PIIEBRIEFING21-5

Scoring50Yearsof

USIndustrialPolicy,

1970–2020

GaryClydeHufbauerandEuijinJung

November2021

1750MassachusettsAvenue,NW|Washington,DC20036-1903USA|+1.202.328.9000|

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Contents

1INTRODUCTION3

2INDUSTRIALPOLICYTHROUGHTRADEMEASURES18

3INDUSTRIALPOLICYTHROUGHSUBSIDIESTARGETED53TOSPECIFICFIRMS

4INDUSTRIALPOLICYTHROUGHPUBLICANDPRIVATE71R&D

5SUMMARYOFFINDINGSANDPOLICY95RECOMMENDATIONS

APPENDIXA106

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1Introduction

BRIEFHISTORY

ProponentsofmobilizingUSgovernmentsupportfordomesticmanufacturing—andcreatingahomegrown“industrialpolicy”—maynotrealizeit,buttheyarechannelinganapproachfirstintroducedin1791byAlexanderHamilton,thestoriedfoundingfatherandTreasurySecretaryunderPresidentGeorgeWashington.WhileservingatTreasury,Hamiltonformedagroupofinvestorscalledthe

SocietyforEstablishingUsefulManufactures(S.U.M.)

tousethepoweroftheGreatFallsinthePassaicRivernearPaterson,NewJersey,todriveanindustrialsectorthatwouldcompetewithBritainasaproducerofmanufacturedgoodsforAmericanconsumers.TheinitialcapitalizationofS.U.M.was$500,000,ahugesumatthetime.

LikemuchofwhatHamiltonwrought,theschemewashighlycontroversial.Hamilton’sarchrivalinAmericanpolitics,ThomasJefferson,didnotseeAmerica’sfutureinexpandingitsindustrialbasebutinsupportingitsagriculturalbackbone,whichhefeltwasthemoralaswellastheeconomiccenterofthenation’sfuture,andhevehementlyopposedgovernmentinvolvementinsupportinganindustrialpolicy.Throughmuchofthe19thcentury,however,Hamilton’sviewprevailed.The“AmericanSystem”ofHenryClay,setuptocompetewithBritainaftertheWarof1812,consistedofhightariffwalls,acentralbankand,aboveall,governmentinvestmentin“publicimprovements”likerails,canals,androadstohelpindustrygetgoodstocustomers—theveryessenceofanindustrialpolicythatsomeanalystssaywascrucialtoUSeconomicdevelopmentaftertheCivilWar.

Inthe20thcentury,thedebateovertheroleofthefederalgovernment,andespeciallyovertariffsandgovernmentspending,hasgonebackandforth.Butby2020,theUSideologicalpendulumappearstohaveswungbackinfavorofindustrialpolicyfordomesticmanufacturing.TheUS-ChinatradewarandCOVID-19promptedtheTrumpadministrationtolaunchbothreshoringpoliciestobringUSfirmswithChineseoutpostsbacktotheUnitedStates,andsubsidiestoboostdomesticproductionofmedicalequipmentandassortedhigh-techproducts.

WhenPresidentJosephR.BidenJr.cameintoofficeheorderedasupplychainreviewreport,anditcallsforambitiousmeasurestostrengthentheUSsupplychainsofsemiconductors,electricbatteries,criticalmaterials(e.g.,rareearths),andpharmaceuticals.OnJune8,2021,theSenatepassedtheAmericanInnovationandCompetitionAct,whichincludes$52billiontoboostdomesticmanufacturingofsemiconductorsand$200billionforscientificandinnovationresearchanddevelopment(R&D).OtherlegislationembracingindustrialpolicyconceptshasbeenintroducedinCongress.

WithPresidentBidenintheWhiteHouseandDemocratsincontroloftheHouseandSenate,ambitiousindustrialpolicyproposalsarebeingturnedintolaw.ThecomebackofindustrialpolicyintheUnitedStatesdoesnotsignalanendtothedebate,however.ItisprobablymoreurgentthanevertounderstandhowandwhetherindustrialpolicyhasworkedtostrengthentheUSeconomy.Anexaminationofrecenthistoryprovidesusefulcontext.Inthiscollectionofcase

GaryClydeHufbauer

,nonresidentseniorfellowatthePetersonInstituteforInternationalEconomics,wastheInstitute'sReginaldJonesSeniorFellowfrom1992toJanuary2018.

