy
Why Government Manufacturing Plans Are Ineffective and Unnecessary
The United States undoubtedly faces economic and geopolitical challenges, including ones related to China, but the solution does not lie in copying China’s top‐down economic planning.
September 28, 2021 • White Paper https://docs.google.com/viewer?url=https%3A%2F%2Fwww.cato.org%2Fsites%2Fcato.org%2Ffiles%2F2021-09%2Fwhite-paper-questioning-industrial-policy-updated.pdf&embedded=true
White Paper Questioning Industrial Policy UpdatedCATO- Studie in Volltext
In the wake of the COVID-19 pandemic and rising U.S.-China tensions, American policymakers are again embracing industrial policy. Both President Biden and his predecessor, as well as legislators from both parties, have advocated a range of federal support for American manufacturers to fix perceived weaknesses in the U.S. economy and to counter China’s growing economic clout.
These and other industrial policy advocates, however, routinely leave unanswered important questions about U.S. industrial policy’s efficacy and necessity. First, what is industrial policy? Advocates of industrial policy often fail to define the term, thus permitting them to ignore past failures and embrace false successes while preventing a legitimate assessment of industrial policies’ costs and benefits. Yet U.S. industrial policy’s history of debate and implementation establishes several requisite elements—elements that reveal that most industrial policy successes are not industrial policy at all.
Second, what are the common obstacles to effective U.S. industrial policy? Several obstacles prevent U.S. industrial policies from generating better outcomes than the market. This includes legislators’ and bureaucrats’ inability to pick winners and efficiently allocate public resources (F. A. Hayek’s knowledge problem); factors inherent in the U.S. political system (public choice theory); lack of discipline regarding scope, duration, and budgetary costs; interaction with other government policies that distort the market at issue; and substantial unseen costs.
Third, what problems will industrial policy solve? The most common problems purportedly solved by industrial policy proposals are less serious than advocates claim or else are not fixable via industrial policy. This includes allegations of widespread U.S. deindustrialization and a broader decline in American innovation; the disappearance of good jobs; the erosion of middle‐class living standards; and the destruction of American communities.
Fourth, do other countries’ industrial policies demand a U.S. industrial policy? The experiences of other countries generally cannot justify a U.S. industrial policy because countries have different economic and political systems. Regardless, industrial policy successes abroad—for example, in Japan, South Korea, and Taiwan—are exaggerated. Also, China’s economic growth and industrial policies do not justify similar U.S. policies, considering the market‐based reasons for China’s rise, the Chinese policies’ immense costs, and the systemic challenges that could derail China’s future growth and geopolitical influence.
These answers to these questions argue strongly against a new embrace of industrial policy. The United States undoubtedly faces economic and geopolitical challenges, including ones related to China, but the solution does not lie in copying China’s top‐down economic planning. Reality, in fact, argues the opposite.
American policymakers on both the left and right are once again embracing industrial policy to fix alleged U.S. market failures and to counter China’s own economic interventions. Congress is currently poised to pass—with vocal White House support—several pieces of legislation that would deliver tens of billions of taxpayer dollars to “critical” domestic industries and technologies. Unfortunately, the public discourse has thus far elided several essential questions about what industrial policy actually is; how past U.S. attempts at industrial policy (properly defined) have fared; whether current proposed industrial policies can fix the economic problems they target; and whether the industrial policies of other countries—particularly China—demand that the U.S. government follow suit.
This paper will systematically answer each of these questions, addressing both economic theory and practice (as demonstrated through numerous historical and current examples of U.S. industrial policy in action). Overall, these answers reveal numerous problems that argue strongly against the adoption of new U.S. industrial policies, and they establish a high bar for future government action.
What Is Industrial Policy?
Assessing the necessity and efficacy of U.S. industrial policy requires first defining the term. Without this definition, industrial policy advocates can claim that past failures are not, in fact, industrial policy, while other policies tangentially related to government action are clear industrial policy successes. There also is the risk, as economist Herbert Stein notes in the 1986 book, The Politics of Industrial Policy, of “adopt[ing] so loose and sweeping a definition of industrial policy that it becomes virtually synonymous with overall economic policy,” thus precluding a legitimate assessment of industrial policy’s costs, benefits, and overall desirability.1 As fellow economist Mancur Olson writes in the same book, often industrial policy proposals “are so vague that they invite the reaction that industrial policy is neither a good idea nor a bad idea, but no idea at all; that it is the grin without the cat.”2 In short, if everything is industrial policy, then nothing is.
Industrial Policy’s Requisite Elements
Fortunately, industrial policy’s long history of academic debate and implementation in the United States establishes several requisite elements that, when combined, can identify whether past or proposed government initiatives are properly considered industrial policy. For example, when examining U.S. industrial policy efforts in the 1920s and 1930s, economic historian Ellis Hawley explained:
By industrial policy I mean a national policy aimed at developing or retrenching selected industries to achieve national economic goals. In this usage, I follow those who distinguish such a policy, both from policies aimed at making the macroeconomic environment more conducive to industrial development in general and from the totality of microeconomic interventions aimed at particular industries. To have an industrial policy, a nation must not only be intervening at the microeconomic level but also have a planning and coordinating mechanism through which the intervention is rationally related to national goals, a general pattern of microeconomic targets is decided upon, and particular industrial programs are worked out and implemented.3
As the Mercatus Center’s Adam Thierer wrote in a 2020 article, Hawley’s definition shows that “targeted and directed efforts to plan for specific future industrial outputs and outcomes is at the heart of a proper understanding of industrial policy.”4 Such outputs and outcomes must also occur within national borders: government procurement of foreign‐made semiconductors, for example, cannot be industrial policy. Thus, industrial policy is inherently nationalist, with government support for domestic industry either indirect (e.g., tariffs, quotas, and “Buy American” mandates) or direct (e.g., subsidies for American companies, jobs, or investments).
Finally, industrial policy output and outcomes are commercial in nature, distinguishing them from both basic scientific research and defense procurement, such as fighter jets. The former has no targeted or strategic commercial application. The latter, as explained by Richard Nelson and Richard Langlois in the 1980s, is categorically different from commercial‐oriented industrial policies for three reasons. First, as the sole consumer of such goods, the federal government has a unique and deep knowledge of the products or technology at issue and its own needs therefor, as well as a strong and direct interest in obtaining high‐quality deliverables. Second, the public strongly believes in the legitimacy of the government’s primary mission (thus minimizing politicization and short‐termism). And third, commercial spillovers are an unintended benefit, as opposed to the main purpose, of government action.5
Similar definitions and policies were offered by industrial policy advocates in the 1980s and 1990s, the last heyday of U.S. industrial policy. This includes former Clinton administration official Robert Reich in The Next American Frontier (1983); historian Otis L. Graham in Losing Time: The Industrial Policy Debate (1992); and former Commerce Department official Erik Pages in Responding to Defense Dependence (1996).6 More recently, the Carnegie Endowment’s Uri Dadush and the Hudson Institute’s Arthur Herman, citing a 2006 paper by economists Howard Pack and Kamal Saggi, have echoed these historical definitions.7
Thus, both advocates and critics coalesce around four essential features of industrial policy:
- a focus on manufacturing, to the exclusion of services and agriculture;
- targeted and directed microeconomic (firm or industry‐specific) support (e.g., tariffs or subsidies), as opposed to horizontal, sector‐wide, or economy‐wide policies (e.g., corporate tax rate reductions or patents);
- a government plan to fix market failures, including negative externalities, and thereby achieve in targeted industries/companies clear, specific, and measurable commercial outcomes, such as jobs, investments (research and development, capital expenditures, etc.), output, or products that are better than what the market could provide in the absence of industrial policy; and
- a requirement that these market‐beating commercial outcomes be generated within national borders.
Industrial policy aims not at making the macroeconomic environment more conducive to industrial development in general but at dictating the specific composition of commercial industrial activity within the nation to achieve a broader national goal.
As Duke University economist Michael Munger explains, industrial policy is not aimed at making the macroeconomic environment more conducive to industrial development in general. It does not target the levels of research, jobs, or even industrial activity that we generally have in the United States, nor does it even correct perceived or real shortcomings of markets by any means necessary.8 It aims at dictating the specific composition of commercial industrial activity within the nation to achieve a broader national goal.9 Thus, for example, industrial policy does not say “we need to lower carbon emissions” (via, for example, a carbon tax or a nondiscriminatory consumer subsidy paired with unilateral free trade in environmental goods); it says “we need to lower carbon emissions by subsidizing or protecting American solar panel companies and workers.”
What Industrial Policy Isn’t
Many of the industrial policies that advocates propose contain the four elements above, but often these same individuals add events or transactions that cannot be considered industrial policy without rendering the term inutile. A pro‐industrial policy symposium hosted by the conservative think tank American Compass, for example, contains proposals for reshoring core digital technologies, offering subsidies for biopharmaceutical and semiconductor manufacturing, and putting local‐content restrictions on electrical grid equipment and medical goods.10 All of these proposals seek to encourage domestic production of targeted commercial industries pursuant to a broader national strategy, and they therefore qualify as industrial policy rightly understood. On the other hand, the symposium adds active labor market policy, environmental regulatory reform, an infrastructure bank, World Trade Organization (WTO) reform, and vigorous antitrust action by a new Department of Economic Resilience. Yet while each might tangentially benefit domestic manufacturing, none directly supports a specific industry or targets specific market‐beating commercial outputs.
This confusion permeates the current debate over industrial policy both here and abroad. In fact, many (if not most) of the industrial policy successes that proponents praise are not industrial policy at all, and they often border on the absurd. Examples include Apple and the smartphone (and almost every piece of essential hardware that it contains); Microsoft Windows; Google, Google Maps, and the entire internet; supercomputers; semiconductors and semiconductor lasers; digital optical networks; the graphical user interface; global positioning system (GPS); LED screens; plasma displays; artificial intelligence and speech recognition; videoconferencing; closed captioning; Linux and cloud computing; nanotechnology; renewable energy (lithium batteries, wind power, solar panels); nuclear energy; fracking; seismic imaging; LED lighting; airbags; the civilian aviation industry (and jet engines in particular); the pharmaceutical and biotech industries, as well as most innovative drugs, including HIV/AIDS treatments and mRNA technology; magnetic resonance imaging; advanced prosthetics; the human genome project; hybrid corn; and even lactose‐free milk!11
Yet few of these modern marvels are the direct result of industrial policy in any legitimate sense. For example, industrial policy proponents routinely cite the Defense Advanced Research Projects Agency (DARPA) for its support for (or even invention of) the commercial internet as a poster child of industrial policy success. However, leaving aside the missing manufacturing nexus, DARPA did not have a plan for, or even anticipate, the internet—there was no “mission‐oriented directionality” to the government support provided, nor was there any effort to make the Advanced Research Projects Agency Network (ARPANET) or early email a broader commercial success instead of simply “data links to connect computer facilities doing defense‐related work.” Indeed, a decade earlier the Department of Defense had terminated research done by the Air Force into “a decentralized communications grid distinct from the traditional telephone,” and those people involved in ARPANET explained that DARPA “would never have funded a computer network in order to facilitate email.”12
Overall, ARPANET’s contributions to the commercial internet (packet switching and early email) were just that—contributions, as were private‐sector efforts such as the early 20th century radio and television technologies, and during the 1970s, Xerox’s Ethernet and Randy Seuss’s Computerized Bulletin Board System.13 Just as surely, government funding has supported research that was later used by private companies to produce commercial information technology successes. But none of these scattershot government contributions to one part of an eventual commercial success can properly be considered a coherent, strategic industrial policy.
Many (if not most) of the industrial policy successes that proponents praise are not industrial policy at all, and they often border on the absurd.
This conclusion may sound obvious, but the argument is common, especially in the tech sector.14 As noted, for example, it is routinely asserted that the federal government—via industrial policies that developed core components and financial support for Apple—invented the iPhone!15 However, as documented by researcher José Luis Ricón, such assertions equate as industrial policy any government support given at any point in the history of a product’s or company’s creation, and assign all credit for the innovation to the state.16 In particular, the industrial policy that led to the multi‐touch screen was actually National Science Foundation and Central Intelligence Agency funding for basic research at the University of Delaware into an entirely different field (neuromorphic systems), and the researchers independently developed the multi‐touch system to aid their state‐funded research. Meanwhile, another private company, Bell Labs, was developing a similar technology without state support. The connection between the state and several other core smartphone technologies was similarly attenuated and unplanned, with foreign or private alternatives emerging in parallel. Furthermore, state funding for Apple was just a small government‐secured loan issued by a private bank that supplemented substantial private startup capital that the company already had. In other words, “Apple was steaming ahead before the involvement of the [state‐backed loan] and given what we know, it is most reasonable to assume that it would have continued to do so hadn’t there been government involvement.”17
Leaving aside even the wholly private innovation of packaging all of these technologies into the iPhone, crediting these technologies to industrial policy renders the term meaningless. Political scientist Alberto Mingardi finds that these sorts of misattributions routinely plague the much‐heralded examples of American industrial policy success.18
The space program is also often cited as an industrial policy model, but, as economist John Kay explains, its lessons are limited at best:
Apollo was a success because the objective was specific and limited; the basic science was well understood, even if many subsidiary technological developments were needed to make the mission feasible; and the political commitment to the project was sufficiently strong to make budget overruns almost irrelevant. Centrally directed missions have sometimes succeeded when these conditions are in place; Apollo was a response to the Soviet Union’s pioneering launch of a human into space, and the greatest achievement of the USSR was the mobilisation of resources to defeat Nazi Germany.19
It’s unfathomable to think that the U.S. government—and American voters—will have the political will for another project such as the moonshot, especially for commercial objectives that, unlike space exploration, lack a traditional government nexus. Furthermore, products developed from space technologies arose not from a central industrial plan, but were instead the result of decentralized private actions utilizing directionless, government‐funded research.
Finally, the COVID-19 vaccines developed under Operation Warp Speed have been heralded as a triumph of American industrial policy, but the first vaccine to reach the market, the Pfizer/BioNTech vaccine, disproves this assertion. BioNTech is a German company that had been working on mRNA vaccines for years and began its collaboration with Pfizer (based on an earlier working relationship) months before the U.S. government began Operation Warp Speed in May 2020 or contracted with the companies for a vaccine in July of that same year.20 (BioNTech management actually predicted in April 2020 that distribution of finished doses would occur in late 2020.) The companies famously refused government funds for research and development or for testing and production—efforts that instead leveraged Pfizer’s substantial preexisting U.S. manufacturing capacity, as well as multinational research teams, global capital markets and supply chains, and a logistics and transportation infrastructure that had been developed over decades. In fact, the Trump administration’s contract with Pfizer was for finished, FDA‐approved vaccine doses only, and it expressly excluded from government reach essentially all stages of vaccine development (i.e., “activities that Pfizer and BioNTech have been performing and will continue to perform without use of Government funding”).21 There is even some evidence that Operation Warp Speeds’ allocation of vaccine materials to participating companies (some of which still have not produced an approved vaccine) may have impeded non‐participant Pfizer’s ability to meet its initial production targets and expand production after the vaccine was approved.22
The rapid development of COVID-19 vaccines is not the ‘triumph’ of government intervention that industrial‐policy advocates claim.
Surely, some state support, such as funding for mRNA research and a large vaccine purchase commitment, was involved both before and during the pandemic, but it lacked the necessary commercial, strategic, or nationalist elements of industrial policy. In fact, Hungarian biochemist and mRNA visionary Katalin Karikó left her government‐supported position at the University of Pennsylvania “because she was failing in the competition to win research grants” and thus “moved to the BioNTech company, where she not only created the Pfizer vaccine but also spurred Moderna to competitive imitation.”23 The National Institutes of Health grant supporting her early work actually came through her colleague, Drew Weissman, and was not directly connected to mRNA research.24 Other efforts, such as Moderna’s mRNA vaccine, had more state support, but the BioNTech/Pfizer vaccine shows that it was not a necessary condition for producing a wildly successful COVID-19 vaccine.
What Obstacles Must Industrial Policy Overcome in the United States?
American industrial policies face several obstacles that prevent their effective implementation. This section provides the most common of those obstacles, as well as real‐world examples of how they have plagued past U.S. industrial policy efforts—and thus why new industrial policy proposals should, in general, be opposed.
The Knowledge Problem
Perhaps the most widespread industrial policy obstacle is the knowledge problem. In “The Use of Knowledge in Society,” Nobel laureate F. A. Hayek explained that the information needed to secure the best use of scarce national resources “never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.” Because this information is unique and ever‐changing, central planners cannot discern it via aggregate, retrospective statistics: “The continuous flow of goods and services is maintained by constant deliberate adjustments, by new dispositions made every day in the light of circumstances not known the day before, by B stepping in at once when A fails to deliver.”25
Thus, decentralized, market‐based economic activity in general produces better outcomes than centrally planned activity (one authority for the whole economic system) because the former better mobilizes the diffuse knowledge—via price signals and millions of individual, real‐time, dynamic transactions—that are needed for economic actors to make relevant decisions. Because no single person possesses all such knowledge in real time, economic planners must show how their “solution is produced by the interactions of people each of whom possesses only partial knowledge” and fixes “the unavoidable imperfection of man’s knowledge and the consequent need for a process by which knowledge is constantly communicated and acquired.”26 They rarely do.
