Industrial Policy Debate and Industrial Policy Development Trend in the United States by LIU Guozhu
Tax will have more and more marked impact on U.S. industrial policy.
Welcome to the 30th edition of our weekly newsletter! I am SUN Chenghao, a fellow with the Center for International Security and Strategy (CISS) at Tsinghua University, Council Member of The Chinese Association of American Studies and a visiting scholar at the Paul Tsai China Center of Yale Law School (fall 2024).
ChinAffairsplus shares Chinese academic articles focused on topics such as China’s foreign policy, China-U.S. relations, China-European relations, and more. This newsletter was co-founded by me and my research assistant, ZHANG Xueyu.
Through carefully selected Chinese academic articles, we aim to provide you with key insights into the issues that China’s academic and strategic communities are focused on. We will highlight why each article matters and the most important takeaways. Questions or criticisms may be addressed to sunchenghao@tsinghua.edu.cn
Today, we have selected an article written by LIU Guozhu, which focuses on the industrial policy debate and industrial policy development trend in the United States.
Summary
Since the Reagan administration, neoliberal economics has gradually established its dominance in American politics, becoming the official economic philosophy. The belief that “no industrial policy is the best industrial policy” prevailed. However, the 2008 financial crisis and the “Occupy Wall Street” movement that emerged in 2011 fully exposed the problems caused by neoliberal economics. These included the hollowing out of the American manufacturing sector, insufficient employment rates, widening income inequality, and overreliance on overseas supply chains—which threaten the prosperity and economic security of the United States.
In response, domestic reflection on neoliberal economic policies began to emerge. Intellectual debates increasingly leaned toward rejecting neoliberal approaches. Advocation of industrial policy arose from both liberal and conservative camps. Starting with the Obama administration, successive U.S. governments have developed manufacturing strategies centered on advancing high-tech manufacturing. These strategies have included measures such as increasing subsidies for technological research and industrial development, optimizing the domestic manufacturing ecosystem, and expanding the use of national protectionist policies. Together, these efforts have gradually built a framework for revitalizing manufacturing industries. This shift does not only signify the decline of neoliberal economics but also indicates the emergence of a new economic paradigm taking shape in the United States.
Why It Matters
In recent years, US industrial policy has received global attention, especially in the context of increased competition between China and the US and the restructuring of global supply chains. Industrial policy has a direct impact on the global economic landscape.
By subsidizing areas such as new energy, semiconductors and electric vehicles, the Biden administration’s Inflation Reduction Act aims not only to reinvigorate the U.S. economy, but also to compete globally with countries like China. This policy orientation will affect the global technology supply chain and could exacerbate geopolitical tensions. The United States can strengthen its technological superiority and military power by developing industrial policies, especially in the fields of science and technology and military technology.
Measures such as the China-US “technology war” and US export control against China show that industrial policy is not only an economic tool, but also an important means of national security and international power game. While promoting localized production and reducing global dependence, the United States has also had a profound impact on international trade rules and global governance. An in-depth study of US industrial policy can provide scholars with key perspectives to understand current international political and economic trends. This article provides some perspectives of Chinese scholars on the evolution of US industrial policy.
Key Points
American industrial policy under the neoliberal economic monopoly
Reaganomics: The Origin of Neoliberal Economic Policy in the United States
The core of Reagan’s economic policies originated from the idea of liberal economists, focusing on reducing government regulation and marginal tax rate while expanding individual freedom. In his inaugural speech, Reagan argued that the government itself was the problem, not the solution, and advocated for reducing its role in the economy to allow individuals and businesses to thrive.
This approach deeply influenced his industrial policy. In 1983, Reagan rejected suggestions for government support of high-tech investment because he believed that such measures would create more problems than they solved. Instead, he favored policies that reduced government interference and enhanced capital formation to drive economic growth. Consequently, Reagan vetoed the National Bureau of Standards Authorization for Fiscal Years 1984 and 1985, regarding it as an overreach of federal power.
His successor, George H.W. Bush, continued this approach, strongly opposing industrial policy and government intervention in economic decision-making, arguing that the private sector is better equipped to identify successful investments and technologies.
The Transformation of the Democratic Party and the Convergence of the Two Parties’ Economic Philosophies
The Democratic establishment initially struggled to define an economic growth theory, but after three defeats, they embraced neoliberalism. Bill Clinton’s 1992 campaign, focused on economic issues, defeated George H.W. Bush, returning Democrats to the White House. Although Clinton appointed industrial policy proponents, his administration avoided large-scale intervention, shifting to a smaller-government approach by 1996.