EuijinJung

wasaresearchfellowatthePetersonInstitutefor

InternationalEconomics.

ShejoinedtheInstituteasaresearchanalystinJanuary2015andwasa2018–19Eranda

RothschildFoundationJuniorFellow.

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studies,wepresentathoroughanalysisandscorecardofleadingUSindustrial

policyinitiativessince1970,inanefforttoassesswhatwentrightandwhat

wentwrong—andhowthecurrentinitiativesmightfare.Thesecasestudiescan

guidepolicymakersastheyembarkonwhatappearstobeamajorinitiative

inUSgovernmentinvolvementintheeconomy,onethathasbroadbuthardly

universalpoliticalsupport.

DEFINITIONANDGOALSOFINDUSTRIALPOLICY

First,weofferadefinitionandthenashortsummaryoftheUSideologicalcycle

foremployingindustrialpolicy.MarcusNolandandHowardPack(2003,10)

define“industrialpolicyasaneffortbyagovernmenttochangethesectoral

structureofproductiontowardsectorsitbelievesoffergreaterprospectsfor

acceleratedgrowththanwouldbegeneratedbyatypicalprocessofindustrial

evolutionaccordingtostaticcomparativeadvantage.”Somewhatmoresimply,

butmoreinclusively,wedefineindustrialpolicyasgovernmentintervention

againstmarketforcestopromoteafavoredfirmorindustry.Acceleratedgrowth

isoneobjective,butcertainlynottheonlyone.Toolsofindustrialpolicyinclude

easycredit,directandindirectsubsidies,preferentialtaxes,andtariffand

nontariffbarriers.

Overthepasthalf-century,thegoalsofindustrialpolicy(aswedefinethe

term)havevaried.Insomeepisodes,thegoalwastoassistdecliningindustries

(e.g.,steel,textilesandapparel),bothtosavejobsandtorescuefirms.Inothers,

thegoalwastooffsetexternalities(e.g.,solarandwindenergy),inparticularto

reducecarbonemissions.Andinstillotherepisodes,thegoalwastopromote

USleadershipinemergingtechnologies(e.g.,semiconductors,communications).

TheTrumpadministrationrespondedtotheCOVID-19nationalemergency

withOperationWarpSpeed,designedtoacceleratethediscoveryand

disseminationofeffectivevaccines.Lookingforward,theBidenadministration

andCongressareseekingtoensurethattheUnitedStatesstaysaheadofChina

infrontiertechnologiessuchasartificialintelligence,cyberspace,andelectric

vehicles.Aswell,robustsupplychainsareafreshconcernofgovernmentleaders,

whofear(givenexperiencesofthepast18months)thatprivatefirmsdonot

adequatelyconsidersystemicfailurescausedbypandemics,naturaldisasters,or

foreignadversaries.

Ourretrospectiveanalysisisnotfocusedonparticularobjectivesbut

insteadtriestodistilllessonsfromindustrialpolicyepisodesthatsoughtvaried

objectivesoverthepast50years.

Thedefinitionofindustrialpolicycouldbestretchedtocoverbroad

governmentprogramssowidelyacceptedthattheybecomepartofthesocial

fabric.In19thcenturyAmerica,thepostoffice,canals,rails,andlandgrant

collegeswouldfitinthatbroaddefinition.Inthemid-20thcentury,thenational

highwaysystemandextensiveelectricalgridsandgaspipelineswouldalsofit.

SuchprogramsarguablyacceleratedUSeconomicgrowth.Thisstudy,however,

isconfinedtomorenarrowlytargeted,andlesswidelyaccepted,government

interventionsthataffectspecificfirms,industries,orR&Dinpursuitofvaried

objectives,manyofthemonlylooselyconnectedtoeconomicgrowth.

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INTELLECTUALDEBATES

Overthepasthalf-century,industrialpolicyhasstimulatedrecurringdebates.