History repeatedly has shown that the ‘critical technologies’ (and suppliers) of today are often not so critical tomorrow, and only markets are flexible and nimble enough to reveal the difference. Planners don’t stand a chance.
A core part of industrial policy’s knowledge problem is timing: because markets and personal preferences are constantly evolving, the facts (products, investments, supply and demand, etc.) on which an industrial policy is designed will inevitably be different than the facts that exist at the time it is approved, and they will likely change again (and again) upon implementation. Discovery is endless. Thus, history repeatedly has shown that the “critical technologies” (and suppliers) of today are often not so critical tomorrow, and only markets are flexible and nimble enough to reveal the difference. Planners don’t stand a chance.
Past U.S. industrial policy efforts have often struggled to surmount the knowledge problem, particularly in high technology goods. As technology experts Patrick Windham, Christopher T. Hill, and David Cheney noted in 2020, for example, “US efforts in the 1990s to identify ‘critical technologies’ did not succeed, partly because it is hard to predict which technologies will be most valuable in the future.”27 James L. Schoff of the Carnegie Endowment for International Peace cites these efforts among the U.S. “technonationalism” failures in the 1980s and 1990s. He documents how past efforts to support critical technologies, (as defined by a National Critical Technologies Panel) through trade and investment restrictions, subsidies, and public‐private consortia failed because the government—which was worried about Japan at the time—could not foresee how the marketplace would develop. The U.S. government therefore focused on current national champions such as Motorola and Toshiba, and missed how the internet would transform mobile and digital technologies and “stimulate the rise of internet titans” that today “possess some of the world’s most coveted technology, investing more than most governments do to push new boundaries and accelerate change through design and systems integration.”28 After noting another U.S. government miscue—seeing Japan as an unstoppable technological powerhouse—Schoff explains that American firms “prospered because of their ability to innovate and compete effectively, not because of such technonationalist or protectionist measures.”29
Even if policymakers pick the right industry to promote, moreover, they can struggle to identify and support the right product in that industry. For example, U.S. semiconductor policy in the 1980s saw dynamic random access memory (DRAM) chips as being central to national security and the future of U.S. global technology leadership and believed that trade restrictions would encourage new American entrants in the DRAM market. Yet no such investments occurred because U.S. firms were exiting the DRAM market after rightly determining that future success would be in advanced microprocessors, specialty chips, and design, rather than “high‐volume, low‐profit commodity” memory chips.30
Similar problems plagued contemporaneous U.S. supercomputer policy, which targeted older technology and vector supercomputers produced by the American firm Cray and Japan’s NEC, just as those products were losing out to non‐vector supercomputers, and as the supercomputer industry was undergoing major structural changes that rendered trade protection obsolete.31 As the American Enterprise Institute’s Claude Barfield explains in his book High Tech Protectionism, “With supercomputers, as with semiconductors and flat panels, government officials either never understood or willfully ignored the structure of the industry and the nature of worldwide competition in the sector [and] seemed blissfully unaware of the technological trajectories of the industry.”32
Examples of knowledge problem failures are not limited to history books. For example, in March 2020 the Trump administration invoked the Defense Production Act to push domestic manufacturers to make more ventilators, which were deemed essential to fighting the novel coronavirus at that time. By the summer, however, medical professionals determined that ventilators were not as critical as they had once thought, but producers continued to churn them out under government orders, leading to reports of the goods piling up in a strategic reserve or being donated to “countries that don’t need or can’t use them.”33 According to a December 2020 report from the U.S. International Trade Commission, production for other medical goods funded by the Defense Production Act will only come online after mid‐2021 (with the virus more contained), even though there was evidence of a domestic medical goods glut in late January.34
Public Choice—Especially in the American System
Government industrial policy plans also face obstacles inherent in the political system that produces and implements those policies. As detailed in the work of public choice theory, political actors act not in the public interest, but in their own rational self‐interest, and thus they use the political systems in which they operate to make themselves, not the general public, better off. Elected officials’ primary goal is therefore reelection, whereas bureaucrats strive to advance or protect their own careers.
Public choice distorts both the design and implementation of industrial policies. On the former, elected officials frequently advance legislative policies that confer concentrated benefits upon small, homogenous, often local interest groups and impose diffuse (but larger) costs upon the public, because only the former groups have sufficient motivation to follow the issues closely and apply political pressure through lobbying, campaign contributions, and votes. Because members of the general public are rationally ignorant about these policies (and thus do not tie their votes or contributions to them), elected officials act rationally in supporting the policies, even when they are known to produce net losses for the country. This collective action problem not only generates pork‐barrel projects (often through “logrolling” bargains, in which legislators trade votes on each other’s pet projects), but it also makes reform or elimination of these programs exceedingly difficult, regardless of their efficacy.35
The same political pressures that distort elected officials’ support for an industrial policy can similarly distort the federal bureaucracy’s work to effectuate it.
The same political pressures that distort elected officials’ support for an industrial policy can similarly distort the federal bureaucracy’s work to effectuate it. Research shows, for example, that government agencies’ agendas often mirror those of the members of the congressional committees that primarily oversee them—members that often actively seek out these committee assignments in order to affect the regulatory agencies beneath them. Similarly, studies show that agencies can become “captured” by motivated special interest groups or their elected benefactors, who use the agency to further their own narrow interests at the broader public’s expense.36 Even where political pressure is limited (often by design), capture can occur where bureaucrats lack the same level of specialized knowledge as the entities they regulate, and thus they grow to rely on those entities for both information and manpower.
All industrial policies face these political impediments, but two aspects of the American system amplify them. First, large segments of Congress may be replaced every two years and the president every four. This dynamic not only injects short‐term thinking and uncertainty into the decisionmaking process, but also makes elected officials more risk‐averse and focused on reelection instead of the long‐term national interest. Thus, as Mancur Olson explained in 1986, “It is precisely in the areas of uncertainty like high technology and new industries that private venture capital has the greatest advantage” over government.37 This dynamic has likely worsened since the 1980s, owing partly to longer presidential campaigns that far exceed those in other countries.38 Representatives today essentially start campaigning for the next election shortly after winning the last one.
Second, the United States has a well‐developed lobbying and interest group system, which would inevitably affect, and likely deteriorate, the design and implementation of any significant industrial policy. As Olson explained, because existing organized interests would greatly influence any industrial policy, advocates must explain how proposals to allocate capital on preferential terms to promising new firms in emerging technologies (who usually lack lobbying power) will be insulated from powerful, often declining, firms with a strong lobbying presence.39 The effect of interest group pressure on federal industrial policy formation and implementation has doubtless increased since Olson first opined on the issue 35 years ago.
Past U.S. industrial policy efforts show how public choice issues can thwart planners’ intentions. For example, Windham, Hill, and Cheney note that, along with knowledge problem issues, U.S. critical technologies efforts in the 1990s failed “because decisions about R&D funding priorities inevitably become political, as groups and leaders vie to have their favorites supported”—a process that “results in a broad list that pleases everyone but is largely useless as a guide to policy.”40
When policies are implemented, moreover, politics often intervenes—even in systems that are designed to be insulated from the political process. The supercomputer policy in the 1990s was essentially client‐service for one American company, Cray, and its computer model, while ignoring other American market entrants, such as Hewlett‐Packard, IBM, Intel, and Sun Microsystems, which offered different, and arguably better, products.41 To block a potential National Science Foundation purchase of a supercomputer made by Cray’s Japanese rival NEC, the House of Representatives passed legislation sponsored by Rep. David R. Obey (D‑WI), whose district included a Cray facility, that all but guaranteed that Cray would win the contract, and the Commerce Department imposed record‐setting antidumping duties of 454 percent on Japanese supercomputer imports in 1997.42 The duties pressured NEC to agree to invest $25 million in Cray, in exchange for Cray dropping the case, and give Cray exclusive rights to sell NEC’s vector supercomputers in the United States.43 This legal extortion scheme was all the more brazen given that Cray did not even make a vector supercomputer at the time its case blocking NEC’s model was settled.
Today, the supposedly impartial Department of Commerce’s abuse of the U.S. antidumping law, which permits remedial duties on dumped imports found to injure U.S. manufacturers and workers, is common practice. The agency’s actions result in duties that go far beyond the levels needed to remedy injurious dumping, while also revealing that it is an agency captured by domestic interest groups (especially the steel industry); that it is unconcerned with the views of diffuse consumers (including other manufacturers); and that it is unburdened by congressional or judicial checks on its authority.44
More recent government efforts to support clean coal and carbon capture technology (CCT) have also fallen victim to politics. A 2018 review by George Mason University’s David Hart of 53 energy technology demonstration projects that were funded by the 2009 American Recovery and Reinvestment Act (ARRA) and administered by the Department of Energy (DOE) reveals that coal‐related CCT projects “dominate[d] the portfolio from a fiscal perspective … accounting for about five out of every six dollars allocated to energy‐demonstration projects during the Obama era.” They also were subject to more lenient private cost‐sharing requirements and overoptimistic government expectations as to whether they would attract follow‐on private investment, and were disconnected from “the benefits that each sector might reasonably expect to receive from a project.”45 Meanwhile, technologies with more potential, such as nuclear power, renewables, and gas‐fired electricity plants, were ignored.
The government’s special treatment of CCT projects, Hart notes, was due at least in part to politics—especially when it came to the largest project in DOE’s portfolio (which received almost one‐quarter of all government funding), FutureGen:
This megaproject, which dates back to 2003 and was terminated for the first time in 2008, was revived through ARRA funding earmarked for its Illinois site. President Obama, then a senator from Illinois, had vowed during his 2008 campaign to support clean coal technologies, and the state of Illinois (which had invested its own funds in the project) and its representatives in Congress (and those of surrounding states) pushed to include it among the “shovel‐ready” projects eligible for the stimulus. Much like the Clinch River breeder reactor demonstration project … the local fiscal benefits of FutureGen apparently weighed heavily in its vampire‐like rise from the dead.46
Another federally funded clean coal project—the demonstration plant in Kemper, Mississippi—was excluded from Hart’s analysis because it had a different funding source, the 2006 Clean Coal Power Initiative, but this “model of President Obama’s climate plan” also suffered public choice problems.47
Then, of course, there is the case of Solyndra and the Obama administration’s “Section 1705” loan program funded by the ARRA. As the Mercatus Center’s Veronique de Rugy explains, Solyndra spent almost $1.8 million on lobbyists, employing six firms with ties to Congress and the White House, while DOE reviewed its loan application. Overall, almost $4 billion in DOE grants and financing went to companies with connections to officials in the Obama administration. De Rugy adds that “nearly 90 percent of the 1705 loan guarantees went to subsidize projects backed by large, politically connected companies including NRG Energy Inc. and Goldman Sachs.”48
Evidence and analysis refute current arguments that economic nationalism would bolster the U.S. industrial base (and thus national resiliency). Instead, American protectionism has been repeatedly found to weaken the U.S. manufacturing sector and the economy more broadly.
Two separate analyses, one from the Reason Foundation and one from Georgetown University, found a significant connection between Section 1705 loan sizes and their recipients’ lobbying efforts.49 These results are consistent with recent research finding that politically connected firms (as measured by contributions to home state elections) are “64 percent more likely to secure an ARRA grant and receive 10 percent larger grants” than other, less‐connected companies, yet “state‐level employment creation associated with grants channeled through politically connected firms is nil.”50 Analyses have also found that the Section 1705 and other ARRA‐funded loan guarantee programs administered by DOE suffered from other political problems, such as conflicting statutory mandates, time constraints, or uneconomic objectives such as job protection and Buy American rules.51
Most recently, a New York Times investigation into Maryland vaccine manufacturer and longtime government contractor Emergent BioSolutions found that the company invested heavily in lobbying while ignoring various safety and manufacturing best practices. It had effectively “captured” the Biomedical Advanced Research and Development Authority, which was authorized to disburse and monitor pandemic‐related contracts, and yet, despite repeated contracting failures, Emergent was rewarded with a $628 million contract to manufacture COVID-19 vaccines. The company’s actions ultimately imperiled millions of doses of Johnson & Johnson vaccines and weakened the Strategic National Stockpile by monopolizing its $500 million annual budget and thus reducing the taxpayer dollars available for pandemic‐related supplies.52
These examples not only show how public choice can undermine, if not actively work against, industrial policy objectives, but they also show that systems designed to be governed by neutral arbiters and to be insulated from political pressures have nevertheless become distorted by politics—just as public choice theory predicts.
Lack of Discipline
American industrial policies can also suffer from a lack of discipline regarding scope, duration, and budgetary costs—often due to public choice issues. Unlike private actions, the successes or failures of which are usually adjudicated (often ruthlessly) by the market, government policies often live or die based on political considerations rather than their actual efficacy. As the Brookings Institution’s Linda Cohen and colleagues explain in their 1991 book, The Technology Pork Barrel:
The second difference between public and private decisionmaking is the institutional structure in which decisionmakers are evaluated. Although retrospective evaluation of R&D is difficult and imperfect in the private sector, it is facilitated by the shared recognition that R&D is intended to provide financial returns to the company and by the presence of quantitative, quite easily observed, indexes of success, such as sales, unit costs, accounting profits, and evaluation of the firm in capital markets. In the public sector, the ultimate external test of an R&D program is its ability to generate more political support than opposition.53
The authors, who are sympathetic to U.S. industrial policy, examine six federal industrial policy programs that originated in the 1960s and 1970s and were intended to develop commercial technologies for the private sector: the supersonic transport, the Applications Technology Satellites Program, the Space Shuttle, the Clinch River Breeder Reactor Project, synthetic fuels from coal, and the Photovoltaics Commercialization Program. (They omit basic research and defense projects from their retrospective cost‐benefit analysis.) They deem only one program—NASA’s satellite activities—as having been worthwhile, but it was killed before being completed. Four others were failures that cost billions of dollars, crowding out more meritorious R&D projects, yet these endured long after fiscal, technological, and commercial failure was established—a survival owed to political pressure (especially financial benefits accruing to numerous congressional districts) and captured regulators. The authors conclude that “the history of the federal R&D commercialization programs … is hardly a success story,” and that case studies overall “justify skepticism” about such programs. This is because “American political institutions introduce predictable, systematic biases into R&D programs so that, on balance, government projects will be susceptible to performance underruns and cost overruns.”54
David Hart summarizes the general problem identified by the Technology Pork Barrel examples in his 2018 paper:
Once a project’s spending spigot is turned on, its geographically concentrated fiscal benefits attract political support without regard to technological payoffs or commercial viability. Large projects are particularly attractive to legislators whether or not the technologies being demonstrated are ready to be scaled up, and even if cost, schedule, and performance targets are consistently missed. According to this view, white elephants are a virtually inevitable outcome of the U.S. political system.55
Numerous other industrial policy projects justify this conclusion, despite Hart’s personal optimism that these forces might be controlled. The Jones Act (Section 27 of the Merchant Marine Act of 1920), for example, restricts domestic shipping services to U.S.-built, ‑owned, ‑flagged, and ‑staffed vessels, in order to foment a strong domestic shipbuilding industry and a ready supply of merchant mariners during wartime, yet the act has presided over the long‐term degradation of both the industry and the oceangoing merchant marine fleet.56 Despite these failures, the law has not only persisted for a century, but has actually been made more restrictive in recent decades—in large part due to the well‐developed lobbying machine comprised of the U.S. shipbuilding industry, maritime unions, the Jones Act fleet, and other groups (including at least one foreign government) that benefit from the policy’s continued existence.57
The U.S. ethanol program has also lasted for decades despite numerous studies showing that corn‐based ethanol imposes substantial economic and environmental damage, while raising food prices and undermining U.S. climate goals. Yet these mandates are championed by almost every presidential candidate visiting Iowa; even the pro‐deregulation Trump White House expanded them in 2018, and both Republicans and Democrats—fully aware of the program’s flaws—work tirelessly to maintain it.58
The U.S. antidumping law has been subject to widespread and decades‐long criticism from economists, legal scholars, and trading partners, and various aspects of its administration have been repeatedly ruled illegal by federal courts and adjudicatory panels under U.S. trade agreements (e.g., the World Trade Organization and the North American Free Trade Agreement).59 Yet the law not only remains in force—accounting for hundreds of special duties today—but has been repeatedly expanded by Congress to achieve desired protectionist results and to permit even greater abuse in the future.60 The government also routinely ignores WTO rulings against the Department of Commerce antidumping abuses—practices that are becoming increasingly common.61
The clean‐coal megaprojects FutureGen and Kemper persisted in the face of repeated failures and numerous cost overruns because of their political value (and political problems in case of failure). As the New York Times wrote of Kemper, “The system of checks and balances that are supposed to keep such projects on track was outweighed by a shared and powerful incentive: The company and regulators were eager to qualify for hundreds of millions of dollars in federal subsidies for the plant, which was also aggressively promoted by Haley Barbour, who was Southern’s chief lobbyist before becoming the governor of Mississippi.”62 As noted above, FutureGen was actually revived because of its importance for former president Barack Obama and his home state of Illinois. That it and other DOE projects were ultimately canceled, Hart notes, likely resulted from a unique confluence of “temporary” events: the ARRA’s 2015 expiration date for fund disbursement, a bipartisan push for fiscal austerity, and partisan Republican opposition to Obama‐era industrial policy projects.63 Only the first item might be replicable today. Even the success of the Petra Nova project “suffered chronic mechanical problems and routinely missed its targets before it was shut down” in 2020.64 According to energy experts, the project reveals the operational and financial impediments to carbon capture more broadly, yet DOE remains committed to funding it.65
Surely, not every U.S. industrial policy boondoggle lasts as long as the Jones Act, but the examples above—and many others—reveal that the risk is significant and the problems pervasive.
