August 28, 2020 5:23PM

Conservative Industrial Policy and the “China Threat”

The Washington Post reports that many conservatives are ditching their “free market orthodoxy” due in large part to Chinese industrial subsidies that allegedly threaten critical parts of the American industrial base:

Since the Reagan years, Republicans have taken the opposite view — that government should stay small and out of the way and not engage in what has been derisively referred to as picking winners and losers. But China’s rise is forcing them to rethink that.

China’s central and regional governments are investing heavily in high‐​tech fields such as aircraft and electric‐​car manufacturing, semiconductors and robotics, by some estimates providing hundreds of billions of dollars to domestic companies through subsidies and other support.

As evidence of this shift, the Post cites to recent federal legislation, passed overwhelmingly by both chambers of Congress and praised by Republican industrial policy advocates, that provides billions of dollars in new subsidies to U.S. semiconductor manufacturers. As I noted a few weeks ago in a lengthy and skeptical blog post on the bill, the primary basis for these subsidies — according to its sponsors and other supporters (and confirmed by the Post) — was the aforementioned China threat, in this case the billions of dollars that the Chinese government is spending to develop a globally‐​competitive semiconductor sector. To its credit, the Post briefly notes my skepticism before quoting many others at length who are supportive of the semiconductor plan and broader U.S. industrial policy efforts (one of whom rejects “naive” libertarian views about government involvement in the economy).

However, the Post unfortunately omits much of my argument against the new U.S. subsidies, most notably the numerous reports (including a lengthy U.S. International Trade Commission analysis in 2019) that China’s semiconductor sector, despite all of those subsidies, was hardly a threat to the thriving — and in many respects globally dominant — American semiconductor industry. Today from the South China Morning Post comes further evidence of that fact:

At an idle construction site in western Wuhan, China’s steep climb to semiconductor independence is clear for all to see.

The partially‐​built factory, owned by Wuhan Hongxin Semiconductor Manufacturing Company (HSMC), was meant to be a key part of a US$20 billion investment that turned the province into a chip manufacturing hub.

But two years after it was started, construction has ground to a halt, with little evidence of progress beyond a few cranes, workers’ dormitories and steel frames jutting into the air.

The project, which the local Dongxihu district government said in July had stalled due to underfunding, is the latest example of a Chinese chip factory hitting the rocks because of poor planning or funding shortfalls.

Earlier this year, a US$100 million manufacturing plant set up by US chip giant GlobalFoundries and the Chengdu city government ceased operations after remaining idle for almost two years. In the country’s east, a US$3 billion government‐​backed chip plant owned by Tacoma Nanjing Semiconductor Technology went bankrupt in July after failing to attract investors.

Be sure to read the whole thing, which details the HSMC project’s many (sometimes humorous) problems and again indicates that China’s grand semiconductor plans and massive subsidies are not nearly as threatening as U.S. politicians and industry lobbyists make them out to be.

The semiconductor episode also permits two broader lessons. First, it shows that the mere presence of foreign government subsidies is rarely, if ever, a good reason for American ones — especially when they’re going to a profitable U.S. industry with billions in domestic capital expenditures (and billions more cash on hand). Second, it provides another good example of why some libertarians remain skeptical of U.S. industrial policy plans. All too often — even (or especially) in the case of “national security” and China (or Japan before it) — ideas that sound good and necessary on paper are revealed upon closer inspection to be corporatist giveaways that counter imaginary threats and end up doing more harm than good. Maybe the U.S. government can overcome these obstacles in the future, but both the semiconductor subsidies and numerous other examples indicate that it’s not the skeptical libertarians who are being naive here.