WritingintheHarvardBusinessReviewin1982,atimewhenAmericafelt

threatenedbyJapaneseindustrialsuccess,RobertReich(1982)titledhis

essay“WhytheU.S.NeedsanIndustrialPolicy.”Hearguedthatgovernment

canhelpUSfirmsadapttoglobalcompetitionintwoways:(1)bysmoothing

themovementofresourcesoutofdecliningindustries,and(2)byensuring

theavailabilityofresourcestopromisingsectors.Inshort,heenvisionedan

idealizedroleforgovernmentintervention,divorcedfromthepushandpullof

practicalpolitics.

OurdefinitionofindustrialpolicyisnotconfinedtoReich’sidealized

conception.Weevaluateseveralepisodesthatattemptedtoneithersmooth

declinenorchannelresourcestopromisingindustries.LauraTyson,inher1992

bookWho’sBashingWhom?TradeConflictinHigh-TechnologyIndustries,

examinedAmerica’sdisputeswithothercountries—especiallyJapan—inthe

computer,semiconductor,electronics,andcommercialaircraftindustries.

ShearguedthattheUnitedStatesshoulddefenditselfagainstdamaging

foreignpracticesbutonlybyapproachesthatencouragecompetition,not

withprotectionistmeasuresthatthwarteconomicadjustment.Nolandand

Pack(2003)contended(despitetheargumentsofcontemporaryscholars)

thatindustrialpolicyhadaminorimpactoneconomicgrowthinAsia.More

recentempiricalliteraturesuggeststhatearlystudiesofinfantindustriesin

developingeconomiesmaynotfullycapturethebenefitsandcostsofindustrial

policy(Lane2020).

ContrarytoReichandTyson,otherobserverspointedskepticallytofailed

initiativesandgovernmentcapture,athemestressedby“publicchoice”

economists,notablyGordonTullochandJamesBuchanan(1962).Skeptics

usuallydefineindustrialpolicytoencompassabroadrangeofgovernment

intervention,notjustepisodesthatattemptidealizedobjectives.PaulKrugman

(1983)examinedtheUSsteelandsemiconductorindustries,twosectorsthat

enjoyedgovernmentsupportincompetitionwithJapan,andconcludedthatin

neitherinstancecouldUSpolicybecalledasuccess.

Fordecades,duringaneraofliberalizationthatlastedfrom1950to2000,US

tradeprotectionwascapturedbysunsetindustries,notablysugarandspecialty

agriculture(e.g.,honey,lamb),apparel,ceramics,basicsteel,andthemerchant

marine,amongothers.Severaleconomistsreported,withfewexceptions,

thatindustrialpolicyinTurkey,SouthKorea,andJapanwaseithernegatively

correlatedwithperformanceornotcorrelatedatall(KruegerandTuncer1982,

Harrison1994,Lee1996,BeasonandWeinstein1996,LawrenceandWeinstein

2001).CharlesL.Schultze(1983),aleadingAmericanscholarandinfluential

advisortoDemocraticpresidents,wasastoutcriticofUSindustrialpolicy.1

Contrastingwithskepticalvoices,18thand19thcenturyliteratureisreplete

withrationalesforgovernmentintervention.AlexanderHamiltonisfamousfor,

amongotherachievements,articulatingtheinfantindustryargument,laterthe

1SchultzeeffectivelysuppressedcallsforindustrialpolicyfromClydePrestowitz,RobertReich,

andRobertKuttnerduringtheCarterpresidency.Similarskepticismcannotbefoundamong

Democraticleaderstoday.

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subjectofanotedtreatisebyFriedrichList.2Closelyrelated,butadvancedin

the20thcentury,istheargumentthateconomiesofscalemaydeterpotential

entrantsandshouldberedressedbygovernmentmeasurestoensureamarket

ofadequatesize.DuringandaftertheSecondWorldWar,academicscholars

focusedondevelopingeconomies.Thebalancedgrowthmodel(Rosenstein-

Rodan1943,Nurkse1952)observedthatindustriesbuyandsellfromeachother

andtheirreturnsdependontheexistenceofcomplementaryindustries,calling

forgovernmentcoordination.AlbertHirschman(1958)advancedthethesis,

urgingtargetedsupportonindustrieswithstrongindustriallinkages.Carrying

theargumentfurther,PackandLarryWestphal(1986)andMasahiroOkuno-

Fujiwara(1988)commendedselectiveinterventionsthatfostercross-industry

externalitiesasajustificationforindustrialpolicy.Noland(2004)appliedtheir

argumenttoKoreanexperience.

