A new report on China from the Senate Small Business Committee, now chaired by Senator Marco Rubio, is turning heads in the conservative policy world. The report details the “Made in China 2025” initiative, China’s national plan for technological and economic supremacy in a number of emerging industries. But what makes the report interesting, particularly from a Republican-chaired committee, is its suggestion that America shouldn’t merely punish China for unfair trade practices, but also should pursue a national innovation strategy of similar ambition.
“This report’s central conclusion is that the U.S. cannot escape or avoid decisions about industrial policy,” its authors write, after opening with an extended quotation from Alexander Hamilton’s “Report on Manufactures.” Then it explicitly rebukes the orthodox libertarian view that markets are “neutral” when government simply gets of the way:
States place great value on capturing high-productivity, high-labor content industries, or developing new ones. This is no new insight, for constraining the excessive possibilities of this behavior is arguably the orienting view of the World Trade Organization (WTO). States can attempt to redirect this fundamental interest by agreeing to “not select” industries, or at least not do so outside the bounds of reasonable policy difference. But even here, distinctions between competing decisions of economic value must be made.
Markets are always and everywhere structured by rules and institutions, the parameters of which shape final outcomes for society at large. That these rules should align with national priorities like strong families and decent wages for average people might seem obvious, but alas, too often it’s not.
When China joined the World Trade Organization, for example, the conventional wisdom predicted business as usual. Imports from China had been rising steadily throughout the 1990s, largely in the form of goods such as toys and clothing produced by low-wage workers. China’s new status would just mean more of the same.
This prediction turned out to be highly naïve. Instead, the Chinese government embarked on an aggressive industrial policy, pulling resources into its export sector and transferring technologies from abroad in an attempt to capture global manufacturing output. The result was a major shock to U.S. manufacturing employment, which fell 18 percent in a few short years, creating regional economic distress that we’re still grappling with.
Made in China 2025 represents the next phase in this economic-development push, targeting what promises to be the emerging industries of the 21st century, from biotechnology and robotics to next-generation information technology such as artificial intelligence. China is not merely trying to catch up to the U.S. but is aiming to surpass us by laying claim to nascent industries, taking advantage of our complacency.
Meanwhile, rather than make the requisite investments to transition workers displaced by the so-called “China Shock” into higher-value manufacturing industries, the U.S. implicitly pursued an industrial policy focused on a handful of extremely lucrative sectors, including software, pharmaceuticals, and financial services, hollowing out the career opportunities for middle-skilled workers. Far from a neutral result, these outcomes were directly shaped by contingent rules of the game, from the structure of the tax code to our intellectual-property regime.
Every successful economic-development story has included national efforts to diversify industries, including our own. The U.S. is dominant in Internet industries, for example, because we made early public investments into the creation of the Internet, encouraged the deployment of broadband infrastructure, and adopted a legal framework complementary to its rapid commercialization.
Today, however, we seem beguiled by the notion that there are “free markets” and “central planning” and nothing in between, causing our economy to become overly specialized in a few narrow if not outright extractive industries. “Lost in the polarity of the discussion,” notes Rubio’s report, “is a path forward that can resolve the concerns of both economic dynamism and efficiency for one, and national sovereignty and value-chain position for the other.”
Indeed, a revived American innovation strategy can transcend both the state-centered Chinese model and the protectionist approach of the current U.S. administration. Making the “full expensing” provisions of the recent tax reform permanent and extending enhanced depreciation to tangible, long-life assets such as factory equipment would be a good place to start. The report also identifies the importance of federal research and technology-transfer programs that make bets on new, high-risk technologies with pathways for their commercialization.
Coupled with active labor-market policies to stabilize and transition displaced workers, such a strategy could prove our innovative superiority to China and the world. We have the tools; we just need to use them.