US industrial policy needs to be systematic, not just ad hoc – Part 2
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Impact #5 of ad hoc industrial policy: Failing to use all required tools
Industrial policy is often caricatured as just tariffs and subsidies. Mis-framed debates that evaluate the merits of tariffs in isolation (inevitably concluding against them) are a dime a dozen. But the industrial policy toolbox is much larger, and industrial policy can only be rightly evaluated as the success or failure of an attempt to deploy a package of tools.
This includes tariffs, quotas, local-content rules, stage-differential tariffs, procurement requirements, export controls, investment screening, publicly funded R&D, tax credits, loan guarantees, federal equity stakes, technological standards-setting, workforce development, infrastructure investment, local and federal permitting reform, regional cluster cultivation, technology extension services, currency management, and demand guarantees.
These tools are most effective in combination. Many are useless or even counterproductive when used alone, because they depend upon other conditions obtaining, or create incentives that can be responded to in both good and bad ways. For example:
- A tariff without antitrust enforcement can produce a complacent industry.
- An investment subsidy without tariff protection can finance capacity that gets undercut by imports.
- Technology development without domestic production incentives can generate inventions that get commercialised abroad.
- Workforce training without support for the employing industry can train people for jobs that don’t exist.
- Government procurement in isolation can buy overpriced “hothouse flowers” without rebuilding an industry capable of mass production for the non-governmental market.
- Local and federal permitting reform without strategic targeting can accelerate low-value projects while leaving critical bottlenecks unresolved (examples here, here, here, and here).
Consider aluminium. A tariff has improved the economics of existing domestic producers, but because they compete with foreign producers enjoying subsidised electricity, this has not resulted in any new primary smelting capacity in the US. The closest the US has gotten is one unbuilt project in Oklahoma that is still pending a solution to the power problem.
We don’t necessarily need great depth of policy intervention in every industry. But we do need, in every industry, to systematically decide what is and is not needed.
Impact #6 of ad hoc industrial policy: Failing to coordinate tools
Constructing America’s industrial policy package on ad hoc basis just begs for multiple failures to coordinate policy tools. Such failures have already occurred.
For example, the US now has tariffs in a wide range of industries, for an average calculated as between 8 and 10 per cent. But we also have a currency overvalued at estimates ranging from 12 to 17 to 19 to 20 per cent. It follows that, whatever the precise numbers, we do not on net and on average have a tariff at all, despite three successive administrations that embraced tariffs. (And, of course, there’s also the economic headwind for America’s exports created by the overvalued currency.)
Our currency problem has been acknowledged by Treasury Secretary Scott Bessent, Commerce Secretary Howard Lutnick, Chairman of the Council of Economic Advisers Steve Miran – and even by President Trump himself here, here, here, here, and here.
The solution, a moderate, variable tax on foreign capital flows into the US known as the Market Access Charge (MAC), is known. The US and multiple foreign nations have done similar things in the past. All our major trading partners make at least some effort to actively manage their currencies. But nothing has been done.
Predictably, given the fact that absent currency management, tariffs tend to induce currency appreciation (though not necessarily a full offset), this has doomed any hope of rebalancing America’s overall trade. America’s trade deficit in 2025 was thus a higher percentage of GDP (2.9 per cent) than in 2016 (2.7 per cent), when Trump was initially elected in large part on the strength of voters’ belief that America’s trade had been mismanaged. The resulting trillion dollars of missing demand for domestically produced goods remains a bar to America’s reindustrialisation.
As another example of coordination failure, consider current industrial policy in AI. This industry has received an ambitious package including a federal framework to coordinate AI R&D, federally funded university-led AI research institutes, subsidised domestic semiconductor fabrication, export controls on advanced AI chips, federal coordination on AI safety, fast-tracked federal permitting for AI data centers, federal procurement of AI models, and proactive AI adoption in national security.
However, the Trump administration has also, in the face of soaring demand for electricity, pulled the plug on multiple green sources thereof, most capriciously but not only offshore wind, where it spent nearly USD 3 billion to compensate firms for terminating already-permitted projects. China, while no friend to the environment in its electricity generation policies, has pursued a source-agnostic “all of the above” approach.
At a minimum, the US should not have industrial policies operating at cross-purposes to each other. Ideally, policies should strengthen and support one another.
Impact #7 of ad hoc industrial policy: Irrational trade-offs
Ad hoc policymaking will never be able to handle trade-offs honestly or efficiently. This is critical, because industrial policy at meaningful scale inevitably imposes significant costs on the rest of the economy. Whether any given policy is worthwhile depends upon understanding these costs and their corresponding benefits, including non-economic benefits such as national security, public health, or environmental protection.
