January 27, 2023

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We need an honest East-West discussion on industrial policy

In the 1970s, my grandfather, an electrical engineer in China, received an unusual job offer: Would he be willing to move from his city to the foothills of a remote Buddhist mountain, a half-day truck ride away, to work in a company? national importance?

The decisive factor was that my grandmother would also get a good job in the state and my mother, uncle and aunt would go to schools that were specially built for the company’s children. And so my family became part of the first Chinese industrial policy push to create a domestic semiconductor sector.

Fifty years later, the US and EU made a new push into semiconductor industry policy with the US Chips and Science Act and the EU Chips Act. But in the intervening decades, industrial policy never went away. Western and Eastern governments have used a range of tools to structure economic production and encourage technological innovation. The failures are largely forgotten, while the successes have been so paradigm-shifting that their origins are easily overlooked.

In the east, Taiwan made its foray into the semiconductor industry by funding research institutes and encouraging the acquisition of foreign technologies. The most successful result was TSMC, the world’s chipmaker whose annual research and development budget now rivals that of Europe’s wealthiest governments. In the West, the US funded defense research and drove countless innovations from its Apollo program, while Germany helped its auto champion Volkswagen with regional government subsidies and equity investments.

What has changed now is the scope of the industrial policy debate and its perceived urgency by Western governments. In China and Taiwan it has always been a priority: the consequence of the need to survive in an industrialized world with much wealthier enemies. Technological catch-up was a necessity for successful nation-building. My grandparents and their colleagues were proud to have been chosen for a mission: “to build from scratch the 64” (referring to 64 important raw materials, including silicon).

In the developed West, industrial policy thrusts came not as a grand crescendo toward modernization but in loud and quiet cycles, culminating in times when one power feared losing to the others. The US space race against Soviet Russia is a prime example, as is American dismay at Japan’s rise in the 1980s.

Now that we are back in a time of global order-shaking, the discussion is loud again. Western fears of the rise of China and concerns about supply chain security amid pandemic shortages drove the new EU and US chip policies.

As a result, Western governments are abandoning their taboos on talking about industrial policy, or orientalizing it as only appropriate for East Asia. Economist Dani Rodrik noted that the US Chips Act is significant because it “is a sign that we have gone well beyond market fundamentalism and shows that there is now bipartisan support for industrial policy.”

Hopefully this means we can start having a more honest global discussion about the existence and role of such policies. Not everyone succeeds, but they were necessary for the success of the East Asian “Tigers”. Even as developed governments practiced industrial policies, the World Bank warned developing countries not to do the same. The US has long accused China of creating an unlevel playing field for foreign firms, helpfully forgetting its own earlier 20th-century history.

Now Korean officials and Taiwanese chipmakers are criticizing the US for its attempt at industrial policy, which it began two generations ago. And why shouldn’t they? As Ha-Joon Chang, economics professor at Soas, puts it, the tech leader benefits from “pushing down the ladder.”

My grandparents’ factory, co-located with China’s first semiconductor materials research institute, was at the very beginning of the chip-making process: refining crystalline silicon, the material from which chips are made. Today’s politics are looking at the more appealing ends of the supply chain: the EU wants cutting-edge chip design and manufacturing.

The EU and US now face the problem of creating institutional capacity to strategically target funding and hold those who receive it accountable. Political economist Doug Fuller, who studies Taiwanese and Korean semiconductor policies, points to the building of policymaking capacity in these countries.

But scoffers of European ambition should not judge too early. Two generations after my grandparents’ factory was built, China now produces more than 80 percent of the world’s solar panels, aided by its dominance in crystalline silicon.