Industrial Policy Returns
April 22, 2019
Over the past few years, the debate about China has shifted from “what are they doing” to “what are we going to do about it?” Theft of intellectual property, forced technology transfer, massive subsidies (largely to state-owned enterprises), and discrimination against foreign companies have all become widely accepted features of the trade landscape, first here in the United States and more recently elsewhere, including Europe. This is why it has become common to say Western policymakers agree on the diagnosis but are not yet united on the prescription.
In attempting to produce an agreement on a prescription—a course of action for dealing with China—the most frequent recommendation is that we ought to work together—form a coalition to meet the China challenge collectively rather than individually. There is wisdom in that; China has demonstrated in the past that it does not like to be an outlier, and consistent, sustained pressure from many sources at a high level can alter their behavior. The timing is also right, since European nations seem, finally, to be coming to the same conclusions about China that we reached some years ago.
There are, however, three obstacles to that strategy. First, and most often mentioned, is President Trump, who has displayed little interest in coalition building on anything, including China. Second is the European Union, which, despite rhetorical expressions of concern, seems determined to color inside the lines when plotting remedies. That is, Europeans look for solutions that are within the World Trade Organization dispute settlement framework and which would not put them in violation of their obligations, while the current U.S. administration is not wedded to that approach, as is clearly evidenced by the tariffs the president has imposed. Indeed, Ambassador Lighthizer has at one point suggested that the trade rules are simply not equipped to deal with a challenge of the magnitude that China presents. Thus, while the will to work together may emerge—if the U.S. position evolves—reaching agreement on what actions to take could prove very difficult.
Third has been the recent re-emergence of the “if you can’t beat ‘em, join ‘em” philosophy—the idea that the best way to deal with China is to do exactly what they are doing. This brings back memories. When I served on the U.S.-China Economic and Security Review Commission, we would periodically have hearings on Chinese industrial policy. Witnesses would present a litany of Chinese activities and explain why they were bad—bad for us, bad for the trading system, and ultimately bad for China. However, when asked what we should do about it, the most frequent answer was that we should do what they are doing. Apparently, in the trade world, two wrongs do make a right.
Lately, this argument has reappeared. Senator Marco Rubio (R-FL) recently released a report on a U.S. response to Made in China 2025 and came to the “central conclusion [. . .] that the U.S. cannot escape or avoid decisions about industrial policy” and that “relevant policy consideration, then, is not whether states should organize their economies, but how they should be organized.” Along with the report, Senator Rubio has introduced several bills, including ones that would restrict Chinese investment in the United States and raise tariffs on goods produced by state-subsidized Chinese companies.
In Europe, Germany’s economic minister has produced National Industrial Strategy 2030 , and he and his French counterpart subsequently issued A Franco-German Manifesto for a European industrial policy fit for the 21st Century . These documents cite Chinese policies and, in the German case, call for a similar approach of greater government intervention in the economy, including subsidies and the creation of national and European champions, borrowing a page from Made in China 2025. The articulation of the need for “Europe First” policies echoes President Trump’s demands to put “America First.”
These proposals vindicate the argument I have made for years that if you are in a race, there are only two ways to win—run faster or trip the other guy. Our president’s policy has focused almost entirely on the latter—trying to hold the Chinese back—even though history has demonstrated its futility over the long term and that running faster is the better policy choice. The recent developments here and in Europe suggest that people are finally catching on and realizing that while we cannot control what China does, we can control what we do, and there is a range of policies we can pursue to make ourselves more competitive.
That realization, of course, does not end the debate. Greater government intervention in the economy is controversial, expensive, and philosophically abhorrent to many politicians. It is also far from becoming policy, but the fact that it is being proposed and by conservatives, who have historically opposed this kind of thing, is telling.
Following the Chinese lead also raises another important philosophical issue that deserves debate. To return to the race metaphor, the Chinese are not simply running faster; they are cheating. Think of the marathon runner who sneaks over the hill and suddenly has moved from mile 5 to mile 17. You might say nobody in the West has proposed IP theft as a policy, but subsidies and “buy national” policies, whether European or American, are cheating too. So, if we do what they do, how do we avoid becoming them? And is that really where we want this story to end?
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C. The author would like to thank Jonas Heering who is an intern with the CSIS Scholl Chair for his research support.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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