One of the classic ways a nation can fail at industrial policy is to see only the benefits of any given policy, such as standing up an industry domestically, without counting the costs. This remains true even when these costs are widely diffused, poorly understood, or otherwise pass unnoticed.
For example, tariffs, at the modest levels the US has thus far imposed them, have not proven to induce overall inflation upon detailed examination of the data. But they can certainly produce price increases in individual products (though sometimes this is only a temporary spike). A similarly complex pattern holds for producer, as opposed to consumer, goods.
Whether these potential price effects are worthwhile depends on the value of the industry thereby saved domestically or reshored. The analytical wrinkle is that, contrary to oversimplified theory and the expectations of most economists, a straight 1:1 relationship between tariffs and price increases is not empirically what happens, due to competition, sunk costs, demand and supply elasticities, corporate pricing strategies, and other factors. This complex reality will need to be part of any weighing of any future protectionist measures.
Another example of difficult trade-offs: Restricting exports of advanced technology will indeed handicap rivals who need that technology to build their own industries. But it will also reduce revenues for the restricted American exporters, making it harder for them to afford to remain at the technological frontier. And, of course, it will encourage the rival to develop its own technologies.
Another example: Trade barriers don’t only raise buyers’ costs. They can diminish product variety and reduce the competitive pressure that, paradoxically, benefits the domestic industry by driving it to excel and innovate.
And subsidising one technology path may crowd out another that would ultimately have proved superior.
Impact #8 of ad hoc industrial policy: Rational decisions require institutions
For government to make the above choices with adequate information, correct logic, and public accountability requires institutions. It cannot be handled like a succession of repeated one-off projects like presidential campaigns.
Industrial policy needs to become a standing national mission like defense, energy, transportation, or environmental protection. It requires permanent analytic capacity, technical expertise, and institutional memory. Among other things, this means a cadre of career officials.
The authors’ proposal for an Industrial Policy Council (IPC) modeled partly on the National Security Council and National Economic Council is one possible way to institutionalise these capacities. The IPC would coordinate agencies and require the government to examine industries, supply chains, competitor policies, trade balances, capital flows, and domestic capabilities as an integrated whole. It would produce an indicative multi-year industrial strategy, “indicative” meaning that the strategy would not embody prescriptive authority, would not be intended for adoption as a single bill, and would not claim to be an exhaustive description of US industrial policy.
If industrial policy is left entirely to the executive branch, it will be unstable, insufficiently vetted, and vulnerable to capture, so Congress will also need formal, expert decision-making capacity. Its committees will need staff who understand industrial organisation, trade, technology, manufacturing processes, finance, and supply-chain structure. The old Office of Technology Assessment should be revived or replaced with something stronger.
Government agencies that will actually implement industrial policies, ranging from the Treasury to the NSF, will also need staff specialising in industrial policy.
None of this should aim at “depoliticising” industrial policy or making it something like the process by which the Fed sets interest rates or the FDA approves drugs. That would be impossible, because:
- Industrial policy is an insufficiently deterministic body of knowledge to be reduced to a standardised routine.
- Industrial policy involves too many choices about ends, as opposed to means, are inherently political.
This would also be undesirable, even if it were possible, because this is a democracy. Instead, the objective should be to make political disagreements occur on top of a shared understanding of facts, tools, and goals.
Impact #9 of ad hoc industrial policy: Lack of legitimacy
Industrial policy at sufficient scale will require true political legitimacy, not the mere passive public acceptance that we have today, which apparently suffices for a bundle of scattershot policies.
If voters are to accept the costs of industrial policy, they are going to need to understand how they will benefit. Selling Biden’s green energy initiatives as climate policy, rather than support for an inevitable technological transition designed to protect the competitiveness of American industry, was probably a mistake.
Legitimacy means, as with any major government policy, acceptance of the need for it as a general proposition, so that people are not put off the whole idea when the inevitable failures occur.
In a technocratic democracy like the US, legitimacy must hold with both Washington policymakers and with the electorate at large.
Individual voters will not need to become experts in semiconductor lithography, shipyard finance, or pharmaceutical precursors. But they will need to understand, albeit in the simplified way mass electorates do, certain basic ideas:
- It matters what industries, and what economic activities within them, exist in the US, because this will determine whether good jobs will be available for them and their fellow citizens.