George W. Bush fully embraced neoliberalism in the early 2000s, cutting taxes, deregulating markets, and supporting global capital expansion. However, tax cuts favored the wealthy, and deregulation contributed to the 2008 financial crisis, which sped up manufacturing outsourcing. President Obama, addressing the crisis with financial reforms and green energy, largely adhered to neoliberal principles, focusing on global trade deals like TPP and TTIP. The 2008 crisis and Occupy Wall Street highlighted neoliberalism’s failures, sparking debates about the need for a new economic strategy in the U.S.
The Great Industrial Policy Debate in the U.S.
The One-Sided Industrial Policy Debate of the 1980s
In the early 1980s, economists Robert Reich and Laura Tyson, aligned with the Democratic Party, proposed an alternative to supply-side economics with three main points: key industries, especially manufacturing, create positive spillover effects for national prosperity; capital markets lacked “patient capital” for high-risk industries; and East Asian industrial policies, particularly in Japan and South Korea, demonstrated that strong bureaucracies could support critical industries.
Despite growing support, industrial policy faced strong opposition. Economist Charles L. Schultze argued that getting monetary and fiscal policies in order was more crucial than industrial policy, rejecting the idea of U.S. deindustrialization and echoing Reagan’s belief that government was the problem. Paul Craig Roberts of the supply-side school dismissed it as ineffective.
As neoliberalism rose, advocates for industrial policy struggled. Reich pushed for workforce training and education to improve the manufacturing environment. Though he implemented some policies as Labor Secretary under Clinton, industrial policy remained taboo, often associated with failure, corruption and state control.
The Liberal Camp’s Call for a New Economic Philosophy
After the 2008 financial crisis, more policymakers and think tanks in the U.S. began reassessing neoliberal economic policies and reconsidering industrial policy. In 2010, NYU’s Jeremy Wiesen argued that industrial policy should not be seen negatively, citing China’s success. However, his viewpoint faced strong criticism, with experts like Michael Schuman and Shantayanan Devarajan downplaying the effectiveness of industrial policy, arguing that it didn’t significantly drive economic growth or solve underlying problems.
Despite this, industrial policy advocates gained momentum, with support from key think tanks and figures across party lines. The Roosevelt Institute, for example, began developing alternatives to neoliberalism, proposing policies like infrastructure investment to enhance U.S. competitiveness.
In line with this trend, Biden administration officials like Jennifer Harris and Jake Sullivan emphasized the need for a new economic philosophy, focusing on national security and economic strategy to tackle modern challenges. In 2023, Sullivan’s “New Washington Consensus” speech marked a clear shift away from neoliberalism, advocating for a modern industrial strategy to address global and domestic issues, effectively signaling the end of the neoliberal economic paradigm.
The Conservative Camp’s Search for a New Economic Paradigm
The conservative camp in the U.S. also saw growing support for industrial policy. They focused on great power competition, argued for abandoning Reagan-era policies and adopted industrial strategies that benefit the U.S. economy and national security. For example, Arthur Herman from the Hudson Institute emphasized that the U.S.-China competition is as critical as the Cold War, not in military terms, but in economic and technological arenas. He argued that a national industrial strategy was vital for both economic and national security. Besides, Robert D. Atkinson and Michael Lind proposed the concept of “National Developmentalism”, advocating for a state role in fostering industrial and economic growth, focusing on innovation, productivity, and competitiveness to strengthen national power.
This call for industrial policy resonated with Republican officials including Marco Rubio, Josh Hawley, and J.D. Vance, who argued that industrial policy was crucial to counter China’s growing technological and industrial power. Rubio, in particular, consistently emphasized the need for a robust industrial foundation to face China’s rising influence.
The convergence of liberal and conservative views on industrial policy led to bipartisan support in Congress for several key bills, such as the Endless Frontier Act and the American Foundries Act of 2020, which later contributed to the CHIPS and Science Act passed under the Biden administration. While some academic voices remain critical, a broad consensus now supports the need for industrial policy, marking a clear shift away from neoliberal economic philosophy.
American Industrial Policy Architecture in the Post-Neoliberal Era
The consensus to strengthen U.S. manufacturing emerged after the 2008 financial crisis, culminating in the America Competes Reauthorization Act of 2010. This legislation established a National Science and Technology Council committee to oversee advanced manufacturing R&D. Subsequent Obama, Trump, and Biden administrations developed manufacturing policies based on this act, recognizing the strategic importance of manufacturing for economic growth, high-paying jobs, and national security.
Developing an Advanced Manufacturing Strategy
Since the 2008 financial crisis, U.S. administrations have developed advanced manufacturing strategies to rebuild the country’s manufacturing sector. In February 2012, the National Science and Technology Council released the National Strategic Plan for Advanced Manufacturing, aimed at bridging gaps in innovation, particularly between R&D and domestic production. The plan emphasized strong partnerships among government, industry, labor, and academia. Trump’s 2018 strategy focused on advancing manufacturing technologies, workforce training, and expanding supply chains. Biden’s Advanced Manufacturing Strategy continued these goals, highlighting technology development, workforce enhancement, and supply chain resilience as key priorities.