The Cato Institute aims to shake up this status quo by shining a spotlight on the Jones Act’s myriad negative impacts and exposing its alleged benefits as entirely hollow. By systematically laying bare the truth about this nearly 100‐year‐old failed law, the Cato Institute Project on Jones Act Reform is meant to raise public awareness and lay the groundwork for its repeal or reform.
Interaction with Other Policies/Distortions
Industrial policy implementation is also often undermined by government policies that may have distorted the market at issue. As the Brookings Institution’s Shanta Devarajan explains:
The analytical case for industrial policies is based on the idea that there is a market failure that is preventing industrialization and so some form of government intervention, such as a subsidy, is necessary to correct that failure. The case is usually made in the form of elegant economic models that portray the market failure and show how intervention can lead the economy to higher growth. Most of these models assume that the relevant market failure is the only distortion in the economy. In the real world, however, these economies are full of distortions, such as labor market regulations, energy subsidies, and the like. In this setting, correcting the market failure associated with industrial policy may not promote industrialization; in fact, it may make matters worse.… Instead of relying on simple models that assume away all other distortions, governments would do better to identify the biggest distortions in the economy (such as energy subsidies) and work on correcting them. And if the biggest distortion cannot be moved, then governments need to take that into account in identifying the next biggest distortion to be addressed.66
Conflicting subsidies are a common problem in the United States. As discussed in the following section on industrial policies’ costs, for example, some DOE funding for CCT was allocated to subsidized, politically powerful ethanol producers, despite the product’s increasingly obvious shortcomings. Without government support for ethanol, other energy‐demonstration projects might have been funded instead, perhaps with better results.
Entrenched, policy‐driven distortions can turn projected industrial policy successes into costly failures—exacerbating market failures rather than fixing them.
Then there are the laws and regulations that make industrial policy projects slower and more costly. DOE loan guarantee applicants, for example, must comply with the Davis‐Bacon Act (mandating high wages and favoring labor unions) and Buy American laws (mandating domestic content and favoring U.S. manufacturers), both of which increase project costs and paperwork.67 Buy American restrictions also can limit companies’ access to needed materials or lead to project delays, and they confounded ARRA‐funded infrastructure projects that were intended to boost the U.S. manufacturing sector.68 These same projects also had to comply with the National Environmental Policy Act (NEPA), as well as similar laws at the state level, which require government review and approval of federal actions that significantly affect the environment. A recent assessment of NEPA by Eli Dourado of the Center for Growth and Opportunity finds that publication of NEPA‐required environmental impact statements takes an average of 4.5 years, and that ARRA projects have entailed approximately 193,000 NEPA reviews, 7,200 environmental assessments, and 850 impact statements. While these reviews are ongoing, no project funds may be disbursed or actual work begun.69
Bipartisan efforts to overhaul NEPA have thus far proven unsuccessful, and Democrats—who currently control the federal government—have expressed a desire to apply both Buy American and Davis‐Bacon to future industrial policy initiatives.70 In fact, both are included in the bipartisan U.S. Innovation and Competition Act and Infrastructure Investment and Jobs Act, each of which passed the Senate in the summer of 2021 and seek to subsidize the domestic production of certain goods and technologies.71
These entrenched, policy‐driven distortions, and others, can turn projected industrial policy successes into costly failures—exacerbating market failures rather than fixing them. Policymakers should therefore focus on correcting distortions caused by current policies before adding another layer of distortion via new industrial policy.
High Costs—Seen and Unseen
Finally, industrial policies impose substantial costs beyond the budgetary line item assigned to a specific project. This includes not only substantial cost overruns, but also numerous unseen costs imposed on other parts of the U.S. economy—costs that often undermine an industrial policy’s own objectives.
Projects frequently fall victim to cost overruns well beyond initial budget projections. Borrowing costs, given the perpetual U.S. budget deficit, also magnify this expense. For example, in 2014 DOE claimed that its green energy lending programs were making money because the agency’s assessment ignored the interest costs that taxpayers paid to finance the loans at issue. As the Urban Institute’s Donald Marron explained at the time, DOE’s alleged $810 million profit became a $780 million loss when Treasury’s borrowing costs were included.72
Furthermore, it often takes years to determine whether a project merits its cost. For example, in 2014 DOE congratulated itself at the opening of the subsidized Abengoa cellulosic biorefinery in Hugoton, Kansas, but that plant was shut down in 2015 and sold off at a severely discounted price as part of a 2016 bankruptcy proceeding.73 By 2018, the entire U.S. cellulosic biofuel industry was on the ropes, and the Hugoton facility still sits idle today.74
Finally, cherry‐picked industrial policy successes often obscure a wider portfolio of failures and thus, higher costs per success. For example, Hart’s review of DOE energy‐demonstration projects found that 10 CCT projects accounted for 82 percent of all DOE funding ($3.49 billion of $4.24 billion) in 2009, but only three were still active in 2018, with the huge FutureGen project among the failures.75 Since Hart’s study, one of these three, the Petra Nova power project, was mothballed after suffering frequent outages and missing its carbon sequestration goals.76 Another, Archer Daniels Midland’s Illinois Industrial Carbon Capture and Storage Project (which captures carbon dioxide as a byproduct of ethanol production), is still operating, but it has reached only half of its annual emissions storage target.77 Only Air Products and Chemicals’ carbon capture facility in Texas (which received $284 million from DOE) can be considered successful.78 Was this one success worth the total CCT portfolio cost of $3.5 billion?
Other industrial policy portfolios raise similar issues. While Tesla famously paid back its $485 million loan under the Advanced Technology Vehicle Manufacturing program, Fisker Automotive went bankrupt without paying off its $529 million loan; Ford’s $5.937 billion loan and Nissan’s $1.448 billion loan also remain outstanding.79 Presumably, they will be paid back, but this story remains unwritten.
Beyond these seen costs are the many hidden ones that even government industrial policy successes impose on the economy, including indirect costs paid by private parties, deadweight costs to the economy, opportunity costs, misallocation of resources, unintended consequences, moral hazard and adverse selection, and uncertainty.
Indirect costs paid by others
Industrial policies that restrict access to goods and services from disfavored (usually foreign) suppliers raise prices for both the restricted items and their favored competitors, imposing significant costs on consuming companies and individuals. For example, tariffs that former president Donald Trump implemented to boost the U.S. steel and aluminum industries have been repeatedly found to raise foreign and domestic steel prices, thus harming downstream U.S. manufacturers and reducing GDP.80 Pervasive Buy American rules, which generally restrict government contracts to domestic producers, have similarly been found to act as a barrier to entering the U.S. market and to raise domestic prices in the same way that a tariff does.81
Trade restrictions or taxation to fund industrial subsidies also impose deadweight costs on the economy. For example, by raising domestic prices a tariff not only redistributes to producers money that consumers used to save when buying cheaper, non‐tariffed imports, but also reduces domestic consumption overall. This portion of the consumer surplus is simply destroyed—a deadweight loss that makes the United States, as a whole, worse off in the amount of wealth destroyed (money that consumers, pre‐tariff, could have saved, invested, or spent on other things). Economists have repeatedly found that import restrictions impose substantial deadweight costs on the economy—a key reason why so few economists support them.82 High tax rates have been found to impose similar costs.83
Industrial policy programs that entail government spending also entail opportunity costs, as explained by St. Louis Federal Reserve Economist Michelle Clark Neely:
Each subsidy given to an industry or firm generates an opportunity cost: the cost of foregone alternatives. In other words, to correctly evaluate a policy, you need to know not only what you’re getting, but also what you’re giving up. Based on industrial policy experiments in several countries, most economists have little confidence in the government’s ability to measure these benefits and costs properly.84
Given that both time and federal budgets are finite, government industrial policies replace efforts and money that could have been spent on other priorities, potentially imposing significant opportunity costs in the process. In The Technology Pork Barrel, for example, Cohen and Noll explain that the Clinch River breeder reactor “absorbed so much of the R&D budget for nuclear technology that it probably retarded overall technological progress.”85 Other nuclear projects, and the Space Shuttle, likely had similar net negative effects.86 As noted above, more recent government overspending on Emergent BioSolutions’ pricey anthrax vaccines left less money available to purchase other medical goods, such as N95 masks, for the Strategic National Stockpile, thus contributing to its shortages when COVID-19 arrived in 2020.87
These opportunity costs are sometimes mentioned when government industrial policies publicly fail, but they must also be considered when evaluating the alleged successes, too. As Duke professor Daniel Gross explains, for example, we celebrate that World War II shifted the scientific establishment from its previous projects to atomic fission, radar, and other war‐related technologies, but we ignore the canceled projects’ potential benefits.88 Once these types of opportunity costs are considered, allegedly successful industrial policies can end up undermining the economy, as well as various strategic national objectives.
Misallocation of resources
Industrial policies also often distort private investment decisions, pushing resources away from productive transactions, businesses, or industries.
Industrial policies also often distort private investment decisions, pushing resources away from productive transactions, businesses, or industries. When the Trump administration pushed automakers to produce ventilators that were never needed, their efforts occupied machinery, labor, and capital that could have been used to make cars that subsequently were in short domestic supply. The canceled $765 million loan to turn Eastman Kodak into a pharmaceutical ingredient company caused the company’s shares to surge 1900 percent, and its market capitalization at one point reached $2.2 billion (a twentyfold increase)—private capital that could not be invested elsewhere (for example, in actual U.S. pharmaceutical ingredient producer Fujifilm).89 Even after the government loan was stymied, and without any new plan for long‐term financial viability (along with continued poor financial performance), the company’s shares still traded at three to four times their pre‐loan announcement price, thus diverting for several months (if not longer) hundreds of millions of private investment dollars away from other companies.90
Industrial policies can also discourage private investment in industries that the government is actually trying to promote. As Harvard’s Josh Lerner explains, with respect to the Obama‐era DOE’s green energy subsidies,
The enormous scale of the public investment appears to have crowded out and replaced most private spending in this area, as [venture capitalists] waited on the sideline to see where the public funds would go.… Rather than being stimulated, cleantech has fallen from 14.9 percent of venture investments in 2009 to 1.5 percent of capital deployed in the first nine months of 2019.91
With respect to the Advanced Technology Vehicle Manufacturing program in particular, Wired magazine found in 2009 that “this massive government intervention in private capital markets may have the unintended consequence of stifling innovation by reducing the flow of private capital into ventures that are not anointed by the DOE,” and then provided instances when this very risk had materialized.92
Finally, potential industrial policy beneficiaries can divert resources from their actual business to obtaining federal benefits (lobbying, grant writing, etc.), thus undermining the former. Wired notes, for example, that
Aptera Motors has struggled this year to raise money to fund production of the Aptera 2e, its innovative aerodynamic electric 3‑wheeler, recently laying off 25 percent of its staff to focus on pursuing a DOE loan. According to a source close to the company, “all of the engineers are working on documentation for the DOE loan. Not on the vehicle itself.”93
Kodak spent almost $800,000 on lobbying before it received its Defense Production Act loan, and Emergent BioSolutions has spent millions on lobbying and winning federal contracts. Overall, countless millions of dollars—dollars that could have been spent on producing better products—have instead been spent on political efforts by companies in the steel, shipbuilding, ethanol, and other industries that are common industrial policy targets.94
Industrial policies produce consequences that not only are unforeseen by government planners but also undermine the policies’ own objectives. As already noted, government subsidies intended to spur various energy innovations repeatedly discourage them. Steel protectionism has boosted less productive and innovative firms’ lobbying efforts and financial returns, thus discouraging overall innovation (R&D spending and creative destruction) in the industry.95
Numerous other examples abound. Semiconductor policy during the 1980s and 1990s sought to boost domestic producers’ global competitiveness (while diminishing their Japanese competitors), but instead it enriched Japanese chipmakers via quota “rents” and government‐backed collusion and helped turn South Korean companies into global leaders.96 Jones Act shipping restrictions, intended to bolster national security, have pushed American energy consumers to buy from Russian producers and American shippers to use Chinese shipyards for repairs. Restrictions on imports of machine tools from major producer countries in the 1980s fueled the growth of China’s machine tools industry.97 Ethanol subsidies and mandates have reduced cropland, increased food prices, and harmed the environment. Buy American restrictions tied to federal transportation subsidies have raised the price of domestically produced transit buses and discouraged the purchase of more‐efficient foreign‐made buses, thus lowering the quality and use of public transit (fewer stops and less geographic coverage), increasing traffic congestion, and harming the environment.98 Outside of the United States, European innovation policy has stymied innovation, while Japanese industrial policy has slowed productivity growth.99 The list of countries and industries more harmed than helped by industrial policy goes on and on.
Moral hazard and adverse selection
Industrial policies also can generate moral hazard (i.e., encouraging actors to engage in overly risky behavior by protecting them from its consequences) and adverse selection (i.e., the tendency to attract the highest‐risk or least‐responsible actors). Research shows, for example, that government loan guarantees that insure lenders against incurring losses from default can encourage banks to take on risky borrowers, discourage them from undertaking standard due diligence to apply for credit guarantees, and attract a disproportionate share of risky borrowers, thus resulting in inefficient resource allocation overall.100 In the United States, the poster child for these problems was the Section 1705 loan guarantee program and the $535 million loan to solar panel manufacturer Solyndra that it supported.101 As explained by economist Ryan Yonk, the scandal with Solyndra was not that the company failed, but that its loan application—which a 2015 Inspector General report found was plagued with deficiencies and misrepresentations about a company with publicly known problems—was ever approved in the first place.102 In a comprehensive assessment of all DOE loans and loan programs implemented between 2009 and 2016, the Heritage Foundation’s Nick Loris found that projects routinely featured failed companies that “could not survive even with the federal government’s help,” and added that both the Government Accountability Office and DOE Office of Inspector General reports “identify that the loan programs were fraught with inefficiencies, lack of due diligence, and inadequate oversight and management.”103
Industrial policies often produce uncertainties due to their inherently political nature (frequent elections, program lapses, etc.) and potential to engender trade disputes or retaliation from foreign trading partners. Numerous studies, for example, show that U.S. tariffs during the Trump administration increased trade policy uncertainty and thereby decreased investment and economic growth.104 These results are consistent with the general economics literature showing that policy uncertainty undermines investment, employment, and economic growth. As the University of Chicago’s Steven J. Davis explains,
a variety of studies find evidence that high (policy) uncertainty undermines economic performance by leading firms to delay or forego investments and hiring, by slowing productivity‐enhancing factor reallocation, and by depressing consumption expenditures. This evidence points to a positive payoff in the form of stronger macroeconomic performance if policymakers can deliver greater predictability in the policy environment.105
Both theory and practice show why it is difficult, if not impossible, for industrial policies to achieve such predictability. These outcomes not only undermine the common argument that industrial policies fix market short-termism—they are similarly afflicted (if not more so)—but also show that such policies impose significant economic harms.