Inthepost-2000literature,externalitiescontinuetobestressedasan

argumentforindustrialpolicy,sinceafirmseldomkeepsallthebenefitsofits

activitiesnorbearsallthecosts.R&Dandworkertrainingarenoteworthyfor

generatingpositiveexternalities.Aswell,afirm’ssuccessfulexperiencecan

bereverseengineeredbyotherfirmstoimprovetheirowntechnology.These

phenomenafurnishthefoundationforvarioustypesofgovernmentintervention.

LeeBranstetterandMarikoSakakibara(2002)findthattheoutcomeofJapanese

government-sponsoredresearchconsortiaispositivelyassociatedwiththelevel

ofpotentialR&Dspilloveramongparticipatingfirms.3

Anewargumentforindustrialpolicyisbasedonthenotionof

informationexternality.Thelogicisthatemergingindustriesmakeinsufficient

investmentbecausepioneerfirmsfeargivingfreelessonstopotential

competitors(HausmannandRodrik2003,Lin2012).Subsidizingpioneers

throughtradeprotectionandothermeasurescansupposedlyoffsettheir

inherentdisadvantage.

Acquiringproductivecapabilityisatime-consumingandcostlyprocess,a

factthatupdatestheoldinfantindustryargumentandfurnishesanewreason

forgovernmentintervention(Chang1994,Loasby1999,Lall2001,Andreoni

2014).Forexample,thegovernmentofatechnology-importingcountrycan

forcethetransferofcoretechnologies.IndustrialpolicyenthusiastsKarlAiginger

andDaniRodrik(2020)suggestthatpolicymakersshouldcraftindustrial

policynotonlytomitigateclassicmarketfailurebutalsotoaddresssocialand

environmentalchallenges.Mostrecently,intheUS-Chinatradewarcontext,itis

arguedthattheUSgovernmentshouldsupportindustriestargetedbyChinato

retainUStechnologicalleadershipandensurethatAmericadoesnotbecome

subservienttoChineseeconomicdominance.4

Forreference,box1.1summarizesrationalesforindustrialpolicy.

2List(1909).InarecentstudyRékaJuhász(2018,page1)findsthat“regionsintheFrenchEmpirewhichbecamebetterprotectedfromtradewiththeBritishforexogenousreasonsduringtheNapoleonicWars(1803–15)increasedcapacityinmechanizedcottonspinningtoalargerextentthanregionswhichremainedmoreexposedtotrade.”

3StrengtheningsupportforgovernmentinterventionsinR&D,BranstetterandKwon(2004)findthatastronglinkagebetweenacademicscienceandindustrialtechnologycontributestoresearchproductivityofJapanesefirms.

4GregIp,“IndustrialPolicy’IsBack:TheWestDustsOffOldIdeatoCounterChina,”WallStreetJournal,July29,2021.

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Box1.1Rationalesforindustrialpolicy

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PIIEBRIEFING21-5|NOVEMBER2021

8

Table1.1

USindustrialpolicyprojects,1961–75

Project

Period

Outcome

NuclearshipSavannah

1962–72

Failure

Mechanizedrefusecollection

1969–72

Success

Computer-assistedelectrocardiogramanalysis

1969–72

Success

Teleprocessingofmedicalclaims

1971–74

Failure

ShipbuildingR&D

1970–??

Unknown

Fishproteinconcentrateplant

1966–72

Failure

Salinewaterconversionplant

1961–65

Failure

Dial-A-Ridetransportationsystem

1971–75

Failure

YankeeNuclearPowerReactor

1960–??

Success

ConnecticutYankeePowerReactor

1968–??

Success

Refusefiringdemonstration

1970–??

Success

Syntheticfuelsprogram

Notspecified

Unknown

OperationBreakthrough(industrializedhousing)

1969–??

Failure

Personalrapidtransitsystem

1972–??