Giving Priority to Advanced Manufacturing Technologies
Both the Trump and Biden administrations prioritized advanced manufacturing technologies. Trump focused on five areas: smart manufacturing, leading materials and processing, domestic medical product manufacturing, electronics design, and food/agriculture manufacturing. Biden’s priorities largely overlapped with Trump’s, emphasizing microelectronics, bioeconomy, innovative materials, and smart manufacturing. However, Biden placed greater emphasis on clean energy technologies, prioritizing clean and sustainable manufacturing to support decarbonization. Biden’s strategy also reflected a broader commitment to supporting the transition to a low-carbon economy, with a stronger focus on environmental sustainability in manufacturing processes.
Optimizing Domestic Ecosystem for Advanced Manufacturing
In recent years, U.S. administrations have taken steps to optimize the domestic advanced manufacturing ecosystem. First, federal investment in research has been key. The Obama administration allocated $100 billion for science and innovation through the American Recovery and Reinvestment Act of 2009, including $18.3 billion for R&D. The Trump administration focused on applied research in AI, quantum computing, and mobile communications, while Biden invested heavily in semiconductor and clean energy technologies.
Second, tax incentives for R&D and manufacturing have driven innovation. The federal R&D tax credit, extended in 2009 to renewable energy sectors and made permanent in 2015, reduced corporate burdens. Trump’s tax policy, aimed at large-scale corporate tax cuts, boosted investment, while Biden targeted tax credits for semiconductor and clean energy industries.
Third, technology innovation centers have fostered regional manufacturing. The Obama administration’s Advanced Manufacturing Partnership invested in emerging technologies, while Biden expanded this with the Tech Hubs Program, focusing on semiconductors, clean energy, biotechnology, and AI. These centers promote collaboration between industries, universities, and local governments, strengthening the U.S. manufacturing ecosystem.
Expanding the Use of State Protectionist Measures
National protectionism in the U.S. has two main models: one focuses on imposing high tariffs to limit foreign competition and encourage manufacturing reshoring, while the other strengthens federal “Buy American” policies to support domestic manufacturers.
Trump viewed tariffs as a tool to force companies to produce in the U.S., promising job creation and economic growth. “Buy American Goods” policies were also central to Trump’s approach. Early in his presidency, he issued executive orders to maximize the use of U.S.-made goods in federal procurement, aiming to stimulate economic growth and support American manufacturing. Biden expanded on this by issuing executive orders in 2021 and 2023 to prioritize domestic manufacturing in federal procurement and R&D investments. He also created the “Made in America Office” to oversee federal compliance with these policies, making the U.S. government a key player in promoting domestic manufacturing. Through these efforts, both administrations aimed to revitalize American manufacturing and create jobs.
Developing a Top-Notch STEM Workforce
To rebuild advanced manufacturing, the U.S. must focus on developing a skilled workforce, particularly in STEM fields. The U.S. Congress recognized the importance of STEM education through the America COMPETES Reauthorization Act of 2010, elevating it to a strategic priority. Obama, Trump, and Biden administrations all aimed to strengthen STEM education to support the manufacturing sector. With a shift toward economic nationalism, the Trump 2.0 administration may increase import tariffs and reinvigorate American manufacturing, including key industries like automotive and energy.
Conclusion
Since the late 1970s, industrial policy, once a taboo in U.S. economics, has become widely accepted, reflecting the failure of neoliberal economics. The U.S. faced issues like deindustrialization, job loss, widening inequality, trade deficits, and dependence on foreign supply chains—problems neoliberalism couldn’t solve. In response, new economic paradigms have emerged, supporting federal industrial policies. U.S. administrations, starting with Obama, have used a mix of “carrot” policies and “stick” measures to promote domestic manufacturing. The growing reliance on tariffs could significantly impact global trade dynamics.
About the Author
Liu Guozhu刘国柱：He is a professor and researcher at Zhejiang University, and the director/researcher of the Center for American Studies. His main research areas include US foreign relations, international relations, and non-traditional security issues. Liu’s multiple research reports have been collected and reported by the National Development and Reform Commission, the Ministry of Foreign Affairs, and CCTV.
About the Publication
Journal of Strategic and Decision-Making（《战略决策研究》）, founded in 2010, focuses on international studies, with an emphasis on international strategic research. It addresses major global, regional, and country-specific practical issues, prioritizing the academic rigor, contemporary relevance, and innovation of research findings, and is dedicated to advancing the development of international strategic theory and policy research. The journal adheres to an academic foundation, promotes problem-oriented approaches, values cutting-edge developments, and encourages interdisciplinary research. Regular sections include International Strategic Theory, Frontiers of International Strategy, and Global and Regional Governance.