Almost all of these seen and unseen costs arose in the 2009 government bailouts of General Motors and Chrysler, which were deemed industrial policy successes by the Obama administration because they only cost taxpayers about $10 billion, which was the difference between the current‐dollar value of funds the government invested and recouped.106 However, this total ignores the true, interest‐adjusted cost to taxpayers, which the Congressional Budget Office estimates was 40 percent higher ($14 billion).107
Furthermore, as economist Daniel Ikenson has explained, even this larger dollar figure ignores all of the bailout’s hidden costs for the economy. For instance, the $61 billion allocated to these corporations could have been spent on more productive initiatives, such as retraining autoworkers. The long‐term competitiveness of GM and Chrysler was diminished because they were not reorganized via standard bankruptcy proceedings. Ford and other U.S.-based automakers who did not receive special treatment lost business, thus harming not only their finances but also American consumers and the economy, because these companies’ better products and business models were not rewarded. Moral hazards arose from encouraging the continuation of the companies’ and the United Auto Workers’ irresponsible practices. Bond holders and other investors suffered because they did not receive the fair value of their holdings, potentially short‐circuiting U.S. bankruptcy law along the way. Then there are the political costs of protecting well‐connected favorites (here, unions), and the cost of uncertainty about whether and when political actors would again decide to intervene in the market and legal system, citing the bailout as precedent.108
If It Creates One Tesla?
Some industrial policy advocates argue that these seen and unseen costs are an expected and necessary part of backing ventures considered too risky for private capital and are worth the expense if the project ultimately supports one big winner, such as Tesla Motors. Even assuming that Tesla’s story is fully written, or that electric vehicle (EV) proliferation benefits average Americans, however, this argument must have limits: Would government backing of Tesla be worth one trillion dollars’ worth of waste, failure, and cronyism? Two trillion? Surely, some number of losers—individuals and the economy overall—would be too much, even if the government picked one winner in the process. Costly public failures might also undermine public confidence in the government and support for future federal policies, industrial or otherwise—jeopardizing the next Tesla (or more worthwhile targets) rather than nurturing it. Solyndra’s failure had this very result.109
These arguments, as well as other industrial policy defenses, also require quantifying the benefits that alleged successes confer, not merely upon the recipient companies and their workers, but on the U.S. economy more broadly. Positive externalities, market‐beating R&D spillovers, and faster economic growth are often claimed, but these benefits are rarely supported by hard evidence or thorough empirical analysis. Indeed, a core theme of scholars Deirdre Nansen McCloskey and Alberto Mingardi’s book, The Myth of the Entrepreneurial State, is the lack of rigorous and systematic empirical analyses of the overall efficacy of nations’ industrial policies, as opposed to whether specific projects achieved certain deliverables.110 Pack and Saggi examined the issue in 2006 and explained a key hurdle to such analyses:
Although there are cases where government intervention coexists with success, there are many instances where industrial policy has failed to yield any gains. The most difficult issue is that relevant counterfactuals are not available. Consider the argument that Japan’s industrial policy was crucial for its success. Because we do not know how Japan would have fared under laissez‐faire policies, it is difficult to attribute its success to its industrial policy. It might have done still better in the absence of industrial policy—or much worse. Given this basic difficulty, only indirect evidence can be obtained regarding the efficacy of industrial policy. Direct evidence that can “hold constant” all the required variables (as would be done in a well‐specified econometric exercise) does not exist and likely never will.111
The authors nevertheless concluded that sectoral targeting has not been not effective.112 Since then, several literature reviews have come to essentially the same conclusion: the few empirical studies of industrial policy tend to focus on specific transactions and issues rather than the aggregate, economy‐wide effects of industrial policy; they often suffer from methodological or data limitations; and they have produced mixed, country‐specific results.113 The studies therefore cannot permit strong conclusions about the success or failure of industrial policy writ large.
Finally, one must also consider whether an industrial policy success would have occurred in a market without the supporting program. Often, subsidized successes perform no better than their unsubsidized competitors. The most recent example is the BioNTech/Pfizer COVID-19 vaccine achieving the same or better results than vaccines that received far more government support. Yonk’s 2020 assessment of DOE loan guarantee programs, for example, finds that few loans were extended that couldn’t have been obtained in the market.114 He adds:
Most Section 1705 funding has gone to large corporations who already have access to capital for investments in research, development, and deployment. Recipients of LPO [DOE Loan Program Office] guarantees include multiple Fortune 200 companies, utility companies, and multinationals. Many are wholly owned by yet larger companies. The application process itself all but ensures that only large, established companies will be capable of participating in the program. Applicants can expect to pay between $150,000 and $400,000 in fees before even being considered.115
As noted above, other analyses of the program have come to the same conclusion. Semiconductor consortium SEMATECH’s work has also been found to have produced deliverables that the market could have provided without government assistance.116 A 2020 analysis of 25 cleantech startups funded by the Advanced Research Projects Agency‐Energy (ARPA‑E) in 2010 found “no clear evidence” that subsidy recipients performed better than similar cleantech startups in terms of being acquired, launching an initial public offering, or receiving venture capital funding within 10–15 years of their founding. The authors therefore conclude that the program did not achieve one of its primary goals, which was to generate “an increased likelihood of success (measured in different ways) for ARPA‑E startups compared to similar companies.”117 The authors find that awardees did obtain more patents than nonsubsidized competitors, but do not rule out that this success was due to ARPA‑E encouraging subsidy recipients to patent or choosing companies with a higher propensity to patent.118 Finally, the authors found that funding from DOE’s Office of Energy Efficiency and Renewable Energy did not affect awardees’ patenting or follow‐on funding, while DOE’s Small Business Innovation Research awardees actually patented less than the average unsubsidized firm.119
The ARPA‑E program was therefore the best of the bunch. However, the bar is low, and success is still no better than what the market could produce. As one supporter of ARPA‑E put it, “one would hope to see stronger evidence of the impact of ARPA‑E support not only on follow‐on funding, but also on product introductions, sales and other downstream commercialization variables over a longer time span.”120 Alas, no such evidence exists.
What Problem Will Industrial Policy Solve?
Industrial policy advocates also routinely fail to demonstrate the existence of the specific economic problem that their proposed policies will solve. The most common problems, without which new industrial policy would not be necessary, are either much less serious than advocates claim or else cannot be fixed with industrial policy. This includes allegations of widespread deindustrialization, declining manufacturing jobs and business investment, the erosion of middle‐class living standards, and the destruction of American communities.
The supposed deindustrialization of the United States does not justify new industrial policies. There is little merit to the common argument that the U.S. industrial base has been dismantled by decades of free‐market fundamentalism and a lack of industrial policy.121 Both the declining number of manufacturing jobs (Figure 1) and the manufacturing sector’s shrinking share of GDP (Figure 2) primarily reflect long‐term global trends that are shared by most industrialized nations and that are disconnected from specific federal economic policies, whether they are free market or interventionist.
Overall, as Figures 3 and 4 show, the historical trends in U.S. manufacturing jobs and the manufacturing sector’s GDP share are a standard story of economic development that all countries eventually experience as they get richer.
Given that these long‐term, systemic trends were experienced in other countries, such as Germany and Japan, that had both trade surpluses and active, comprehensive industrial policies, there is little to suggest that new U.S. industrial policies would change the same trends in the United States.
Furthermore, Table 1 and Figures 5 through 7 show that the U.S. manufacturing sector remains among the most productive in the world and has actually expanded since the 1990s—continuing earlier period trends in output, investment (both capital expenditures and R&D), and financial performance.
As shown in Table 2 and Figures 8 through 10, moreover, the R&D spending trends for the U.S. manufacturing sector generally track those of the nation overall, which hit all‐time highs in R&D spending as a share of GDP and inflation‐adjusted dollars spent.
As documented by economist Donald Schneider, numerous experts have concluded that overall net investment in the nonfinancial corporate sector (i.e., new investment minus depreciation) has not declined in real terms. As shown in Figure 11, this reached an all‐time high on a per worker basis during the mid‐2010s and leveled off afterward.
Research from University of Houston economist Dietz Vollrath shows that a causal connection between total U.S. business investment and economic growth disappears after accounting for slowing population growth, which is not something that industrial policy can fix.122
These topline data underscore that any new American industrial policy would require targeting specific industries to change the sector’s composition, not the horizontal tax or educational policies that some advocates claim to be industrial policy. And while some manufacturing industries have undoubtedly declined over the last several decades, these changes usually reflect fundamental shifts in U.S. and global markets that are driven by trade, technology, changing consumer habits, and other trends, as opposed to a weak manufacturing sector. The declines also have been offset by gains in other industries, particularly durable goods industries, such as transportation and aerospace, and high‐value nondurable goods industries such as chemicals and energy (see Figure 12 and Table 3).
These and other U.S. manufacturing data reveal a flexible and dynamic sector that is generally responsive to free‐market forces that are important for the health of the economy overall, not merely for the manufacturing sector. Furthermore, the offshoring or automating of low‐wage, low‐skill industries in the apparel, furniture, and other manufacturing industries, while undoubtedly difficult for the workers directly affected, is an important part of a healthy, dynamic economy and an essential part of economic development, moving resources from less‐ to more‐productive domestic enterprises. This is true regardless of whether the enterprises are in manufacturing or other sectors.
Manufacturing jobs cannot justify a new industrial policy push. It is highly questionable to assume that the significant decline in the number of factory jobs during the 1990s and 2000s could have been reversed via industrial policy because those same trends were happening in all industrialized nations, including those with robust industrial policies. American policy could, in theory, produce a one‐time increase in overall manufacturing employment, but the long‐term downward trend would continue. Furthermore, as shown in Table 1 and Figure 13, U.S. manufacturing workers continue to be among the most productive in the world, even accounting for a slowdown since the Great Recession.
However, altering the composition of the 165‐million‐person American workforce to include an additional one or two million manufacturing jobs would not necessarily be better for the workforce or for the U.S. economy overall, because manufacturing jobs are not sufficiently special or economically beneficial as to warrant government industrial policy interventions, even assuming that such interventions would be successful.
As the Cato Institute’s Ryan Bourne documented in 2019, manufacturing jobs are not significantly more stable or secure than jobs in other sectors, especially for low‐skilled workers whose jobs have been disappearing for decades and who are most exposed to, and replaced by, automation and trade.123 As shown in Figure 14, annual job creation in manufacturing has been low since the 1960s, and there was net job destruction from the 1960s through 2010.
Although the number of manufacturing jobs has increased since the Great Recession, the Bureau of Labor Statistics projects that the sector will resume its long‐term trend of shedding manufacturing jobs (444,800 of them, to be exact) over the next decade due to international competition and productivity‐enhancing technologies.124 On the latter issue, for example, the number of man‐hours required to produce a ton of steel in the United States dropped from 10 in 1980 to approximately 1.5 today. The newest steel plants, however, need even fewer workers—one Austrian mill needs only 14 employees to make 500,000 tons of steel wire per year.125 Because demand for steel is finite, steel industry employment will thus continue to decline while productivity continues to climb.
Indeed, American manufacturing jobs tend to be highly productive, but this benefit has a downside: it caps industrial employment. For example, U.S. manufacturing gained almost 1 million jobs between 2010 and 2018, outpacing job growth in China, Germany, and Japan in the process. However, over the same period, real manufacturing value‐added per worker and per hour worked in the United States increased by only 0.3 percent per year and 0.1 percent per year, respectively, as compared to 5.6 percent and 5.7 percent per year between 2000 and 2008—a time of significant manufacturing job loss in the United States.126
In other words, American workers were improving their ability to produce manufactured goods at a much more rapid pace during the height of manufacturing job loss than during the subsequent period of reemployment. Thus, the goal of promoting high‐productivity, high‐innovation industries that need fewer higher‐skilled workers conflicts with the goal of supporting numerous comfortable, stable, and secure jobs. An industrial policy that seeks to achieve the latter objective—for example by reshoring jobs in the textile, apparel, or consumer electronics industries—would inevitably sacrifice the former.
There is also little to indicate that boosting nominal manufacturing employment would solve the sagging labor force participation, even among less‐educated male workers. For starters, the labor force participation rate hit 63.4 percent in January 2020, which was lower than its 2000 peak but was at approximately the same level as in June 1979, when U.S. manufacturing jobs were at an all‐time high in nominal terms. The prime‐age (25–54) employment to population ratio, by contrast, was far higher in January 2020 (80.5 percent) than it was in 1979 (around 74.5 percent).127 Only male prime‐age employment dropped from 1979 to January 2020, but a 2020 Bureau of Labor Statistics review of the increase in male prime‐age nonworkers attributes the rise to issues other than deindustrialization, most notably health issues and past incarceration.128
Previous research by the American Enterprise Institute’s Scott Winship, moreover, finds that most (56 percent) prime‐age men who were inactive or not in the labor force in 2014 reported that they were disabled, while another third were retired, enrolled in school or training, or taking care of a family member.129 Just 1 in 10 prime‐age men not in the labor force fell outside of these categories, while about one‐quarter of them said they wanted a job. Leaving aside what may be driving these trends, nothing here supports an industrial policy solution—whether it targets low‐skill, labor‐intensive jobs or higher‐skill, grey‐collar jobs that require advanced training. Indeed, even in late 2018, when both the U.S. labor market and manufacturing sector were booming, there were approximately 500,000 manufacturing job openings (a 3.9 percent opening rate)—the highest levels ever recorded, dating back to 2000.130
Thus, the connection between male prime‐age employment and nominal manufacturing jobs may be weak today, and there is no reason to think that targeted policies to boost manufacturing jobs, as opposed to broad macroeconomic policies that produce a strong labor market generally, will increase male labor force participation.
Finally, wages and incomes, both in and out of manufacturing, do not justify new industrial policies. Contrary to the conventional wisdom, middle‐class compensation has not been stagnant, nor has significant “wage polarization” (i.e., increasing numbers of high and low wage jobs) occurred over the last several decades.131 Economist Michael Strain finds, for example, that median production and supervisory wages have increased by more than 30 percent since the early 1990s, and total personal compensation—wages, benefits (an increasing portion of pay), taxes, and transfers—is up 61 percent. Instead, stagnation occurred between the late 1970s and the early 1990s, long before the largest declines in manufacturing jobs and before the advent of modern globalization. Ironically, it was during this stagnation period that the United States last became enamored with industrial policy.
In general, most Americans are becoming financially better off over time, although they may be doing so through different jobs.132 Among them are e‑commerce warehouse jobs, which have increased substantially and are increasingly well‐compensated. In fact, the average hourly pay for blue‐collar and administrative jobs in the warehousing industry now exceeds the average pay for similar jobs in both manufacturing and the private sector overall (Table 4); it is now more lucrative to transport and deliver the proverbial “cheap T‑shirt” than it is to make it (Figure 15).
The growth of these and other well‐paying services jobs underscores that the manufacturing wage premium today is small, if it exists at all. According to a December 2019 report by the Bureau of Labor Statistics, for example, by the end of 2018 “average hourly earnings of production and nonsupervisory workers in the total private sector had surpassed those of their counterparts in the relatively high‐paying durable goods portion of manufacturing” (nondurables pay was even lower).133 As shown in Table 5, many blue‐collar services jobs in the United States not only have grown faster than manufacturing jobs since 1990, but also pay higher hourly wages and have faster wage growth. The number of these jobs is also expected to increase in the future.
The Bureau of Labor Statistics reports that manufacturing workers continue to have higher weekly earnings, but only because they work more hours per week to compensate for the relatively low hourly pay. The report adds that manufacturing employment declined across virtually all industries since 1990, and that manufacturing hours are more volatile from month to month.
In the face of these realities, manufacturers routinely report having difficulty attracting workers, even when offering higher wages, which is consistent with the data on labor force participation and job openings. Prior to the COVID-19 pandemic, for example, finding workers was consistently the biggest problem that manufacturing employers reported to the Federal Reserve’s Beige Book survey, and the Department of Defense explained in its 2019 Industrial Capabilities report that one of the defense industrial base’s biggest needs was “increasing the prestige of manufacturing as a profession in order to inspire more prospective workers to choose it as a career.”134 Meanwhile, Bloomberg reported in 2019 that furniture manufacturers in trade‐impacted Hickory, North Carolina, which had an unemployment rate of 4.3 percent, could not find local workers willing to do physically demanding work that sometimes entailed risk, even by offering $2,000 hiring bonuses and paying $35 an hour wages.135 The Wall Street Journal found a similar dynamic nationwide in January 2021: despite a red‐hot sector and increasing wages, manufacturers reported difficulties in finding qualified workers, which was due in part to competition from warehousing jobs, and had resorted to waiving drug‐use restrictions and tapping local jails’ work‐release programs.13
Finally, it is essential to note that the United States has been trying to increase manufacturing jobs for decades with little avail. As a 2013 Congressional Research Service report concluded about the state of American manufacturing, “Although Congress has established a wide variety of tax preferences, direct subsidies, import restraints, and other federal programs with the goal of retaining or recapturing manufacturing jobs, only a small proportion of US workers is now employed in factories.”137
This again indicates that, even if manufacturing jobs deserve to be saved, a U.S. industrial policy would be unable to achieve that objective. Perhaps for these reasons, even some industrial policy advocates have stopped citing manufacturing jobs as a core industrial policy objective.138
American living standards also cannot justify industrial policies. In terms of basic necessities such as food, clothing, and home goods, Americans today are absurdly rich as compared to only a few decades ago. According a 2016 report from Southern Methodist University, the share of American households with access to telephones or cell phones, electricity, air conditioning, home appliances, TVs, computers, and other common household goods is at or approaching 100 percent.139 Research from economist Bruce Sacerdote finds the consumption gains for below‐median income families to be particularly impressive: low‐income consumption (adjusted for inflation) increased between 62 percent and 164 percent between 1960 and 2015, not fully accounting for improvements in quality (which for some items, such as cars and homes, have also been substantial).140 Accounting for these consumption improvements also dramatically narrows inequality, especially for single parents.141
The improving quality of life for low‐ and middle‐income Americans has not been fueled by new debt, but instead by a combination of higher incomes and lower prices.