Unknown

Hydraulickneeprostheticdevices

1959–68

Success

Rapidexcavationandmining(REAM)gun

Notspecified

Failure

Resourcerecoveryfromrefuse

1971

Failure

Poultrywasteprocessing

1969–71

Success

Expresswaysurveillanceandcontrol

1961–??

Success

Maritimesatelliteprogram

1970–??

Unknown

RefanJetEngineProgram

1972–75

Unknown

Salinewaterconversionplant

1962–??

Failure

Bus-on-MeteredFreewaySystem

1972–75

Success

Automaticvehicleidentification

1971–73

Success

Source:Baer,Johnson,andMerrow(1976).

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Theauthorswereespeciallyskepticaloflarge“show”projectsanddistilled

fourstrategiesforsuccessfuldemonstrations(paraphrased):

?Conductthedemonstrationonassmallascaleaspossible.

?Donotemphasizelargeprojectsattheexpenseofsmallonesthatmaydeliverincrementalimprovements.

?Resistpoliticalpressuretodemonstratebeforeatechnologyiswellinhand.

?Allowtimeforslippage,especiallyforlargeprojectswithsignificanttechnologicaluncertainty.

In1979RichardR.Nelson,anacknowledgedexpertonR&Dandtechnological

progress,recruited10distinguishedscholarstoexamineUSpublicpolicyand

technicalprogressinsevenindustries:semiconductors,commercialaircraft,

computers,agriculture,pharmaceuticals,residentialconstruction,andmotor

vehicles.Evaluationofpublicsupportfocusedoneventsinthe1960sand1970s.

Theresultingvolumeofcasestudies,some500pages,waspublishedin1982,

followingawaveofindustrialpolicyinitiativeslaunchedbyPresidentJimmy

Carter,someofthemextendedbyPresidentRonaldReagan.

Nelson(1982)summarizedfindingsandrecommendationsintheconcluding

chapter.Severalofhisobservationsbearrepeating,nowthatPresidentBidenand

theCongressareembarkingonafreshwaveofindustrialpolicyinitiatives:

?ThebestwayforgovernmenttostimulateindustrialinnovationisthroughR&Dsupportpolicies.Threetypesofsupportareparticularlyfruitful:

(1)publicprocurement(exemplifiedbyDepartmentofDefenseprocurement

ofaircraft);(2)fundingofnonproprietaryresearch,allowingthescientific

communitytoguidetheallocationofR&D(USagriculturalresearchisthe

preeminentcase);(3)allocationofdecisionmakingtopotentialusersto

guidetheresearch(Sematech,launchedduringtheReaganadministration,

illustratesthisapproach).

?However,inindustrieswherecommercialrivalryisstrong(e.g.,semiconductors,pharmaceuticals,andmotorvehicles)itisdifficultforpubliclysupportedbutuser-guidedresearchtosucceed.Proprietaryinterestsofindividualcompaniestendtodominatetheresearchagenda.Whenrivalryisstrong,othermodesofR&Dsupportmayhavegreatersuccess.

?TobeavoidedareR&Dprojectsinwhichgovernmentofficialstrytoidentifylikelycommercialwinners.ResidentialconstructionR&Dandsupersonictransportprojectspursuedduringthe1960sand1970sillustratethis

sortoffailure.

?Theimpactofregulation,antitrust,andpatentsoninnovationiscomplex

andvariedamongdifferentindustries(Nelsonhimselfwaswaryofstrong

generalizationswithrespecttothesetraditionalpolicies).Dependingon

circumstances,regulationcanhelporhinderinnovation.Thesameistruefor

antitrustandpatentpolicies.

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Finally,thescholarsrecruitedbyCohenandNoll(1991)generallytakea

skepticalviewoftargetedUSindustrialpoliciestoadvanceandcommercialize

technology.Theypresentdetailedcasestudiesofsixpost–SecondWorldWar

initiatives:Americansupersonictransport,theapplicationstechnologysatellite

program,thespaceshuttle,theClinchRiverbreederreactor,syntheticfuelsfrom

coal,andthephotovoltaiccommercializationprogram.Averaging45pagesper

case,thestudiestakeadeepdiveintothepoliticssurroundingeach,tranchesof

budgetsupport,technologicalobstacles,andcommercialsuccessorfailure.Their

conclusionsarestark(p.365):“ThehistoryofthefederalR&Dcommercialization

programs…ishardlyasuccessstory.Onthebasisofretrospectivebenefit-cost

analysis,onlyoneprogram—NASA’sactivitiesindevelopingcommunications

satellites—achieveditsobjectivesandcanberegardedasworththeeffort.”

