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The revival of industrial policy means bad news for the emerging tech sector

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executive summary

Bipartisan legislation, such as the US Innovation Competition Act (USICA), has shown interest among a series of policy makers in strengthening priority sectors and using industrial policy to counter China’s economic impact. I am. The use of industrial policy in the past has often been transformed into resources managed by politically linked and unsuccessful investments, rather than promoting general welfare. Even with good intentions, policy makers lack the incentives and knowledge to make the best decisions about market direction, and as a result, industrial policy has historically resulted in poor or unsuccessful investment, and taxpayers I was paying for it. An alternative strategy to promote the strategic sector is to reduce barriers to entry and innovation, including focusing on easy regulation and the elimination of regulatory bureaucracy.

Preamble

Policy makers on both sides of the aisle have expressed concern about intensifying economic competition and the impact of other countries such as China. Not only are these countries aiming to replace US economic leadership in key industries such as technology, but they are also seeking to expand geopolitical control through active economic intervention. In response, federal policy makers will consider several means of industrial policy that are government-led support for a particular company or industry with the aim of strengthening a particular technology or company that is considered important. I am. The US Innovation Competition Law (USICA), which includes the Endless Frontier Law (EFA) and the Creation of Incentives for Semiconductor Manufacturing (CHIPS) law, is an example of such industrial policy.

Nevertheless, history has shown that previous attempts to use industrial policy in both the United States and around the world have resulted in investment failures and inefficient spending with little impact on consumer well-being and competitiveness. It shows that it has been brought.

What is industrial policy?

The term industrial policy has been used for decades, but defining it has proven to be a daunting task. Policy makers and scholars expand or contract the definition of industrial policy depending on their mission and perspective, but develop or reduce a particular sector or industry that is generally considered strategic or national interest. It is defined as a national policy aimed at. This goal is achieved through targeted government intervention. This usually leads to tax incentives, direct investment, protection from foreign competitors, or exclusive privileges that do not normally occur in private sector competition.

Proponents of industrial policy efforts consider certain industries to be important to national interests and argue that government intervention in the market is needed to protect the well-being of Americans. By using this classification and rhetoric, policy makers justify the increased involvement or promotion of government involvement in these sectors. Such government intervention takes place in the US Space Program and the Global Positioning System (GPS), and those advocating industrial policy will either take a long time to develop or will not be developed without government direction and support. It is often emphasized as a likely technology. However, most industrial policies do not reflect investment in technology that fails to develop or is too slow to achieve the desired benefits, but reflects the manipulation of the market by the government.

Disadvantages of industrial policy

The fundamental problem with industrial policy is that government bureaucracy does not have the same incentives to focus on consumer welfare as market participants have. Unlike companies, policy makers do not invest their own resources, and their own success does not depend directly on the outcome of the target company. Therefore, those who make investment decisions do not bear the financial costs and cannot benefit from the decisions, and this isolation from the project is more politically convenient than the project that maximizes consumer welfare. Shift your decision criteria to prioritize your projects. Therefore, industrial policy tends to favor different types of business. Businesses with well-connected and strong lobbying teams, businesses in politically popular sectors, and businesses in trending markets.

The twisted incentives for policy makers are clear. As in the case of Solyndra, politically popular sectors and businesses allow policy makers to brand themselves as advocates of green energy and manufacturing. There are also clear electoral incentives. When policymakers invest directly in strategic or booming sectors labeled as essential to economic growth, they can afford to fail because they have to do something. The tolerance for this failure can be particularly relevant if the investment is likely to occur in a member state or district. In short, industrial policy chooses winners and losers rather than maximizing consumer welfare.

Another important issue with industrial policy is its timeliness. Industrial policy is not a rapid process and can become obsolete before its solution is realized. For example, semiconductor shortages due to both pandemic-related supply chain disruptions and an increase in smart devices are curbing production in various industries. Some products, such as smart toasters and refrigerators, may be more than sufficient for consumers who do not have microchips, which leads to long manufacturing processes and high rarity, which allows businesses to reduce their dependence on semiconductors. You may choose. This is a discovery process that is unique to the market process. Manufacturers of various products need to determine whether the current use of rare semiconductors is efficient and adapt accordingly. Policy approaches such as the CHIPS Act, which focuses on funding the establishment of new semiconductor factories, can be very risky as they lock resources into these technologies. By the time these factories are built (which can take up to three years), the demand for semiconductors can drop significantly and investment can be wasted.