The improving quality of life for low‐ and middle‐income Americans has not been fueled by new debt, but instead by a combination of higher incomes and lower prices. According to the Cato Institute’s Marian Tupy, for example, the average amount of time that unskilled American workers had to work to earn enough money to buy a long list of everyday items has declined by 72 percent since the late 1970s, when manufacturing jobs were at their zenith.142 That means that, for the same amount of work that allowed unskilled workers to purchase one item in 1979, they could buy 3.56 items in 2019, on average. Tupy has found similarly impressive gains for food consumption, helping to explain why food insecurity reached an all‐time low before the COVID-19 pandemic hit.143 The United States’ poverty rate also hit a record low in 2019, and one recent study found that only 2 percent of Americans were living in poverty (as it was defined in 1963, when it was almost 20 percent).144
Of course, some consumption challenges remain, particularly in health care, higher education, and housing. However, each of these sectors is already highly subsidized, protected, and regulated, and new industrial policies targeting them, especially trendy “worker‐centric” approaches, could just as easily raise prices and discourage innovation rather than the opposite. Market‐oriented improvements to tax, trade, immigration, and regulatory policy are far more likely to improve these sectors—and thus raise American living standards—than any new industrial policies targeting them.
Finally, industrial policy will not solve the problems of struggling communities in the United States. To begin with, most American localities that once centered on low‐skill manufacturing have since transitioned to other industries and are doing well today. A 2018 Brookings Institution report, for example, found that 115 of the 185 counties with a disproportionate share of manufacturing jobs in 1970 had successfully transitioned away from manufacturing by 2016.145 Forty of the remaining 70 older industrial cities, moreover, exhibited strong or emerging (average) economic performance. Overall, only 30 of the original 185 manufacturing communities were still struggling. Anecdotal evidence reiterates these findings: towns such as Greenville‐Spartanburg, South Carolina, or Pittsburgh, Pennsylvania, which once depended on low‐skill manufacturing, have since adapted and are now home to thriving companies and modern workforces. The contrast between these localities and those still reeling from decades‐old economic shocks indicates that the latter’s problem is not a lack of federal industrial policy, but instead one of local policies and these specific communities’ inability to adjust to global economic forces and competition from other states.
Additionally, as the Peterson Institute’s Adam Posen recently explained, “there are precious few examples of a government successfully reviving a community suffering from industrial decline.”146 He cites failed U.S. efforts to revive the Massachusetts textile towns of Lawrence and Lowell, and similar futile efforts in the Midwest. Then there are the continued struggles of former steel town Youngstown, Ohio: “A succession of presidents has promised—and failed—to turn around Youngstown, which, despite all the political attention and federal dollars lavished upon it, doesn’t have a supermarket in the residential neighborhoods closest to downtown.”147
Posen details similar failures to revive struggling communities or regions in Germany, Italy, Japan, the United Kingdom, and even China— a nation that has pursued unprecedented levels of industrial subsidization and government intervention and that runs perpetual manufacturing trade surpluses.148
Thus, leaving aside whether national economic policy should relieve states and towns of their responsibilities to create viable commercial centers, little evidence indicates that it can.
Do Other Countries’ Industrial Policies Demand a U.S. Industrial Policy?
Finally, the industrial policy experiences of other countries, particularly China, cannot justify similar policies in the United States. Significant political and economic differences limit the extent to which these experiences can inform U.S. industrial policy efforts. Regardless, other countries’ industrial policy successes have been exaggerated, while numerous failures have been ignored. This includes China, which has commonly been cited to justify new U.S. industrial policy, yet has a spotty industrial policy record and faces numerous economic challenges in the years ahead—some caused by its own industrial policy efforts.
The Perils of Cross‐Country Comparison
In general, real or perceived industrial policy successes in other countries cannot inform whether similar results are possible in the United States or whether the federal government should adopt industrial policy as broadly defined. For example, reviews of the economics literature conclude that the empirical studies of industrial policy are limited and, of the few that have been published, they primarily assess specific cases, industries, and policy episodes. These papers cannot, therefore, predict whether the analyzed cases would translate to the United States. As José Luis Ricón explained, “If there is one conclusion from the recent empirics of [industrial policy] it’s that it’s pretty much dependent on which industry, which country, in which period of development it is applied.”149
This challenge is particularly significant for proposed U.S. industrial policies, given our political system and the special obstacles that industrial policies face here. As economist Nathan Lane explained in 2020 after reviewing the academic literature, “Without a doubt, future research must do more to understand the interaction between political economy and industrial policy. Because industrial policy is state policy, its success, scope, and efficacy is sensitive to institutional context.”150 He adds that, thus far, few empirical papers have examined how politics affects industrial policy, leaving it an open question.151
The American political system is particularly susceptible to public choice problems due to the short duration of many elected federal positions and our well‐developed lobbying and special‐interest group system. One would also need to consider the specific laws and regulations, such as Buy American restrictions and NEPA, and the sheer size and diversity of the U.S. economy (as opposed to, say, Israel)—both of which would further diminish assertions that industrial policy can work in the United States simply because specific programs worked in other countries.
Industrial policy successes abroad, such as in Japan, Korea, and Taiwan, are routinely exaggerated and must be balanced against other countries’ numerous failures.
Industrial policy successes abroad are routinely exaggerated. Numerous analyses, for example, have punctured the myth that Japanese industrial policy was primarily responsible for the country’s impressive growth and productivity during the 1970s and 1980s.152 As the Wall Street Journal reported in 2002, Japan’s Ministry of Finance admitted that the Ministry of International Trade and Industry’s interventionist and protectionist policies had “eroded the competitiveness of the industries the government had sought to support.”153 Economist Saul Lach’s 2003 assessment of much‐heralded R&D subsidies for Israeli manufacturers found that such funds did benefit small firms, but it had negative effects on large firms, and, because most subsidies went to the large firms, they generated statistically insignificant improvements in company‐financed R&D.154
In his 2019 book, Free Trade and Prosperity, New York University’s Arvind Panagariya shows that the supposed industrial policy success stories of South Korea and Taiwan, both of which experienced rapid, manufacturing‐led economic growth in the mid to late 20th century, are less accurate than alleged.
Taiwan’s growth should be attributed to a general shift in trade policy away from import substitution toward trade and investment liberalization, particularly for industrial inputs, and to various domestic policies and outcomes, such as political stability, labor market flexibility, macroeconomic stability, infrastructure expansion, and secondary education.155 Government intervention, moreover, did not cause economic outcomes to differ from that of a neutral policy regime. Instead, sectors that had the best export performance were labor intensive ones not subject to government targeting via industrial policy, and the public sector’s share of manufacturing output declined significantly over the growth period examined.156
The South Korean government intervened heavily in its economy, promoted exports, and maintained import restrictions from the 1950s through the 1970s. However, when considering the economy as a whole, South Korea’s policy regime was only slightly biased toward exports when compared to a hypothetical free trade alternative.157 In other words, the overall industrial policy effects were modest. Moreover, the exported goods that grew rapidly during the 1960s—plywood, woven cotton fabrics, clothing, footwear, and wigs—were labor intensive and not subject to state targeting.158 The South Korean government also implemented domestic policies similar to those in Taiwan, and pushed industrial targeting in a limited number of sectors. The government pursued greater targeting of the heavy and chemical industries between 1974 and 1982, but the supported industries performed poorly during this period, with relatively low total factor productivity as compared to unsupported industries. The nation’s overall GDP growth rate was significantly below that achieved during the previous, less‐interventionist period. Economic growth returned to this level and heavy and chemical industries’ performance improved only after the government ended specific support for those industries in 1983 through 1995, ceased promoting strategic industries more broadly, and liberalized both import restrictions and the country’s financial sector.159
In both cases, Panagariya’s evidence leaves those crediting industrial policy with Taiwan and South Korea’s growth to argue not that government interventions boosted growth above that which a more liberalized regime would have produced, but instead that such benefits cannot be dismissed as implausible.160 Such a standard is hardly a ringing endorsement of industrial policy, but even it is too kind, given that—as Panagariya also shows—the less‐interventionist Singapore, Hong Kong, and Taiwan grew faster than the more interventionist South Korea.161 Indeed, a 1991 analysis from economists Jaime de Melo and David Roland‐Holst finds that South Korea’s industrial policies in the 1970s erected barriers to entry and allowed incumbent firms to exploit their policy‐induced market power, and that additional liberalization would have increased national welfare by as much as 10 percent of GDP.162
Finally, industrial policy successes must be balanced against the numerous failures of such policies in countries around the world. This includes not only the U.S. policies noted in this paper, but also well‐known debacles abroad, such as British automotive, aviation, and computer efforts in the 1960s and 1970s; French “national champions” in computers and machine tools during the same period; numerous European technology projects in the 1990s and 2000s; Argentina’s national smartphone initiative (and several other consumer electronics failures); Tunisia’s “Ben Ali” firms (named after the country’s leader, who owned most of the favored firms); India’s Planning Commission and License Raj between the 1950s and early 1990s; and numerous iterations of Brazilian automotive policy.163 Other, lesser‐known industrial policy failures are also plentiful.164
The China Threat
American industrial policy advocates, including high‐level officials in the Biden administration, routinely cite China’s growing economic and geopolitical power—both supposedly fueled by Chinese government industrial policy—as necessitating urgent federal government action.165 China’s recent and troubling embrace of illiberalism and expansionism, as well as the COVID-19 challenges to U.S. and global supply chains, have amplified these views and lead to a bipartisan push for American industrial policy in order to counter the China threat.
However, while China’s deepening authoritarianism surely warrants criticism and attention, the view that Chinese industrial policy is an urgent threat to the United States—one justifying a broad rejection of free markets and strong embrace of American industrial policy—is misguided. Similar to that of its Asian neighbors, China’s rapid growth since the 1980s can be largely attributed to market‐based domestic reforms following decades of self‐imposed poverty, and its general liberalization of trade and investment policy, including its accession to the WTO—not industrial policy. Despite this “catch‐up growth,” moreover, China still lags behind the United States in both GDP per capita and in many important industries. Chinese industrial policy may have helped some other industries, perhaps even overtaking Western competitors in the process, but the cost of doing so was enormous, and those policies have introduced systemic challenges that could hamper future growth. China also faces several other headwinds, financially and demographically, that could derail its ascension to the top of the global economic order.
Combined, these facts rebut the all‐too‐common perception in the United States of China as an unstoppable economic juggernaut that—fueled by industrial policy—will inevitably overtake the United States unless we adopt similar policies here. American industrial policy should be considered on its own merits, not on the basis of an overwrought fear of the China threat.
China’s Rise and Subsequent Embrace of Industrial Policy
China’s economic rise is undeniable. Growth in GDP per capita over the past four decades has been relatively steady, with a slight decline over the past decade (see Figure 16), at rates easily surpassing the United States and other countries. Furthermore, China’s share of global trade grew from 3 percent in 1995 to 12 percent in 2018, and China is now the world’s largest manufacturing nation, with growing high‐tech and internet industries. Over the same period, China became the world’s second largest economy and the largest trading partner of many economies, including the European Union.166
Little of China’s impressive historic growth, however, can be attributed the nation’s industrial policies. Instead, China’s economic outperformance began during its period of reform and opening up in 1978 (starting from a very low, communism‐induced baseline), followed by its integration into the multilateral trading system—that is, the World Trade Organization—in 2001 and the requisite structural and economic changes that accession required. For example, a 2012 study by the University of Toronto’s Xiaodong Zhu concluded that China’s growth was driven not by capital investment but by productivity growth, which can be attributed to “gradual and persistent institutional change and policy reforms that have reduced distortions and improved economic incentives.”167 Numerous other economists have found that most of China’s export competitiveness stems from internal, market‐based reforms—on property rights, privatization, price controls, trading rights, and import liberalization, for example—that are often initiated in response to new WTO commitments.168
Along the same lines, Barry Naughton, an economist specializing in China, and author of The Rise of China’s Industrial Policy, explains that China’s impressive pre‐2010 economic growth did not result from the type of top‐down industrial planning and state intervention that has become prevalent in China today. He notes that
there is a huge disconnect between the success that we attribute to the Chinese economy today and the orientation of Chinese policy today. China’s emergence as an economic and technological super‐power is due primarily to the policy package that it followed from 1978 through the first decade of the 21st century, that is, until about 2006–7. China’s policy package today—that is, the policies that started tentatively after 2005 but were fully in place by 2008–2010—are radically different. Because of this, it is a mistake to attribute China’s success to the policies China is currently following.169
By contrast, Naughton agrees with many other economists that the driving force of Chinese industrial development was market‐oriented reforms, with the government primarily relying on market forces and minimizing direct interventions; economic success was particularly tied to China’s WTO entry.170 “How much of that success could be attributed to industrial policy and planning?” Naughton asks. “The answer is simple: none.”171
As Naughton notes, the Chinese industrial policies that American critics are targeting today only began in 2006, when Beijing adopted plans focusing on innovation and seeking to match the industrial capabilities of advanced economies. The 2008 global financial crisis amplified these efforts, and by 2010 China established innovation priorities for strategic emerging industries programs with its desire to surpass, not merely match, other nations.172 Five years later, China adopted a new wave of industrial policies that were focused on emerging and general‐purpose technologies and supported by new public‐private industrial guidance funds, which allowed it to become a technological frontrunner.
Today, Chinese industrial policy covers a wide range of government actions, including direct investments, budgetary support, cheap loans, tax breaks, and regulatory preferences, and it is therefore difficult to estimate these initiatives’ total price tag.173 However, the industrial guidance funds offer some insights into the magnitude of China’s industrial policy: by June 2020, these funds had raised approximately 40 percent ($672 billion) of a targeted $1.55 trillion goal, the majority of which (61 percent or possibly higher) is dedicated to high technology and advanced manufacturing, with infrastructure, agriculture, and other services also prioritized.174
Chinese Industrial Policy’s Mixed Record
While American politicians and pundits often portray Chinese industrial policies as uniformly successful, the reality is much more complicated. Surely, not all Chinese industrial policies have been costly failures. The China State Grid Corporation, for example, developed ultra‐high‐voltage transmission projects and is now a world leader in the field.175 Similarly, industrial planning and subsidies have helped cultivate China’s renewable energy sector, which now leads the renewable energy output worldwide.176 China’s industrial policies in steelmaking, high‐speed rail, and machinery have also helped the nation become a global economic power in those industries.177
Chinese industrial policy successes are matched by failures. Perhaps the most notable example is China’s unsuccessful decades‐long quest to be a global leader in semiconductors.
However, Chinese industrial policy successes are matched by failures. Perhaps the most notable example is China’s unsuccessful decades‐long quest to be a global leader in semiconductors, an industry considered by U.S. industrial policy advocates as “too critical to fail.”178 Despite receiving billions of dollars in government funding and being prioritized in government policy documents, such as the Guidelines to Promote a National Integrated Circuit Industry, Made in China 2025, and the Technical Area Roadmap, China’s domestic players are still, by most expert accounts, decades behind the world’s best producers.179 Its share of the global installed semiconductor capacity jumped from 1 percent in 2000 to 15 percent by 2020, but three‐fourths of that capacity is owned by foreign multinationals.180
Government support also has not stopped six multibillion‐dollar Chinese chip projects from failing over the past two years, and high‐profile manufacturers, including Wuhan Hongxin, Tacoma, and Dehuai, have dissolved or declared bankruptcy.181 The manufacturers that have survived are still two to three generations behind the United States, not to mention the current industry leader, Taiwan Semiconductor Manufacturing (TSMC), and China’s national champion, Semiconductor Manufacturing International Corporation (SMIC), are developing facilities to produce chips that are much smaller and less technologically developed than the world’s leading firms.182 By contrast, China’s major advances have come in the form of less technically challenging and more labor‐intensive back‐end manufacturing and “fabless” design companies that have low barriers to entry because of widely available design tools.183
China’s Semiconductor Manufacturing International Corporation and other producers also remain heavily reliant on the United States and other countries for semiconductor manufacturing equipment, which is why current Chinese industrial policy is focused on simply surviving U.S. sanctions, rather than leading the world.184 According to a 2021 report in Japanese newspaper Nikkei:
U.S. research firm IC Insights in January predicted that China’s self‐sufficiency ratio for semiconductors would be only 19.4% in 2025. This was a slight downward correction after the firm in 2020 predicted the ratio would rise to 20.7% by 2024. It also noted that over half of the ratio was accounted for by mainland China units of overseas manufacturers, such as Taiwan Semiconductor Manufacturing (TSMC), and South Korea’s SK Hynix and Samsung Electronics, with the self‐sufficiency ratio that involves only Chinese manufacturers estimated at around 10%.
