Does America Need an Industrial Policy?

By Fareed Zakaria, CNN

President Obama spoke forcefully in his State of the Union about the importance of reviving manufacturing in America. If you talk with economists they will tell you it’s a very complex problem, involving tax, trade regulatory policy, exchange rates, and educational skills. It is all those things.

But when you move from high-level policy to specific cases, you will often find one element that is rarely talked about: a foreign government’s role in boosting its domestic manufacturers with specific loans, subsidies, streamlined regulations and benefits. In effect, these governments – many in Asia, though some in Europe as well – have a national industrial policy to help manufacturers.

In a front page story last week, the New York Times detailed how Apple’s iPhone ended up being made outside America. The Times wrote about the Apple executives who visited a factory in China to see if it could cut the glass precisely for the phone’s touch screen. When the Apple team got there, the factory owners were already constructing a new wing. “This is in case you give us the contract,” the manager explained.

How could they afford such an extravagant gesture? Well, it turns out, the Times noted, that they received subsidies from the Chinese government. That one incident is part of a pattern.

In 2009, for example, Bridgelux, a light-emitting chip manufacturer in the United States, was searching for a new factory site, the company considered the cost of building in the U.S. and elsewhere. The government of Singapore offered to pay half the setup cost of the plant.

“Why can’t we do that here in the U.S.?” the CEO Bill Watkins asked.

Andrew Liveris, the CEO of Dow Chemical, has been arguing for a national policy aimed at reviving manufacturing. In his book, Make It In America, Liveris argues that not only would a manufacturing policy produce good, long-term jobs, it would upgrade the job skills that are crucial to keeping innovation alive.

“Innovation doesn’t just happen in laboratories by researchers,” he told me. “It happens on the factory floor. The process of making stuff helps you experiment and produce new products. If everything is made in China, people there will gain the skills, knowledge and experience to innovate. And we will be left behind.” He worries that with tablets like the iPad and Kindle being made mostly in Asia, the next generation of these products could well be imagined there.

Companies can’t compete with countries, he says.

Take solar energy, an industry largely invented in America, in which the manufacturing has largely moved to China thanks to massive state subsidies. Or consider wind turbines: China’s biggest windmill makers have received more than $15.5 billion in credits from state-owned banks.

As a result, despite many concerns about quality, they won their first major foreign orders in the past year.

In theory, I am deeply skeptical of government industrial policy. Government doesn’t know how to pick winners and losers, it makes mistakes, the process gets politicized.

And yet, when I look around the world, particularly in Asia, I see governments playing a crucial role. They do make mistakes – their versions of Solyndra – but they seem to view it like venture capitalists.

Their role is to seed many companies, only a few of which will succeed. Once successful, the government helps these companies to compete against big American multinationals.

There used to be a joke about Marxist economists who would say of a deviation from pure Communist economics: “It might work in practice, comrade, but it doesn’t work in theory.”

That’s what industrial policy looks like these days.

The theory doesn’t make much sense but it’s hard to argue with the results.

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