Whileallbutoneoftheprogramscouldbejustifiedbyproponentsas

responsestomarketfailureonthepartofcommercialfirms,theauthors

identifiedthefollowingcommonreasonsforgovernmentfailure:

?Programsweretooambitious,inboththeirtechnologicalaspirationsandtheirscale.

?Moreupfrontresearchandsmallerdemonstrationswouldhavebeenbetter.

?Demonstrationswereoftenhasty,inpoliticallyinspiredeffortsforaquick“show.”

?Managerswerereluctanttocancelprograms,evenaftermisseddeadlinesandmediocreresults.

?Budgetboomsandbustsmeanttoomuchmoneyattheearlystageandtoolittlelateron.

Basedontheiranalysis,CohenandNoll(1991)offeredseveral

recommendations,includingarestructuringofcongressionalcommittees.Their

400bookconcludeswiththisadvice,whileacknowledgingthedifficultyof

raisingthebattingaverageofcommercializationprojects(p.392):

Twofirmconclusionscanbedrawnfromthenation’sexperienceswith

commercializationprojects:itisdesirabletomaintainabaseprogramdesigned

toexpandcommerciallyrelevanttechnologicalknowledge,anditisdesirable

toseparatethoseprogramsinstitutionally—inCongressandinthefederal

bureaucracy—frombasicscientificresearchandfromoperationalresponsibilities.

RESEARCHAPPROACH

Weconcludethatitisimpossibletorefutecallsforindustrialpolicyatan

abstractlevelbecauseargumentsforinterventionbuildonarguablemarket

failuresand,intheinstanceofJapaneseandChinesesuccess,plausiblefearsthat

Americawill“l(fā)oseout”toitsAsianrivals.Thequestioniswhether,inpractice,

governmentfailuresandimplementationobstaclesseverelyunderminethecase

forintervention.Advocatesofindustrialpolicyinevitablycontendthat“thistime

isdifferent”whenconfrontedwithpastfailures.Nevertheless,anexaminationof

yesteryearcasesmay,ataminimum,injectanoteofcaution,andperhapsyield

lessonstoimprovethedesignoffutureepisodes.

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Economistswhosubscribetoaneoclassicalframeworkmaydismissepisodes

thatseektocreatejobsinrisingindustries,withtheargumentthatbalancing

unemploymentandinflationisthetaskoftheFederalReserve,notgovernment

interventioninspecificfirmsorindustries.Economistswhoarealerttomarket

failuresmayapplaudepisodesthatseektosavejobsindecliningindustries,with

theargumentthatsmoothingdisruptionandpreservinghumancapitalisavital

taskofpublicpolicy.Whateverthemeritsoftheseviews,weassessindividual

casesfromtheperspectiveofproponentswhotypicallycountjobscreated

orsaved,ignoringgeneralequilibriumanalysisorthevalueofhumancapital

gainedorlost.

Apartfrompartialequilibriumjobcounts,proponentstypicallyclaimthat

publicsupportwillenableanAmericanindustrytodevelopnewtechnologyand

becomecompetitiveinworldmarkets.Accordingly,wedrawoncasestudiesto

scoreseveralepisodesofUSindustrialpolicysince1970,withaviewtothehopes

andaspirationsofproponents.Ourchoiceofepisodesisbynomeansarandom

sampleofstateandfederalindustrialpolicy.Weselectedhigh-profilefederalcases

plusaveryfew(outofhundreds)statecases.Wedividetheepisodesintothree

broadcategoriesreflectingtheprincipalinterventiontools(notaneconomist’s

rosterofmarketfailures)andevaluatetheminthenextthreechapters:

?caseswheretrademeasuresclosedtheUSmarketoropenedforeignmarkets(chapter2);

?caseswherefederalorstatesubsidiesweretargetedtospecif