China’s government under Xi had put large amounts of subsidies into semiconductor projects across the country until 2020, but the results of the funding were limited, with many projects failing. The government now seldom mentions the 70% self‐sufficiency target laid out in its Made in China 2025 industrial policy.185
Indeed, industrial policy shoulders much of the blame for the current state of the Chinese semiconductor industry, which features rampant misallocation of resources, ineffective implementation, corruption, and a significant shortage of human capital, as well as heavy reliance on well‐funded but uncompetitive state‐owned enterprises (SOEs).186 Future success is also far from guaranteed. According to Christopher Thomas from the Brookings Institution, most segments of China’s semiconductor industry trail its foreign competitors and face numerous economic obstacles to catching up.187
Industrial guidance funds were intended to combine government direction with private capital and market forces, and have also proven to be unsuccessful. In particular, they have not met their objective of attracting private investors and instead rely on state‐owned entities for funding.188 Because of poor management and risk assessment, moreover, many funds are underinvested, redundant, or wasted on illicit activities.189 It is also unlikely that these investments, if they materialize, will be profitable, because the government is targeting only a 5 percent rate of return in order to focus on social objectives like acquiring intellectual property and expanding domestic output rather than profits.190 Even these alternative goals, however, could prove to be wishful thinking, because history has repeatedly shown that new general‐purpose technologies spread slowly through an economy and have effects that were often difficult to foresee.191
Even where Chinese industrial policy has developed a competitive industry, its efforts in electric vehicles show that the costs can be astronomical, successes modest, and future, market‐based growth uncertain. The Chinese government started providing subsidies to the EV industry in 2009, aiming to develop quality domestic manufacturers and a domestic supply chain ecosystem.192 These subsidies helped Chinese firms to go from 10 percent of global market share in 2011 to 53 percent in 2019, with 1.5 million electric vehicles sold in China in 2018 alone.193
It is estimated, however, that the Chinese government spent nearly $60 billion cultivating its EV industry between 2009 and 2017, through a mixture of R&D grants, consumer subsidies, public procurement, and local protectionism. These subsidies may have created an EV market from scratch, but they also produced numerous problems that made the Chinese government fear that it was repeating the same mistakes it made when trying to boost its traditional auto industry. In particular:
Instances of fraud and collusion were made public by a 2016 government investigation. In several instances, manufacturers received subsidies for vehicles that existed only on paper or that were equipped with batteries that didn’t meet subsidy eligibility requirements. In some cases, vehicles were sold to companies related to the manufacturer so they could pocket the subsidies.
The cost of subsidies may have been worthwhile if the irrational exuberance that accompanied this “let 100 EV firms bloom” period also led the way in technological superiority. Yet even as registered EV firms mushroomed to more than 400 by 2018, according to some estimates, only about 15% of them are actually manufacturing cars. The vast majority of these firms appears to have either not reached the production stage or have products of questionable quality.194
The Chinese government quickly curtailed EV subsidies and shifted to a market‐based program emphasizing quality, fuel efficiency, and competition.195 (It is far from certain that the U.S. political system could so quickly permit the same.) The EV sector, however, may not be sustainable in the absence of state interventions, as consumer subsidies alone accounted for one‐quarter of total EV sales. Indeed, sales in China declined by 20 percent in 2019 compared to 2018, shortly after subsidies to private passenger EVs were terminated in June 2019.196 Chinese EV companies still lag behind the world’s leaders, and the United States’ Tesla is venerated there.197
China’s shipbuilding sector offers another example of industrial policy subsidies not commensurate with returns. According to a 2019 study from Panle Jia Barwick and colleagues, Chinese industrial policy generated more production and investment in the domestic shipbuilding industry, but not only did it come at a very high cost; it also generated “sizable distortions,” industry fragmentation, and increased idleness. The authors estimate that, between 2006 and 2013, the Chinese government directed policy support totaling 550 billion renminbi (RMB) (approximately $80 billion at the time) to the shipbuilding industry, but these subsidies generated only 145 billion RMB ($21 billion) of net profit for domestic producers. Furthermore, a large share of the subsidies (230 billion RMB/$33 billion) went to global ship owners—of which Chinese shipping companies are a small share—via lower ship prices.198
Similar evidence of Chinese industrial policy problems can be found in its domestic aircraft and automotive manufacturing industries, as well as 3G mobile technologies.199 These and other examples call into question the overall economic benefits of China’s recent embrace of industrial policy. Not only do projects’ direct costs often outweigh their benefits (if there are any), but the broader costs imposed by China’s industrial policies may actually hinder rather than accelerate China’s economic development. In particular, China’s industrial policies have been shown to create the following problems that hinder stable, long‐term economic growth.
According to a 2013 government audit, for example, the new energy sector generated 1.6 billion RMB (approximately $258 million) of misallocated funds between 2011 and 2012.200 A 2021 paper from Chong‐En Bai and colleagues finds significant talent misallocation in China, with potential entrepreneurs instead being attracted to the large state sector.201 Given the extent of Chinese industrial policy activities since 2010, not to mention the Chinese government’s penchant for downplaying economic problems in official statistics, the total amount of resource misallocation—capital, labor, materials, equipment, and time—caused by such policies is likely substantial.
Corrupt behavior stems from the state’s control over resources and financing, and is evident in Chinese sectors such as tobacco, banking, and infrastructure, in which state monopolies dominate.202 In general, corruption is more prominent in countries with active industrial policies, and this is appears to be the case in China, too: according to Transparency International’s Corruption Perceptions Index, China ranks 87th out of 180 countries, indicating a fairly high level of corruption.203 Such corruption slows economic growth and development by thwarting competition, deterring investment, exacerbating market distortions, and reducing tax revenue.204
Chinese industrial policies also have created investment bubbles and overcapacity in many targeted industries—bubbles that Beijing is now trying to deflate. For example, both China’s semiconductor and EV industries show signs of irrational exuberance and financially stressed “paper companies” that will never be productive. The large‐scale bankruptcies and business failures associated with Chinese industrial policies contribute to broader financial challenges in China, such as its growing debt load and share of nonperforming commercial loans.
Meanwhile, the subsidized companies that survive may engage in duplicative projects or produce too many goods, resulting in overcapacity (where supply exceeds demand). We can find evidence of subsidy‐induced overproduction in China’s steel, cement, chemical fiber, aluminum, solar panel, and other industries.205 This not only threatens China’s economy, but also fuels tensions among China’s trading partners and generates global economic distortions. Chinese government efforts to rein in overcapacity have thus far had limited success.
Finally, one must consider whether the United States could emulate Chinese industrial policy, even if doing so were desirable. China’s industrial policy model is unique: the Chinese government controls a large share of the economy and therefore has an enormous amount of money at its disposal. As Naughton explains, this “puts limits on the degree to which industrial policies can impose costly distortions on the economy.”206 The U.S. system—thankfully—lacks such characteristics and would therefore suffer far more damage from “China‐style” industrial policy interventions. As noted above, moreover, the United States also differs from China in that our political system is less tolerant of costly public failures, particularly in the commercial (as opposed to, say, national defense) arena. Popular backlash, which the U.S. system fortunately permits (again, unlike China), would be all but guaranteed.
China’s Systemic Challenges
China also faces broader systemic challenges that call its future global economic dominance into question.
China also faces broader systemic challenges that call its future global economic dominance into question. First, China is experiencing significant demographic headwinds that will only accelerate in the coming years. Despite relaxing its decades‐long family planning policy, China continues to have a falling birth rate. Last year, its population rose to only 1.41 billion from 1.40 billion in 2019, with individuals over 60 now accounting for almost one‐fifth of the population.207 An aging China creates pressures on its health care system and the overall economy.208
China could offset demographic concerns with rising productivity (it appears uninterested in immigration), but this factor is also lagging—likely due in part to Chinese industrial policy. According to a 2020 International Monetary Fund Report, China’s average productivity rate, as shown in Figure 17, is only a third of that in other developed economies—including Japan, Germany, and the United States.209
A 2014 study published by Europe China Research and Advice Network corroborates the International Monetary Fund’s findings: although Chinese Global 500 firms grew from 3 in 1995 to 89 in 2013, these firms compared unfavorably to their Western counterparts, with larger payrolls, less capital intensity (assets/employees), lower profitability, and fewer innovation capacities.210
It is an open question as to whether China will catch up to more productive developed economies. China’s productivity growth has stagnated in recent years, with average annual growth dropping from 3.5 percent between 2007 and 2012 to only 0.6 percent from 2012 to 2017.211 Growth in total factor productivity is now only a third of what it was before the Great Recession, a much sharper decline than other countries have experienced.212 As noted by the Wall Street Journal, much of China’s productivity slowdown is attributable to the government’s “massive stimulus program to prop up economic growth” instituted after the financial crisis, and productivity has further deteriorated under President Xi Jinping.213 Other contributors to China’s slowdown include recent government efforts to control private businesses, especially technology firms, and growing bureaucratization, which has confounded central government efforts to implement economic and social reforms that might boost national productivity.214
Inefficient SOEs are also a significant cause of China’s productivity issues. Despite constituting a smaller share of China’s economy today as compared with decades ago, “SOEs are dominant in key industries, including energy, aviation, finance, telecoms and transportation.”215 A 2021 Bruegel study similarly finds that “China’s competitive environment is generally poor,” with Chinese SOEs generally in an “advantageous position” across most economic sectors.216 However, even though SOEs benefit from privileged access to credit and other resources, they lag in productivity behind privately‐owned counterparts by 20 percent.217 As noted by Cato adjunct scholar Terence Kealey, “as judged by the numbers of patents granted for every unit of investment in R&D, private companies in China are three times more efficient than are state‐owned enterprises.”218
Unfortunately, Chinese SOEs’ economic prominence appears to be growing, with the government increasingly favoring these entities, while cracking down on private firms and entrepreneurs and limiting foreign investment. As explained by China expert Nicholas Borst, much of SOEs’ rise is attributable to Chinese industrial policy: “State‐owned firms have been at the forefront of the Chinese government’s drive to develop domestic sources of key technologies, such as semiconductors.”219
Finally (and in part due to the aforementioned issues), China faces a growing debt burden that will, unless tamed, weigh on future growth. China’s debt‐to‐GDP ratio reached approximately 280 percent in 2020 (295 percent if foreign debt is included), the majority of which is in the form of corporate bank loans. However, China’s banks—long considered tools of Chinese industrial policy (via, for example, low‐interest loans to preferred industries)—are showing signs of strain. In 2020, Chinese banks had a record high of $466.9 billion in nonperforming assets—a number that is expected to continue rising.220 According to the Bank of Finland, moreover, “China was already engaged in efforts to bail out small and medium‐sized banks before covid‐19 struck,” and stress tests released by the People’s Bank of China in November 2020 showed that 10 of 30 banks—including all of China’s systemically critical banks—would fail under even mild stress scenarios.221
Chinese government debt may be more manageable (constituting approximately 70 percent of GDP), but it is expected to expand significantly in the coming years as the government funds a social safety net for its aging population.222 Certain Chinese industrial policy projects, such as high‐speed rail, also contribute to China’s growing public debt burden.223 As the same Bank of Finland analysis explains, China’s substantial increase in debt has long concerned observers of the Chinese economy, because similar trends in other countries’ indebtedness have typically led to economic collapse or banking crises. While a crisis seems unlikely in the near term, such concerns are almost certain to weigh on future growth and other government initiatives.
It is possible that China can overcome these economic headwinds and others, including environmental degradation, overseas project failures, restive populations, alienation of foreign firms, and increasing illiberalism.224 It is undeniably a large economy with an increasingly educated population. But China’s economic challenges, caused in no small part by its relatively recent embrace of industrial policy, argue strongly against the implementation of a U.S. industrial policy as a last‐ditch effort to counter an unstoppable global hegemon.
Advocates for industrial policy often leave unanswered several important questions about its efficacy and necessity.
Resurgent calls for American industrial policy suffer from several flaws. They depend on a malleable definition that prevents legitimate analysis, omits past industrial policy failures, and takes credit—often absurdly—for innovations only tangentially related, at best, to government action. They ignore the many economic, political, and practical obstacles that have historically prevented U.S. industrial policies from producing market‐beating outcomes. They claim, often without support, to solve problems—deindustrialization and declining American innovation, the disappearance of good jobs, the erosion of middle‐class living standards, and the destruction of American communities—that are often exaggerated or most likely cannot be solved via industrial planning. And they erroneously use the experiences of other countries, particularly China, to justify new American industrial policy.
Surely, not every U.S. industrial policy effort has ended in disaster, but facts both here and abroad argue strongly against new government efforts to boost critical industries and workers and thereby fix alleged market failures.
In reality, industrial policy, as properly defined, has an extensive and underwhelming history in the United States, featuring both seen and unseen high costs, failed objectives, and political manipulation. Surely, not every U.S. industrial policy effort has ended in disaster, but facts both here and abroad argue strongly against new government efforts to boost critical industries and workers and thereby fix alleged market failures. Such efforts warrant intense skepticism—skepticism that today is unfortunately in short supply.
Lincicome, Scott, and Huan Zhu. “Questioning Industrial Policy: Why Government Manufacturing Plans Are Ineffective and Unnecessary,” White Paper, Cato Institute, Washington, DC, September 28, 2021. https://doi.org/10.36009/WP.20210928.
Neoliberals and libertarians also criticize the fact that Oren Cass uses the term libertarianism very broadly and uses it as a scapegoat, enemy image and straw man for his own alleged anti-market hidden agenda. For example, The Washington Examiner writes:
“Market-skeptical conservative group forms to wage war on a straw man
by Brad Polumbo
February 19, 2020 07:00 AM
A new group, American Compass, launched on Tuesday to much fanfare. The group’s mission is reportedly “going back and finding things that always were part of the American tradition that have been important to conservative thinkers but that seem to have gotten lost in the more market-fundamentalist mode of, especially, the last 20 to 30 years.”
Led by former Manhattan Institute scholar Oren Cass, the group has drawn impressive names to its nascent effort to charter an intellectual course for the nationalist Right.
There’s just one problem: The “market-skeptical” conservative movement is railing against an imaginary libertarian GOP orthodoxy that does not and, frankly, never really has existed. The idea motivating this entire project is completely detached from reality and all recent political history.
Cass posits that the GOP has “outsourc[ed] economic policymaking to libertarian ‘fundamentalists’ who see the free market as an end unto itself.” In this, he and his ideological allies are waging war on a straw man.
Consider the GOP in recent decades. Has it really been “free market fundamentalist” and obsessed with fiscal conservatism? I wish. In reality, the supposedly libertarian Republican Party and free market conservative intelligentsia have presided over an explosion in the scope of the federal government and the addition of trillions to the federal debt.
According to the Cato Institute, President George W. Bush actually grew the federal government faster than his Democratic successor, President Barack Obama. Under Bush, federal employment grew nearly 14%, as compared to just 8% under Obama. Meanwhile, far from balancing the budget, the Bush administration added a whopping $6 trillion to the national debt. Oh, and Bush even instituted tariffs to protect the steel industry, the kind of anti-market policy these new conservatives apparently stand for. The tariffs failed horribly, for what it’s worth.
Is that GOP record really what “rigid libertarian orthodoxy” looks like?
It’s not just Bush, either. As far as congressional Republicans go, they’ve hardly been any more “fundamentalist” in their commitment to free market economics in recent decades. The GOP has repeatedly helped pass socialist “farm bills” subsidizing rich landowners and agricultural interests, fought for bloated defense budgets, and protected socialist international subsidy programs such as the Export-Import Bank.
So, Cass and other market-skeptical conservative critics have it entirely backward — the real problem is that, in the last several decades, the GOP hasn’t been fiscally conservative or committed to free markets.
Of course, we should all welcome the emergence of new ideas and energy into the conservative intellectual movement. There’s little doubt that new policies and new voices are sorely needed. Yet, attacking a straw man of a libertarian-dominated GOP accomplishes nothing. Market-skeptical conservatives ought to launch an intellectual war against something that actually exists.
In any case, The Economist has already reported that Trump’s new right is now also building new think tanks and institutions corresponding to the existing conservative establishment Republican think tanks such as AEI, Heritage Foundation and others.