- Markets are great, but they’ve never been the whole story, not in the US or any other successful country. Successful nations use a long list of other policies.
- Trade is a good thing for many reasons, but foreign nations will take advantage of us if we let them. So America needs tariffs and a competitive dollar.
- Technology doesn’t just come from Silicon Valley entrepreneurs, but from a long road many of whose steps need to be executed by the government.
Without such understandings, voters will have to choose between presidential and congressional candidates who claim to support sound industrial policy, but without any basis upon which to judge. Both demagogy’s appealing but ineffective solutions and the phony expertise of “experts” will have free rein.
Without entrenched public appreciation of industrial policy, the lazy generalisations of “picking winners is wrong” on the right, and “helping corporations is corporate welfare” on the left could potentially combine to snuff out industrial policy entirely.
The fact that the average voter realised America’s “free trade” policy was a mistake long before the experts in government or academia did should serve as a reminder not of the superior wisdom of the masses, but of the fact that a successful democratic society needs policy wisdom (wisdom, not expertise) at both the popular and elite levels.
But voters don’t bother to understand isolated fragments of things. They bother to understand things they view as important, and they form a gestalt impression of the issue. For this to happen, industrial policy must form a whole in their minds.
Impact #10 of ad hoc industrial policy: Lack of discipline
Industrial policy must include discipline. The state must have the capacity not only to support industry, but to demand performance from it. Firms receiving protection or support should be expected to invest, upgrade, train, export where appropriate, and meet measurable milestones, such as market share and job creation.
Industrial policy must not become an open-ended subsidy machine or get stuck in the rut of programmes continued out of mere institutional inertia. Programmes will need clear objectives, performance benchmarks, sunset provisions or periodic reauthorisation, independent evaluation, and the ability to terminate failures.
The US is quite capable of doing this. In decades past, the US successfully terminated huge programmes for synthetic fuels and a supersonic transport when their usefulness or feasibility became dubious. This sort of behavior is most likely to become standard operating procedure when industrial policy is systematic, i.e., when voters and politicians have expectations.
An entrenched public sense of the legitimate objectives of industrial policy will also help discipline against the hijacking of economic objectives by extraneous political ones, such as Trump’s retaliatory tariffs on Brazil for its prosecution of its former president or on India for buying Russian oil. The same goes for worthy but peripheral social-policy objectives, such as the affordable childcare required by the CHIPS Act.
As shown by Trump’s termination of many of Biden’s green energy initiatives, policies depending upon the political will of individual administrations are vulnerable to abandonment and failure. A better grounding in public opinion would also militate against such policy flip-flops, which in this case have thus far cost the auto sector alone USD 52 billion in write-downs (source, source, source).
A solid grounding in public opinion can only come from the public being explicitly told, over and over again, by America’s highest leaders in both parties why the US is embracing industrial policy. Said explanation will need to be comprehensive because, as argued above, only a comprehensive industrial policy truly makes sense or will hold the public’s attention.
Conclusion: This is required for industrial policy to survive
If America doesn’t get truly systematic about its industrial policy, there is a grave impact the current trend will stall out. As the authors documented in their book Industrial Policy for the United States: Winning the Competition for Good Jobs and High-Value Industries, movements in favor of proactive industrial policy have stalled out before. Nixon was secretly researching one in the early 1970s. In the early 1980s, the decline of American competitiveness produced a serious debate about industrial strategy. But it then fizzled. Bill Clinton campaigned in the early 1990s like he was going to impose one, but in office he did not. We cannot afford to make this mistake again.
Marc Fasteau is a retired banker, entrepreneur, and real-estate developer. He is a vice-chair of the Coalition for a Prosperous America (CPA), a think tank and lobby group composed of labour, agricultural, and industrial interests that supports trade and industrial policies favouring domestic producers. Years ago, he was a congressional economic staffer. He is a graduate of Harvard College and Harvard Law School, where he was on the Law Review. He lives in New York City and Santa Fe, NM.
Ian Fletcher was Senior Economist for CPA from 2010 to 2012 and is currently a member of its Advisory Board. Before that, he was a Research Fellow at the US Business and Industry Council, an economist in private practice, and an IT consultant. He predicted the demise of free trade in his 2010 book Free Trade Doesn't Work: What Should Replace it and Why. He was educated at Columbia University and the University of Chicago and lives in San Francisco.
Note: This is exclusive coverage by AL Circle in partnership with Marc Fasteau and Ian Fletcher and may not be reproduced, republished or shared without prior permission.
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