The application of these policies is often associated with favoritism, as businesses lobby violently against endangered public resources. However, as the cases in Japan, Europe and the United States show, companies often fall short of their promises to bid on these profits, so invested resources do not always lead to economic growth. Taxpayers remain exacerbated by seeing their valuable resources being swept into low-return, high-risk investments. In addition, consumers are facing less dynamic markets. SMEs are finding it harder to compete with large companies that are enjoying benefits such as tax cuts, subsidies, and access to low-cost loans.

Lessons from the past: US and overseas industrial policy

Promoting industrial policy in the United States to counter the progress of other countries is nothing new. From the 1980s to the 1990s, industrial policies were widely sought to counter the rise of Japan. Much of Japan’s success was due to domestic industrial policy. Proponents of using a similar approach in the United States argued that Japan’s economic rise could pose an inherent threat to US leadership and possibly fuel another war. This fear led to a fervent anti-Japanese campaign involving policy makers hitting Japanese products with a big hammer in front of the Capitol.

However, further examination of the implementation of these policies in Japan reveals that these policies have not produced the intended results. A 2007 study of Japan’s industrial policy revealed that Japan’s economic growth could be primarily due to labor and financial market reforms rather than industrial policy efforts. Industrial policy allowed for increased production in the sectors to which it was applied, but those increased production did not appear to improve welfare. Meanwhile, labor and financial market reforms have enabled process innovation and increased capital goods and investment, facilitating innovation. Industrial policy is also widely used in the European Union and its member states and hopes to enhance innovation in the technology industry. Nevertheless, EU intervention has failed to position the continent as a competitive edge in the technology market. In 2019, no European company made a list of the 10 most valuable companies in the world. Despite the large investment, European industrial policy can hardly be shown, but there are multiple failures such as Minitel, Galileo and Quaero. In all of these cases, policy makers sought to enter emerging markets such as the Internet, GPS, or search services with large investments backed by taxpayers’ money. Most of these initiatives were short-lived, faced with multiple delays, or did not offer innovation in the markets they entered.

In the United States, cases such as federal investment in solar energy company Solyndra and Wisconsins Foxconn subsidies, while taxpayers face costs, some have failed to achieve these types of policies. Shows whether people tend to be privileged.

Better way: less regulated approach

USICA responds to legitimate concerns about the importance of sectors such as semiconductors and artificial intelligence (AI) in the current economy. Policy makers are naturally afraid that countries such as China could threaten US leadership and lead to harsh decisions regarding product choices for both the US and its allies. Nevertheless, the use of industrial policy tools is not the most effective way to drive growth and maximize the well-being of Americans. Markets and technologies are constantly changing, often in unpredictable ways.

Policy makers should consider encouraging private sector innovation and development by reducing annoying government hurdles, rather than relying on government’s tedious intervention in the market. An example of this type of approach is the Clintonian framework for global commerce, which encouraged further development of Internet services and commerce. Instead of encouraging direct government intervention, the framework discouraged reducing the amount of regulatory bureaucracy and imposing new tariffs and taxes on Internet commerce. The bill recognizes the explosive and decentralized nature of the Internet, making regulation inconvenient and potentially harmful. Government regulation in this sector was only stipulated under certain conditions as a last resort. With this framework, e-commerce is growing rapidly and consistently, with internet shopping now accounting for 14% of all retail revenue.

Use of soft law tools such as policy guidance and regulatory sandboxes[AK6], Consensus Standards, or Pilot Programs can enable flexibility and innovation, and provide alternative mechanisms for industrial policy. This approach can be particularly useful for federal policies targeting technologies such as semiconductors and AI, as it can investigate regulatory barriers and work with innovators on regulatory policy to support these industries. By adopting policies with a technology-neutral approach, market players can quickly adapt to these changes and support unpredictable and productive evolution and applications. For example, the adoption of federal standards provides baseline federal standards that give companies legal certainty of their business while allowing experiments at the state level. This certainty is valuable to companies looking to make significant long-term investments, such as semiconductor factories, by allowing them to more accurately calculate their return on investment.

Conclusion

Due to concerns about the rise of competing economies such as China, policies such as USICA are trying to counter the domestic and international influences of these countries. These bills propose an expanded role for the federal government in strategic sectors such as AI and semiconductors. However, this strategy does not guarantee success and has consistently underperformed in the past. Policy makers often lack the incentive to correctly assess the market they want to intervene in, often directing resources to low-value uses. Handy approaches such as sandboxing and deregulation can instead prosper these strategic sectors by removing the barriers that constrain innovation.

Sources

1/ https://Google.com/

2/ https://www.americanactionforum.org/insight/the-return-of-industrial-policy-means-bad-news-for-emerging-technology-sectors/

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