US industrial policy needs to be systematic, not just ad hoc – Part 1

After decades during which the very concept was taboo and the reality swept under the rug, the US has now rediscovered industrial policy. But this rediscovery remains incomplete, as too much of it is reactive, scattered, and driven by whichever crisis has the attention of the moment. This ad hoc approach can win a few economic skirmishes, but it will not be enough to win Cold War II.

Simply scaling up more and more ad hoc policies, the trajectory we are now on, will never produce a coherent strategy. This is because what counts is not the number of policies, their aggregate budget, or even how widespread they are. What counts is whether they fit together, effectively support each other, and serve rational overall industrial policy goals.

The biggest industrial policy issue now facing the country is therefore converting our scattershot, mostly defensive improvisations into a coherent national industrial strategy.

How to do this is, of course, an ongoing question we will be answering for decades to come. So we will not address it here. Instead, we will review the impacts of not doing so, to generate the required sense of urgency.

These policies were necessary and we should continue to respond similarly to similar threats. But this approach suffers from two problems that preclude it from being a template for a successful overall national industrial policy.

First, not every problem meriting an industrial policy response takes the form of a looming catastrophe. Sometimes the impact is just decades of suboptimal performance in a particular industry, such as autos – with all its negative implications for worker incomes, corporate profits, tax revenues, technological progress, productive capacity, the trade balance, and regional decline.

Second, some industrial policy needs do not derive from possible negative outcomes at all, but from opportunities that America would benefit by seizing. Some of most important technologies of the future will require years of government-funded nurturing before they mature enough for the private sector to take over completely.

Here’s an article on key past inventions that could hypothetically have been invented earlier. Whether state support could have helped accelerate their arrival is a case-by-case question, but the point stands: We risk delaying valuable innovations, or waiting for them to appear in another country, which will then reap their commercial benefits.

Impact #2 of ad hoc industrial policy: Solving only the obvious problems

An ad hoc approach risks addressing only sectors where the problems are obvious. These will get the tariffs, the subsidies, and White House attention. Other sectors will languish.

Consider how in recent years vast industrial policy attention has been lavished on new technologies that everyone is aware of, like electric cars under Biden or artificial intelligence under Trump, while it has not been given to less glamorous technologies that may prove almost as important in coming decades, such as new materials. (If you don’t even know what these are, that’s precisely our point.)

Or consider the machine tool industry, which has been in decline in this country since the early 1980s but has received little policy attention. Machine tools operate behind closed doors in factories, so the average voter is barely aware of their existence. But they are foundational for every other manufacturing industry.

Industrial robotics is another important, underpublicised field where the US has lagged due to a lack of industrial policy attention. Washington spent billions on military and space robotics, but almost nothing on industrial applications. Meanwhile, rivals like Japan, Korea, and Germany allocated huge resources to systematic strategies to build strong positions in the industry.

Impact #3 of ad hoc industrial policy: Waiting too long

Many industrial vulnerabilities are not obvious until it is either too late, or far more difficult and expensive to remedy them than if they had been detected earlier. In many industries, this sort of “frog boiling” is precisely how the US got into its present predicament.

China (and Japan decades earlier) repeatedly exploited this dynamic. These nations’ industrial-policy strategists knew they could rely on the progression of American perceptions from “America’s X industry is too strong to need help” to “America has only lost the low end of the X industry” to “America’s X industry is collapsing but we should leave it to the market” to “America’s X industry is too far gone to save, so no policy action is justified.”

The core problem here is that the loss of industrial capabilities and their recovery are asymmetric processes. Industries can be killed off very fast if starved of sales revenue by predatory foreign competition. But they will not just spring back up quickly if conditions change.

Most important industries have a large minimum viable scale, which means the investment required to jump-start them from scratch is huge. Also, capital investments, supplier networks, skills bases, customer relationships, and financing channels interlock, often presenting “chicken and egg” problems. Specialised suppliers may have lost their anchor customers and gone broke, leaving nobody in the US with the right skill set and production equipment. Skilled workers will have retired, switched sectors, and never trained their successors. Engineers have moved into other fields, their former expertise has decayed, and they never learned the current state of the art. Customers have redesigned their procurement around foreign suppliers.

Early on, while US production still exists, relatively simple, low-cost measures such as tariffs can suffice to bring an industry back to health. Later on, heavier handed, riskier, and more expensive measures, such as subsidies, governmental equity infusions, and guaranteed purchase agreements, can be required. Rare earths are a good current example of such a package that is actually now being implemented .

It follows that even skeptics of industrial policy should support a proactive “nip industrial problems in the bud” approach. But this requires three things:

1. Systematic governmental surveillance of the technological and financial health of American industries.
2. Systematic understanding of how industrial policy works, what it can do, and how it should be implemented.
3. Consensus in favor of taking action sooner, rather than later.