Lessons From Past Industrial Policy Offer Insight For Chip Development

With the launch of the $53 billion federal Chips program on Tuesday, the United States officially adopted "industrial policy"—the deliberate use of resources provided by the state to support certain industries.

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Such excursions have been uncommon in Washington for a reason. Governments rarely have a better understanding of which technologies will succeed than the market, and they frequently add goals to the endeavor that have little to do with promoting the growth of the targeted industry.

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These concerns are receding. Governments all around the world are controlling the rate of industrial development due to geopolitical rivalry, supply shortages brought on by pandemics, and the switch to zero-carbon energy. Together with the Inflation Reduction Act, a U.S. initiative that invests billions of dollars in electric cars, and other green energy. 

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According to historical evidence, the United States' industrial policy has typically had the best chance of success when it has a clear goal in mind, like sending a man to the moon or creating a Covid vaccine. When attempting to reverse economic downturn or pursuing haphazard social and regional development goals, it has had the least success.

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The program documents made public on Tuesday imply that Gina Raimondo, the secretary of commerce, has both learnt from the past and yet runs the risk of making some of the same errors.

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Industrial policy, sometimes known as "picking winners," can be viewed as un-American since it puts the opinions of bureaucrats and politicians above those of the free market.

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The United States has really a long history of interfering to help specific sectors. The first American president was Alexander Hamilton. In order to compete with the UK, the Treasury Secretary supported protection for American manufacturing.

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Following World War II, governments in East Asia and Western Europe supported or made investments in businesses that they saw as essential to their countries' development. American industrial policy was slightly different. The Military and the National Aeronautics and Space Administration assisted in attracting funding for emerging technology, such as jets and lasers, in the 1950s and 1960s. They were early customers of companies like Texas Instruments Inc. and Fairchild Semiconductor International Inc., whose top engineers later founded Intel Corp., as they required semiconductors to direct ballistic missiles and the Apollo spacecraft.

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The Trump administration's Operation Warp Speed, which spent billions of dollars supporting the development and acquisition of experimental Covid-19 vaccines, successfully duplicated this form of industrial policy through "induced demand" in 2020–21. The end result is a number of extremely successful vaccines that make use of cutting-edge technologies, such messenger RNA, and are now being used to treat other diseases, like cancer.

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But, the U.S. also gathered numerous instances of unsuccessful industrial policy along the road. Supersonic airplanes and quick-breeder nuclear reactors were unsuccessfully developed. According to previous President Donald Trump, Taiwan's Foxconn Technology Company agreed to build a flat panel display facility in Wisconsin, but it has not yet done so. To preserve industries deemed essential to the country, Congress and administrations have regularly used tariffs, quotas, and other trade barriers. The Jones Act of 1920 still mandates that cargo moving between American ports be transported on ships made in the country in order to maintain the shipbuilding sector and, consequently, Navy readiness. Quotas were employed by President Kennedy to safeguard textiles. Steel and aluminum were protected by tariffs under President Trump. Prices have often gone up for American consumers while the targeted industry has continued to shrink as a result.

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The key takeaway is that when a goal is well-defined and utilizes incentives from the private sector, industrial policy is most likely to be effective. When it is utilized to address several societal issues that are unrelated to the industry's economic viability, it has a lower chance of success.

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Generally opposed to government action, former Treasury Secretary Lawrence Summers claims: "I like industrial policy advisers how I like generals. The most averse to war yet willing to fight when necessary are the best generals. What worries me is how much those who work in industrial policy like their work.

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Republican lawmakers supported Chips alongside Democrats despite their normal reluctance to interfere in the market because to the distinctive nature of the sector. Although semiconductors are essential to both industrial and military technologies, a growing portion of their production has shifted to China, South Korea, and Taiwan in recent years. As a result, the United States is heavily dependent on two geopolitically risky places and one potentially hostile country (China). The vulnerability has been described by Treasury Secretary Janet Yellen as a "externality," which is economistspeak for a cost, such as pollution, that doesn't factor into a private actor's calculations and justifies government involvement.

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Commerce officials claim to have taken these considerations into account. The financial requirements Ms. Raimondo outlined on Tuesday focus on particular semiconductor types that are essential to national security but lack production capability in either the United States or its partners. That, they claimed, gives the private sector a very clear signal about where to focus its resources. The requirements also clearly state that initiatives must be economically sustainable after receiving funding from Chips, and they support the growth of two new supplier industrial clusters that are deemed necessary for a healthy environment.

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Yet, the Biden administration is also working toward more general social objectives in other ways, a type of mission creep that can jeopardize success. Recipients of funding are required to offer "affordable, accessible, reliable and high-quality child care for both facility and construction workers," pay union-scale wages for construction, and, ideally, use organized labor.

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They are not permitted to repurchase stock or pay dividends using public assistance. Joint ventures and licensing agreements are not permitted in China. The government must receive a portion of their unexpected earnings.

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They decrease users' financial flexibility and raise costs, which detract from the program's appeal to businesses. Similar requirements imposed on bailouts after the 2008 financial crisis pushed banks to repay the funds as soon as feasible rather than using them to increase their lending capacity. Because of the unappealing terms, a Federal Reserve lending program for medium-sized enterprises during the COVID-19 pandemic attracted few applicants. The objectives of Chips would be harmed by a lack of involvement.

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These circumstances, to be sure, haven't yet waned interest. Officials from the Department of Commerce point out that many semiconductor companies already offer child care and pay high wages, and that the enabling legislation mandates some requirements, such as union wages and buyback restrictions. They claim that the windfall profit-sharing forces applicants to be upfront about the amount of assistance they require.

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However, officials will be free to interpret the rules anyway they see fit. They must recognize their leverage in order to accomplish this. The $3 trillion that semiconductor companies were anticipated to spend on capital expenditure and research and development over the next ten years, according to a 2021 report, is small compared to the $39 billion allocated for factories, which is easily more than what the U.S. has previously spent on sector-specific industrial subsidies. Also, these businesses have options. China's ambitions have not abated, and countries like Japan, the European Union, South Korea, Taiwan, Canada, and India are all offering or considering their own incentives for chip manufacture.

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This brings up one more risk: it becomes more difficult for anyone to succeed when so many nations adopt the same industrial agenda. With so much public funding going after semiconductor manufacturing, an oversupply may develop in the ensuing years. To prevent that, Ms. Raimondo claimed she is speaking with US allies. Although beneficial in theory, it has yet to be seen whether such coordination can be accomplished in reality.