The Return of Industrial Policy

In my lifetime, the world economy has been on a trajectory toward free markets. Some of the earliest geopolitical headlines I can recall include the fall of the Berlin Wall, a major blow to communism, and the signing of the North American Free Trade Agreement, which cemented a free market on my home continent. In this era, India liberalized its economy while other Asian nations gained prominence in world trade.

Now, after a long run, the winds are shifting. The U.S. and many other nations are moving away from free market capitalism and toward active industrial policy: national strategies to support growth and geopolitical advantages within parts of the economy.

The COVID-19 pandemic brought many market shortcomings to light. In the first wave of the pandemic in spring 2020, nations scrambled to secure their supplies of personal protective equipment, revealing that most of these products were imported from China. Later in the year, as vaccines went into production, dependencies on foreign suppliers presented a risk for access to the vaccine. In recent months, the semiconductor shortage disrupted the automotive market and remains a risk to other sectors, with little global capacity to produce chips outside of Taiwan and mainland China.

These market concentrations developed naturally through rational business decisions. Over the long run, they led to lower costs, but now the risks of those orientations have become sharper, adding to a push for a more active industrial policy. Most recently, the U.S. has restricted exports of key technologies to China and pushed to repatriate supply chains, especially in semiconductor manufacturing.

This realignment crosses most political persuasions. President Biden’s domestic agenda builds upon his predecessor’s signature economic policy of trade confrontations meant to support domestic production; in fact, most of the Trump administration’s tariffs remain in force. Republican Senator Marco Rubio recently made a case for “common good capitalism.” While Rubio noted that market outcomes are “generally right,” job losses can upset families, and losing productive capacity jeopardizes national security. Consensus is emerging that there is room for state intervention.