“A Washington army in waiting
In preparation for power, America’s new right builds new institutions
The movement inspired by Donald Trump entrenches itself in Washington, DC”
Oren Cass and his American Compass is now also seen as an important vanguard of the new conservatism within US conservatism, as the following article in The American Conservative makes clear:
“American Compass, Moving the Needle
Oren Cass’s pro-worker, pro-family think tank has exercised surprising influence on the broader conservative movement.
Sep 20, 2022 12:30 PM
In 2011, in between his second and third years at Harvard Law School, Oren Cass joined Mitt Romney’s presidential campaign as a summer fellow. As editor of the Harvard Law Review, Cass had acquired a reputation as a rising expert on trade and technology. The campaign put him in charge of what internally was called the „jobs book,“ and later became Romney’s „59-point plan“ to jump-start a sputtering economy.
As the platform began to take shape, Cass was asked to brief Romney on trade. He assembled a PowerPoint littered with shopworn Republican platitudes about the virtues of globalization; he called the World Trade Organization „the best hope for efficiently opening markets around the world.“ Romney thumbed through the proposal and said, “That’s fine. But what are we going to do about China?”
Cass didn’t have an answer. Few right-wing economists had even grappled with the question, and most of the ones who had thought it was foolish—why wouldn’t we let China send us cheap stuff? Cass told me he found the mainstream conservative treatment of the issue „incredibly superficial and poorly developed.“ So he kept digging. And after stumbling upon the work of thinkers like Robert Lighthizer, Dani Rodrick, and Clyde Prestowitz, Cass considered that America’s becoming dependent on a mercantilist dictatorship with a burgeoning industrial base was, at the very least, a national-security threat that couldn’t be addressed by blind faith in market forces.
By summer’s end, Cass was named Romney’s domestic policy director. And the platform that emerged from his and Romney’s mind-meld was, in substance, shockingly Trumpian. Romney promised he would sanction China for manipulating its currency and stealing America’s intellectual property on his first day in office. He didn’t want a trade war with China, but said he didn’t want a „trade surrender either.“ Romney’s plan even drew the ire of the Wall Street Journal editorial board, which denounced parts of it as „crude“ and encouraged other Republican candidates to „repudiate“ his „China blunder.“
Cass counts the moment as formative, setting him off on a „journey“ through the right-wing policy ecosystem, challenging its cherished libertarian pieties on everything from trade to labor. His 2018 book, The Once and Future Worker, claimed that the labor market’s ability to sustain strong families and communities, not aggregate consumption, is „the central determinant“ of America’s „long-term prosperity.“
And after bouncing from consulting to blogging to the nonprofit world, he institutionalized that mission with the founding of American Compass in 2020, a small but influential Washington think tank crafting pro-family, pro-worker policy proposals and engaging critics in digital debates.
Compass is engaged in the long-running, internecine conservative dispute over globalization, industrial policy, and family subsidies that came to a head with the election of Donald Trump. In each case, Compass sides against the Reagan-era consensus that free markets and liberal trade policy always benefit the American worker. And it is trying to define a new course for a conservative movement that has tired of platitudes about „free markets and free people.“
„I always use the metaphor of a flagship,“ Cass told me of Compass’s founding mission, „for post-Trump conservatism, and in particular, for conservative economics.“
American Compass is small—a six-employee outfit headquartered in a converted yoga studio. It doesn’t love the label „think tank,“ which, as research director Wells King put it, is evocative of fellows who „sit at their desks and think long and hard for a long time and maybe produce one or two white papers a year.“ But Compass is similar to the established think tanks in that it is organized around an idea—to „restore an economic consensus that emphasizes the importance of family, community, and industry to the nation’s liberty and prosperity.“
That mission statement is a conscious pivot away from the current right-of-center economic consensus, which is laser-focused on slashing marginal tax rates for hedge-fund managers. And in contrast to its rival think tanks, Compass is grappling with the tensions between conservatism and unfettered capitalism. „Creative destruction“ upends businesses and ways of life that sustained communities for generations. The free movement of goods across national borders and the birth of international supply chains ship physical resources and know-how from American communities to those overseas. The collapse of American manufacturing has shunted once-employed men to the service industries, if they’re lucky, or drug abuse and Social Security fraud if they’re not. Financialization has created a caste of people whose livelihoods are removed from actual production and who increasingly hold their fellow countrymen in contempt.
Compass’s policy proposals, such as local content requirements, aggressive antitrust enforcement, generous child benefits, and a financial-transaction tax, call for interventions in the marketplace that would have been unthinkable for a conservative think tank ten years ago.
And that has won them their share of critics. Libertarian economist Michael Strain, who declined to be interviewed for this piece, dismissed Cass’s work in an interview with Jonah Goldberg as „mostly a source of confusion.“ That is of a piece with Compass’s other opponents, who think the debate on economics is settled: free trade gives us cheaper consumer goods and lower input costs for small businesses, and government action creates distortions in the marketplace. To intervene in the market, as Cass and Compass propose, would be to „pick winners and losers“ and adopt progressives‘ „big government“ pose.
King argues that those Reagan-era hang-ups have stunted the conservative movement’s ability to face the challenges of the modern economy, which is why Compass has rejected the „ideological approach that characterizes too much of the right of center.“ It also gives Compass „a more accurate assessment of what’s gone wrong in the economy,“ King said.
Take family policy. Conservatives have long cared about family structure and plummeting birth rates. But instead of hosting a well-funded roundtable on „cultural breakdown,“ King and Cass drafted Compass’s Family Income Supplemental Credit (FISC) proposal, which would pay families with young children up to $4,800 per year in monthly installments. It’s not a „tax break“ or trickle-down benefit from an „opportunity zone“—it’s money, straight from Uncle Sam, to families with kids.
The FISC proposal is a good example of how Compass operates. Sensing a fight over family policy brewing in the new Congress, Cass and other Compass staff rallied to draft a proposal that could serve as model legislation and was true to its organizational principles, providing relief for American families without creating disincentives to work.
Weeks before Compass published its proposal, Senator Mitt Romney had introduced the Family Security Act, which would give families a $350 cash benefit per month per young child. It did not, however, include a work requirement. Cass and King felt this omission would warp the relationship between families and the state.
Cass, King, and the Compass staff, while pleased with what King said was the senator’s „important, constructive“ work, felt the Compass plan, with its still relatively lax work requirement, „did better with conservative principles and priors.“ Shortly after Romney introduced FSA, Compass hosted a 30-minute discussion with the Utah senator. Romney was convinced by the discussion and later meetings, and created „FSA 2.0„—a streamlined benefit for working families that would provide qualified families with $350 per child per month.
As opposed to legacy think tanks, where fellows dedicate themselves to a niche cause and put out obscure white papers on their subject of interest twice a year, the FSA was an example of how Compass mobilizes its small team to move the needle on the Hill. Its targeted-strike approach has proven effective in other areas as well. Senator Tom Cotton’s American Workforce Plan, which would tax university endowments to pay for on-the-job training programs, was inspired by a Compass proposal. King and the Compass staff also provided research making the case for the CHIPS Act and influenced Marco Rubio’s new labor-reform bill.
„We deploy our entire team’s resources to focus on the mission,“ King said.
In debates, essays, and interviews, Cass has called for a „bounded economy.“ In the „bounded“ system Cass envisions, the flows of goods and services, capital, and people across national borders would be well controlled, with caps on immigration and creative regulations to induce domestic production. A bounded economy, Cass wrote, „imposes the necessary interdependence on labor and capital while also allowing for the actual benefits of trade that Smith and Ricardo described.“
Adam Smith and David Ricardo are frequently cited by both Cass and his critics. The two economists‘ views on trade have been the subject of intense debate; a famous economics textbook even omitted part of a quote from Smith’s The Wealth of Nations to make Smith out as an unreserved champion of international trade. Smith’s and Ricardo’s theories, particularly Ricardo’s theory of comparative advantage, are the foundations of our international-trade regime and at the heart of the debate in which Compass is engaged.
Ricardian theory holds that trade between nations will redound to the benefit of both countries, so long as the countries are producing those goods and services in which they have comparative advantage—that is, the industries in which they are relatively more efficient. Trade between such countries will produce a bundle of goods for both trading partners that exceeds what would have been possible had they not specialized and traded with one another.
That’s why many economists don’t object to China’s rise. Free trade, in their view, is good, as long as both sides are producing those goods in which they hold comparative advantage. “The economist’s case for free trade is essentially a unilateral case,“ said Paul Krugman. „A country serves its own interests by pursuing free trade regardless of what other countries may do.”
Veronique de Rugy, senior research fellow at the Mercatus Center, told me she was „a little baffled“ that people still believe trade deficits are a meaningful indicator of economic health. „Economists have explained this to others for years,“ she said, and „a lot of the remedies to try to address this notion that trade deficits are bad are actually hurting precisely the people that those who don’t like trade deficits are trying to help.“
Compass argues that it matters which goods and services are being traded, and whether that trade is sending critical industries and capital away from the United States and to our strategic rivals. As Cass told me:
Part of the problem is that if you expect the logic of comparative advantage to hold, but you have one country—China—that’s trying to strategically figure out what it wants to specialize in, and another country—America—that says, „Free markets will tell us what to specialize in“ (and that may be whatever’s left over that no one else wants to specialize in), then you can get a situation where you lose the expertise and the supply chains and competency in the stuff that’s actually most valuable, both for national and military power right away and what’s going to be healthiest for your economic trajectory in the long run.
And it’s not only a question of economic trajectory, but community health. Ron Hira, associate professor of political science at Howard University, argued that offshoring firms are „systematically transferring productive capabilities—knowledge, tools, and technologies—from one country to another.“ Once those assets leave a community, they rarely return. And that’s in part why Cass thinks de Rugy’s libertarian commitments at home are undermined by a liberal international trade regime.
„I think that’s where, ultimately, the libertarian rhetoric falls most flat,“ Cass said. „You can have free trade or you can have free markets. But you can’t actually have both.“
Since its founding in 2020, American Compass has moved the right-of-center conversation in Washington in a more pro-family, pro-worker direction. They’ve challenged old-guard institutions like the Heritage Foundation, who have begun to change their tune, ever so slightly. Kevin Roberts, Heritage’s new president, who did not respond to an interview request, made several concessions to Cass in a recent debate at the Reagan Foundation. Cass thinks this is indicative of Compass’s influence.
„I look back to early 2020, when Heritage, under prior leadership, hosted Senator Pat Toomey to speak about why this new turn on the right of center was wrong, mentioning me and American Compass by name,“ Cass told The American Conservative. „Then I look at my recent conversation with Kevin Roberts, and the extent to which he and Heritage have inched in our direction. To me, that’s an important microcosm of the impact that we’ve been able to have.“
Wes Hodges, former Compass coalitions director, said the organization has given young conservatives the tools to speak about economics outside the libertarian framework proposed by rival right-wing think tanks.
„American Compass has, by a good amount of work and a great amount of wit, built a vocabulary that allows people to talk about these economic topics in a way that is more nuanced and focused on our needs today,“ he said. „It has allowed offices on the Hill and young scholars-to-be to be able to actually engage on these ideas in a way that won’t immediately exile them.“
Editor’s note: An earlier version of this piece stated that Compass’s Family Income Supplemental Credit (FISC) proposed paying „families with young children $9,600 per year in monthly installments“; the correct figure is up to $4,800 per year, disbursed in monthly installments. It claimed Senator Romney’s FSA 2.0 would provide families up to $600 per child per month; the correct figure is $350 per child per month. It referred to Tom Cotton’s „Workforce Training Grant“; Cotton’s legislation is called the “American Workforce Act.” Finally, it claimed that King and Compass „provided the research that inspired the CHIPS Act“; Compass provided research that made the case for the CHIPS Act.
The American Conservative immediately cross-examined Oren Cass to find out more about his intentions:
“Seven Questions for Oren Cass on the New Conservatism
American Compass, a new organization dedicated to rethinking right-of-center economic orthodoxy, launches tomorrow.
May 4, 2020 12:54 PM
Editor’s Note: One of the leading figures in the post-Trump realignment of the GOP has been Oren Cass, whose book The Once and Future Worker was an attempt to rethink America’s labor structure for the 21st century, and cast a skeptical eye toward free-trade liberalism that has hurt the middle class. This week, his new organization launches, American Compass, which will put institutional structure behind some of these discussions. We caught up with Cass and asked him a few questions about how to think about right-of-center economic policy and some of his goals. These remarks have been slightly edited for clarity and succinctness.
AB: If I had to put my finger on the biggest way your recent work diverges from what conservatives are used to, it would be this: About a decade ago, when I first started working in conservative politics, we used to hear a lot about “culture.” Politics was downstream from culture, we had to change the culture rather than make laws, and that the best way to restore the place of families in American life was to do this, as if the success of families was unrelated to their economic circumstances. You obviously disagree. Why was this approach mistaken?
OC: The approach isn’t wrong, it’s just woefully incomplete. I think culture is incredibly important and changes in it contribute to all sorts of problems, and we should talk about all of that. But, and this is something I wrote about recently for First Things, we shouldn’t be using “culture problem” as some get-out-of-jail-free card to avoid talking about public policy. For one thing, while the “downstream” metaphor has some value, human society is not a one-directional process that just moves in neat order from one category to another. Yes, culture influences politics. But politics also influences culture. The economy is influenced by both and influences both. So the fact that a problem is in part cultural does not mean that it is not also other kinds of problems.
And when you have a problem with many causes, you don’t go looking for the causes you can’t address and say “well, nothing we can do”—at least, you don’t do that unless you’re looking for an excuse to justify inaction. You go looking for the causes you can address and ask “what can we do about those?”
Looking across the nation today at all manner of social dysfunction—and of course, the problems aren’t all the same, they don’t all have the same causes and the same solutions, but just to generalize for a moment—I think it’s impossible to make a claim that these are only cultural problems rather than economic, or that better public policy cannot help. Certainly, there’s a lot of good research showing the underlying connections, for instance between the labor market and family formation.
But just intuitively, the cultural shifts highlighted as explanatory tend to be quite broad and universal ones. In a sense, all Americans swim in the same cultural pond. And yet when we look for the social dysfunction, we find it all in precisely the segment of the population that is facing economic struggles and a labor market that has left them behind. You have all these people who go to college—and really, where is the quote-culture worse than on a college campus—who then have no trouble moving on to careers at which they work very hard, establishing strong, stable families and communities, and so on. Just as they did when the quote-culture was purportedly so different in the past. Meanwhile, you have all these people who are not completing college, who have seen a worsening of their economic prospects, and there you find a wide range of social maladies, bordering in some cases on social collapse. What a coincidence, if our national cultural just happened to bifurcate just as our economy has, leading to radically different social outcomes for different economic classes, in a way that has nothing to do with economics.
AB: Granting economics among the root causes, you still have the problem that American conservatism has typically been hostile to government, and especially national government. You’ve made a good case for a more vigorous role for the government to play, but there is still a lot of mistrust among conservatives, much of it justified, that will make them think industrial policy is likely to be set by the ITC or Commerce Department’s equivalent of a Lois Lerner or James Comey. What’s the best way to persuade conservatives that competent government in the interest of the common good is even possible?
OC: I think it’s healthy, and fair, to be skeptical of government. But I think the crucial question is: compared to what? There are many things, that if government doesn’t do them, no one is going to do them. So while it may be satisfying to shoot down proposals as imperfect, or unlikely to work as well as proponents hope, those concerns aren’t really relevant. The question is whether they are better than nothing—an improvement on the status quo. Lois Lerner and James Comey are great examples because, guess what, we still need an IRS and an FBI. And with Lerner in particular, conservatives still tend to like the idea of a charitable tax deduction, even knowing the potential for abuse.
More generally, we have lots of examples of huge government programs that are on balance positive: public education, social insurance, the military… by the way, I just described virtually our entire government budget. Yes, all those things have problems and suffer scandals. But you don’t hear a lot of calls to repeal them all, or people wishing we’d never pursued them. So I’m all for humility and skepticism, but in some senses this answer is a repeat of my answer on culture: those things shouldn’t be used as an excuse for inaction.
When it comes to industrial policy, for instance, the question isn’t whether some federal agency is going to miraculously build the industries of tomorrow from scratch; of course it isn’t. The question is: given all our challenges, the hollowing out of industry, stalled productivity growth, aggressive strategies pursued by other countries, is trying to adopt some form of industrial policy preferable to doing nothing? It will have costs as well as benefits, there will surely be embarrassments along the way, it won’t deliver 100% of what we wish it would. But if we can agree there’s a problem, and see a path to programs that on balance would offer benefits, then that’s a pretty strong case for pursuing it—and for pursuing it in a way that tries to limit arbitrary power, preserve markets, and so on. The way to advance conservative values is to us them in the formulation of public policy, not just as an excuse to avoid formulating public policy.
