21 November 2024

Industrial Policy for the United States

Winning the Competition for Good Jobs and High‑Value Industries

Marc Fasteau and Ian Fletcher
2024, Cambridge University Press, 836 pages,
ISBN 9781009243070

Reviewer: Kate Barker, Universities Superannuation Scheme

The subtitle of this book, ‘Winning the Competition for Good Jobs and High-Value Industries’ gives a very substantial clue about the arguments put forward.  With the newly-elected Labour government consulting on its ideas for the UK’s industrial strategy, late 2024 seemed a good time to grapple with them.   Grapple is the word, as at 850 pages (including over 150 of notes and index) it is quite a read.  Unlike so many lengthy books, however, it is very rich in content and I expect to find myself referring back to it often.

The early chapters set out the bones of the argument – leading on from the opening statement: ‘The US has been losing the international competition for high-value industries and the good jobs, wealth, tax revenues and national defense capacities they provide.’  The general thesis is that a renewal of industrial policy (broad policies of exchange rate management and R&D) together with policies aimed at particular industries (such as tariffs, export subsidies and government support for technology to support particular industries) is needed urgently in the US.

Th authors define what they term ‘advantageous industries’ – with characteristics such as high income-elasticity of demand, susceptibility to repeated improvement, human capital accumulation and path dependency.  The advantageousness of an industry may change over time.   Some familiar points are deployed in pursuit of the argument that there should be special regard for manufacturing – such as co-location of production and R&D, and jobs supported outside manufacturing.

They list 26 different industrial policies – pointing out not all useful in all times and places.  These range widely from infant industry protection to fostering clusters to technology denial.  The following chapter sets out views on trade – which generally boil down to a refusal to accept free market policies on trade on the grounds that America’s trading partners do not play by them.  There are three key suggestions: most economists might broadly accept one which focuses on tariff reciprocity; might be more cautious about the argument that protectionism can sometimes be beneficial; and probably are even less enthusiastic about the proposal about management of the dollar (via measures such as a tax on foreign purchases of dollar denominated assets).

Many SPE members will tend to be hostile to the many of the proposals – and they are carried further than I would support.  But it is worth pausing to consider how developed countries should think about their resilience in uncertain geopolitical times.  Some recent elections and the Brexit referendum suggest that we have not sustained support for trade openness – and it is worth debating how to respond.

The bulk of the book is taken up with eight chapters on post-WWII industrial policy in different countries; six chapters on the history of industrial policy (especially in the US); six chapters on innovation as a system; three US industry sector case studies and two cluster case studies.  Between them they present a wealth of detailed information on the successes and failures of policies across places and through time.  The authors are honest about failures – recognising for example that a generally favourable set of policies in Germany is now wearing rather thin.

In the section on recent US policy, there is praise for Trump’s first term – breaking the momentum of ever more trade agreements, and ‘making it impossible for elected officials, the press or the public to continue ignoring the damage done by free trade.’   However this is balanced by comments criticising his lack of proactive support for critical domestic industries.   

Much of this substance is unfamiliar to me – and so hard to critique.  However, the chapter on Britain, discouragingly entitled “No Theory and Little Execution”  seems a pretty accurate account of the way in which policy here has swayed between free markets and state intervention, but often without much heft behind either.   Britain also gets a negative mention in a later chapter on Nanotechnology – for a sub-scale intervention which spread finances too thinly.

Indeed, the only positive mention, and this is for England, goes to Henry VIII for the policy of moving clothmaking up the value chain – ‘based on correct understanding of the technological and economic circumstances of the day’.  We seem to have fallen back since the late 15th century.

The other section of the book where I have my own observations is the chapter on the US automotive sector.  Reading this, it seemed an omission not to refer more to the overseas activities of the big car manufacturers, and how these could relate to offsetting the impact of US economic cycles, as well as enriching technological development.

One very striking point, an obvious one, is the sheer scale of resources the US is able to put into its policy priorities.  Taking just one example, DARPA  (Defence Advanced Research Project Agency) devoted $1.5 billion in 1983 to a Strategic Computing Initiative (which was only partially successful).  In the early 2000s, federal R&D spending was averaging around $185 billion (though somewhat boosted by Covid-related research).

The final chapter sets out the authors’ policy recommendations – very much focused on obtaining leading positions for the US in all advantageous industries.  Here just some from a very long list are mentioned, to give an overall flavour.  Some industries should have policies focused to their needs; programmes should have agencies with the right technical skills; setting the right timescale for interventions is important; failing programmes should be terminated.  An Industrial Strategy Council is recommended – which would assess the present conditions, including looking at how competitors were behaving, and forming ‘an estimate of the dollar valuation that would bring overall US trade into balance within five years’.

Among other recommendations – doubling the $3 billion budget for Small Business Innovation Research; equity finance to bridge the “Valley of Death’; more generous R&D tax credits; reforms of the patent system; increase tariffs where national security is threatened, or against dumping; abandon US General System of Preferences; reserve some of US market for advantageous industries; stronger competition law for industries protected; ban Chinese firms in critical industries from raising money in US capital markets.

This is a large agenda which would result in very big changes in the way the US behaves in many trading relationships and international trade bodies.  It stems largely from two considerations – that the costs of freer trade have been higher for the US than most economists like to think, and that other countries have exploited the US by not playing fair in return.  With the election of Donald Trump we may see a real-life test of this policy mix.