By Samuel Hammond
Friday, February 15, 2019
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.
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