AB: Let’s make that more concrete. For instance, today it does look like some consensus is developing that we should bring certain vital industries back to the United States, drug manufacturing for instance. If that were to happen, it seems to me we might see a big argument about where to put them, with libertarian conservatives wanting maybe Utah or Arizona, and populists wanting them to go to union states in the rust belt. How should we be thinking about these sorts of problems?
OC: This is a great example. Bringing back industries doesn’t have to mean a government program that picks which states to build factories in. The right way to think about economic policy generally, and in this instance industrial policy, is to step back and recognize that markets generate outcomes in response to the conditions they are operating in. This isn’t about the market being free or unfree. It’s about how we choose to educate, how we choose to regulate, how we choose to invest in research, how we manage trading relationships with countries whose own markets are decidedly unfree, and so on.
So if we want vital supply chains to return to the U.S., we should start by asking why did they leave, and under what different conditions would they have stayed, or be likely to return? And then we should try to create those conditions. Just as a hypothetical example, in the drug manufacturing context, what if we said that drug patents expire sooner if used for manufacturing outside the country? Or what if we said that Medicare pays a higher reimbursement rate for drugs manufactured inside the country? Or created a bank that made zero-interest loans for the construction of new manufacturing facilities of all kinds? Or created a fast-track permitting system that ensured site review and approval within one year and allowed no further legal challenges?
Every one of those ideas has pros and cons, and there are plenty of other approaches too. In fact, next month American Compass is hosting an online symposium where leading experts will each lay out the case for a different approach to encourage reshoring of supply chains. That’s the kind of policy development we need, that existing institutions have really failed to facilitate. But the point is, none of them entails bureaucrats choosing which state to put a factory in. They require policymakers to have a goal in mind—we have to be willing to say, “yes, we care where these things get made” instead of just “wherever the market wants to make them is best.” They require the crafting of policies in pursuit of that goal, which will surely be imperfect in many ways. But there’s no question that policy could help create conditions in which drug manufacturers would be more likely to construct plants in the United States.
AB: The Washington Post reported that Mitch McConnell is telling his caucus to resist Trump’s infrastructure spending impulses. It seems at the very least that we are likely to see a lot of resistance to the ideas you’ve been talking about from the traditional Republican donor class. It seems some of these people have assigned Pat Toomey and Nikki Haley to denounce your views as well at the Heritage Foundation and in the Wall Street Journal. What’s the plan for bringing the GOP around on some pro-worker, pro-industry policies?
OC: I think “assigned” is a bit harsh. How about “encouraged” or “invited”?
OC: OK, well you’re certainly correct that there is a lot of resistance within the right-of-center, from politicians, from institutions, and from donors. But I think it’s really important to distinguish among types of resistance. There are some true believers who have really convinced themselves of these quirky, unsupported theories that the smallest government and the least attention to the market’s operation generates the best outcomes. Mostly, though, you have people who haven’t thought critically about the issues and are just going with the flow of existing orthodoxy. And then, when it comes to politicians in particular, you encounter the meta problem where many are focused less on what they believe than on what everyone else believes, and it becomes a self-fulfilling prophecy where everyone thinks everyone else is committed to market fundamentalism and so they should be too.
So on one hand, you’re right, it feels like this overwhelming consensus. But on the other hand, it’s a spectacularly fragile one—like a crowd all pretending a naked emperor is splendidly dressed. And my experience has been that if you’re just willing to say, “actually, that’s not true,” and point out with logic and evidence that these basic tenets are not supportable, the whole façade collapses pretty quickly. And you may not have a lot of success that way with someone who has already dedicated a career to arguing the contrary. But with people who are open-minded, and with the kinds of people who will be defining the future direction of the right-of-center, I think there’s tremendous opportunity.
AB: Of course, there are also a lot of bets against you. When Donald Trump leaves office, either in 2021 or 2025, a lot of people in Washington expect, and perhaps even hope, that conservative politics will return to its previous melange of casino capitalism and permanent war. It isn’t obvious to me that this “national conservative” moment or whatever you want to call it is more than a flash in the pan yet. Tell us why that’s wrong.
OC: Well, what you’ve described is exactly the impetus for American Compass. If you look out across the right-of-center at individuals, you see this incredible intellectual energy and creativity and eagerness to return to first principles and formulate a conservatism that is responsive to the challenges of a modern economy. And then you adjust the setting on your binoculars so that you’re looking at institutions, and it all disappears. Within just about every institution, from Heritage and AEI to the Wall Street Journal and National Review to name your Senate office or agency, you find people excited by the idea that conservatism means more than just tax cuts, and in fact doesn’t really have anything to do with tax cuts. But the institutions themselves are, by and large, creatures of inertia.
I don’t think it should be surprising that even years into this enormous disruption within right-of-center politics, the institutions aren’t especially interested in reform, rather they’re putting their heads down and hoping that Trump too shall pass. And if this were about Trump, maybe that would be right. But it’s not about Trump. I think he has probably accelerated the process, but the fusionist coalition of economic libertarians, social conservatives, and defense hawks that carried the right-of-center through the Cold War is way past its expiration date. And this is something that the people you see leading these efforts now were already talking about long before Trump descended down the Trump Tower escalator.
Go look at what Senator Hawley was writing in National Affairs eight years ago. Or the way Senator Rubio was talking about fighting poverty. Or, for that matter, my essays in National Review, calling for confronting China on trade and challenging conservatives to take inequality seriously. Go back to 2008 and look at what Reihan Salam and Ross Douthat wrote in Grand New Party. The right-of-center was overdue for change, and a lot of the same forces that drove Trump’s success—things like the hollowing out of American industry, the deaths of despair—were also going to catalyze a firm rejection by conservatives of libertarian pieties and a reevaluation of what conservatism should stand for.
So I understand why the institutions want to go back to how things used to be, and have perhaps even convinced themselves that there’s a chance of that, but in reality there’s not. Their ideas and their coalition just do not hold together any more. The question is what comes next. And to advance that debate, there have to be institutions on the other side of it. And the goal of American Compass is to be such an institution.
AB: You’ve been on the right your whole career, but I want to ask you about the left. In the UK and to a lesser extent with the Bernie Sanders campaign, working class people have deserted socialist candidates in rather embarrassing electoral defeats. At the same time, Trump’s election continued the trend of Republican voters skewing downscale. The vision laid out in The Once and Future Worker is mostly about policy, but is it also good politics?
OC: I’m a real believer, maybe somewhat naively, that ideas matter and that it is good politics to have a coherent, defensible platform that addresses people’s actual concerns and the nation’s actual challenges. And so by that standard, yes I think it’s good politics.
That still leaves the question of what the coalition looks like. Because of course, no particular approach is going to suddenly attract 80 percent of the electorate. The other side adjusts as well, and you end up back at 50/50, or maybe 55/45 if you’ve really got your act together and your opponents don’t. The political scientists will blather on about median voter theorem and such things, but I think the better explanation is that politics and policy, like life, is full of tradeoffs. Every now and then you can find a free-lunch win-win, but by and large, if you’re serious about making changes to benefit some people, that is going to hurt others—often those happiest with the status quo.
This is a point I spend a lot of time on in The Once and Future Worker, that one of the great faults of our existing economic consensus is that it just takes all of the arrangements that most benefit well-educated knowledge workers—on globalization and immigration, on environmental regulation, on education, on labor, and so on—and tries to sell them as in fact best for everyone. And that’s just not true. Reorienting our policy framework and society to the advantage of those who have been left behind in recent decades is something we should do, indeed that we have to do if we want to survive as a free-market democracy, but that means reorienting it away from today’s “winners.”
And while people intuitively think of progressives as the group likely to be sympathetic to people who are struggling, in fact the progressive ideology is much more likely to believe that it can avoid tradeoffs entirely and instead develop some new social model, some set of programs that overcomes human nature, and so that is obviously very attractive to people who don’t want to make any sacrifices. It is conservatives who are more likely to recognize the inevitably of tradeoffs, the importance of preserving the non-negotiable foundations of our society—things like strong communities built on people’s rootedness to a place, the value of work and the importance of supporting a family and being a productive contributor to society.
So I think that’s where we’re headed—toward a progressive party that tries to march ahead on our current course with ever more redistribution as a backstop, and a conservative party that pushes to reverse some of our costly mistakes and restore the conditions that we know are necessary for people to flourish. A key question, in my mind, is whether conservatives can persuade enough people who might personally thrive in the progressive regime to look beyond their narrow self-interest and recognize that their preferred model simply isn’t sustainable; that for the common good and ultimately their own good, we need to pursue a different course.
AB: If you were to do a “Conservative Mind”-style run-down of where we might go in American history to find figures who are sympathetic to your vision, who are some people we might look to? In the more recent past one might point out that Pat Buchanan has been a big critic of free trade and consumption-oriented societies.
OC: This is an easy one—so many of the great American statesmen were sympathetic to the vision I’m describing. It’s the market fundamentalism of today that is a bizarre outlier. Washington and Hamilton both recognized the need for the national government to have a robust economic policy. John Quincy Adams. Henry Clay, of course, was the leading advocate for what he called the “American System,” which featured government intervention in the banking system, strong protection for domestic industry, and massive infrastructure projects—what they used to call internal improvements. Lincoln declared himself a Clay acolyte and pushed those policies further. Teddy Roosevelt obviously believed that public policy was critical to a well-functioning market. And on and on.
It’s really quite funny to look at the economic policy of the past and contrast it to the conventional wisdom of today. For much of American history we had among the world’s highest tariffs, at times we tightly restricted immigration, maintained punishingly high marginal tax rates, regulated the financial system so tightly that banks were not allowed multiple branches… how is that we didn’t collapse, and instead rose to become the world’s most powerful economy?
Today, economic policy pretty much means taxes and spending, and to the right-of-center it means tax cuts and deregulation—just getting out of the way. But historically, American policymakers thought deeply about the market’s underlying conditions—as I was discussing earlier in the context of the pharmaceutical plant. How could government build institutions and make investments and craft rules that would lead to a market that generated widespread prosperity? That’s the tradition we have to get back to.
About The Author
J. Arthur Bloom is managing editor of Modern Age and the former editor of The American Conservative online. He was previously deputy editor of the Daily Caller and a columnist for the Catholic Herald. He holds masters degrees in urban planning and American studies from the University of Kansas. His work has appeared in the Washington Post, the Washington Times, the Spectator (U.K.), the Guardian, Quillette, the American Spectator, Modern Age, and Tiny Mix Tapes.
Conversely, other conservatives criticize that Oren Cass, with his emphasis on the working class, might want to attack the middle and upper classes in the USA, to be a kind of proto-socialist with a potential shift to the left and an hidden agenda like Bernie Sanders and the progressives, especially since he also would accept money from democratic donors and left-wing forces. The National Review suspects American Compass of being a shift to the left and some kind of chameleon masquerading as New Conservatism. It is also interesting from which groups Oren Cass, as a formercampaign advisor to Mitt Romney, has recently received money.
“Does American Compass Point Left?
August 16, 2021 6:30 AM
When nominal conservatives start rushing to the left as left-wing dollars flow into their institutions, skepticism is warranted.
‘The Conservative Case for [Liberal Thing]” is a punchline. These “conservative cases” are drafted by think-tankers in the metaphorical hot-take mines who in many cases are paid to do so by a left-of-center foundation seeking to bamboozle Republican policy-makers and conservative supporters into empowering liberal interest groups, undermining long-standing conservative principles, or just doing whatever liberals want to do anyway.
Is that what is going on with American Compass, the think tank led by ex–Mitt Romney adviser Oren Cass that presents supposed conservative cases for organized labor, industrial policy, and calls to “reimagine capitalism in America”? The think tank is the most prominent element of the “labor conservatives” who form a “redistributionist right,” with Politico and other D.C. outlets framing it as the vanguard of a new, capitalism-skeptical Right that would emerge in the wake of Donald Trump’s rise and fall.
But peeking behind the curtain of American Compass’s funding raises concerns as to what that compass holds as its north. Two major liberal funding networks, the William and Flora Hewlett Foundation and the Omidyar Network, have provided major grants to American Compass as part of projects to “reimagine” capitalism. The foundation funders’ rhetoric and the fellow travelers they fund alongside American Compass raise questions about what these foundations are hoping to achieve with their funding.
In 2020, the William and Flora Hewlett Foundation reported providing $611,000 in combined grants to American Compass. Created by one of the co-founders of Hewlett-Packard, the Hewlett Foundation has a consistent history of funding socially liberal and environmentalist organizations and projects, with major recipients including the ClimateWorks Foundation, Planned Parenthood, and Arabella Advisors’ New Venture Fund.
While Hewlett’s Madison Initiative has funded some right-leaning organizations in the spirit of full debate, that is not how the foundation is promoting its support for American Compass. The Chronicle of Philanthropy, the trade publication for the multibillion-dollar nonprofit industry in which the Hewlett Foundation is a major player, portrayed Hewlett’s efforts “to identify a successor to neoliberalism,” which it defined as “the market-based economic theory that has guided academic and policy debate for several decades,” claimed that this theory was expounded by F. A. Hayek and Milton Friedman, and alleged that its prominence was “supported by grants to scholars and think tanks by a succession of conservative philanthropists such as Charles Koch.”
For its part, the Omidyar Network reported giving American Compass $200,000 as part of its “reimagining capitalism” project. Omidyar is a familiar name to students of righties-pushing-liberalism-for-hire: Pierre Omidyar, who created and funded the Omidyar Network as part of a growing network of grantmaking and advocacy organizations that include Democracy Fund, Democracy Fund Voice, and Omidyar Network, is notable for funding liberal-in-conservative-clothing groups that target former president Donald Trump and his supporters. Stand Up Republic, the left-wing election-administration organization headed by former presidential candidate Evan McMullin? Omidyar’s groups funded it. The Bulwark, the online magazine created by castoffs from the Weekly Standard’s closure that attacks Mike Rowe for opposing anti-COVID mandates? Until recently, it was identified as a project of the Defending Democracy Together Institute, whose 501c(4) organization, Defending Democracy Together, Omidyar has funded through his nonprofit Democracy Fund Voice. This is part of a broader effort to attack mainstream Republicans through a wide array of other dark-money groups. The Omidyar network of organizations isn’t exactly the outfit one would expect to fund the development of a “post-Trump Trump-ism.”
And the fellow travelers of American Compass receiving Omidyar’s “reimagining capitalism” support are a glaring warning light that Cass may be more of a Bill Kristol than an Irving. Also receiving Omidyar funds for “Building alignment around a coherent new vision and set of economic values” are Demos, a socialist think tank; the Roosevelt Institute, a think tank that cheerleads New Deal–style statist policy; and Economic Security Project, a campaign backed by Facebook co-founder and former New Republic publisher Chris Hughes to create a universal- basic-income welfare program. Omidyar Network itself promoted its “Our Call to Reimagine Capitalism in America” in the language of radical academic Ibram X. Kendi and critical race theory, with its second of five “key pillars of change” being “an explicitly anti-racist and inclusive economy.”
With bedfellows that fit more comfortably at a Democratic Socialists of America meeting than the Knights of Columbus or Elks Lodge that Cass and other right-leaning populists might call to mind, for what does American Compass stand? It is hard to say, but there’s evidence that Cass has shifted left since he published The Once and Future Worker, a collection of essays expounding his populist, worker-focused economic-policy approaches.
In the chapter on labor organizing, titled “More Perfect Unions,” Cass offered reforms that limited the political authority of Big Labor while increasing workers’ collective powers, proposing that worker cooperatives take over government social-safety-net functions and recommending that the government recognize independent “works councils” to conduct collective representation outside the adversarial union system. Throughout, Cass recognized that reform of labor organizing had to separate the interests of working families from those of labor bosses, whose activist liberal politics union members often do not share.
But now, Cass endorses “sectoral bargaining,” best known for being practiced in France. In this system, labor unions negotiate contracts nationwide not for the 8 percent of French workers who are union members but for over 98 percent of the workforce. So while the Cass of Once and Future Worker could recognize that “Democrats prize union bosses’ Midas-like ability to transform the dollars and energy of a bipartisan workforce into homogenous left-wing support,” $811,000 in Big (liberal) Philanthropy money later American Compass would give those union bosses more coercive power than even the Democrats’ PRO Act, which is itself little more than a vehicle to funnel even more money from unwilling working families to the Left’s Midases.
There is nothing inherently wrong with a conservative organization taking funds from liberal entities or with a conservative organization dissenting from some conservative orthodoxy. But when nominal conservatives start rushing to the left as left-wing dollars flow into their institutions, skepticism is warranted.
It is interesting that left-wing or democratic critics have not yet made accusations of fascist corporatism or comparisons with the use of the working class and workers‘ concepts, similar to those of the National Socialist Workers‘ Party in Germany.