China Is Scaling Back Its Failed Semiconductor Industrial Policies. America Should Do the Same.

The Biden administration's rush to engage in more centrally planned industrial policy, particularly when it comes to the production of semiconductor chips and other high-tech manufacturing, has always been framed as an attempt to counter China.

In fact, it's right there in bold print at the top of a White House's "fact sheet" about the passage of the CHIPS and Science Act of 2022, the legislation that will funnel $52 billion of public subsidies into the pockets of semiconductor manufacturers in the coming years. The bill will "lower costs, create jobs, strengthen supply chains, and counter China," according to the White House. When The New York Times covered the bill's passage in August, it dutifully reported right in the headline that the massive "industrial policy bill" would "counter China."

The idea that China's own massive public investments into high-tech manufacturing require a response from the U.S. is also accepted as fact by many Republicans. The bill passed both chambers of Congress with bipartisan support. Rep. Michael McCaul (R–Texas), the highest-ranking GOP member on the House Foreign Affairs Committee during the last session, told Politico that the bill was "vitally important to our national security."

"There are nation states—in Europe, in Asia, particularly China—that are heavily investing in both science and in advanced manufacturing," Senate Majority Leader Chuck Schumer (D–N.Y.) said in July, summing up the case for the bill and for greater industrial policy in general. "If we sit on our hands and do nothing, America will become a second-rate economic power."

To defeat China, the argument goes, the U.S. must adopt the tactics of the Chinese Communist Party, at least when it comes to high-end manufacturing.

How's that going on the far side of the Pacific? Not so great, actually.

"China is pausing massive investments aimed at building a chip industry to compete with the U.S.," Bloomberg reported last week. "Top officials are discussing ways to move away from costly subsidies that have so far borne little fruit and encouraged both graft and American sanctions, people familiar with the matter said."

Industrial subsidies bearing little fruit and encouraging graft? What an unexpected outcome!

Of course, that's exactly what top-down industrial policy tends to be best at producing. China might be relatively new to this game, but industrial policy has a long, mostly ugly history in other parts of the world—including right here in the U.S.—and there's little reason to think that this time will be different.

China's shift away from industrial policy seems to be driven, according to Bloomberg, by the strain that COVID-19 has put on the country's economy and fiscal policies rather than by any sudden rediscovery of the benefits of free markets. Even so, there's a certain irony to the Chinese government changing course just months after U.S. policy makers decided that we had to copy China in order to compete with it.

Writing for National Review, Veronique de Rugy notes that the hugely expensive subsidies included in the CHIPS and Science Act are intended to take the American share of semiconductor manufacturing from 12 percent of the global share all the way up to 14 percent by 2030. That's not a lot of bang for the taxpayers' truckloads of bucks.

"I have always believed that this mimicking of Beijing's economic policies is nuts. I don't see how becoming more like Communist China, with its warm embrace of central planning under President Xi, will strengthen us economically," writes de Rugy, a Reason contributor and economist at the Mercatus Center. "In fact, as similar historical episodes suggest, it will weaken our economy. And it will do so for the very same reason that Beijing's own heavy-handed interventions are now weakening the Chinese economy—a realization that appears to be dawning on Chinese leadership."

The Bloomberg report says Xi is becoming frustrated about how tens of billions of dollars dumped into the semiconductor industry in recent years haven't produced major breakthroughs that allow the country's domestic chipmakers, like the Semiconductor Manufacturing International Corporation, to compete with the world's top producers.

America's foray into high-tech industrial policy seems to be on the same trajectory. The New York Times, for example, reported last week that "new chip factories would take years to build and might not be able to offer the industry's most advanced manufacturing technology when they begin operations." Meanwhile, everything from federal permitting requirements to America's broken immigration system is creating huge hurdles for the semiconductor manufacturers that are planning to expand their capacity in the United States.

It's relatively easy to shower an industry with public money, it turns out, but that's not all it takes to shift a global semiconductor market that's worth $528 billion. Indeed, if public subsidies were the answer, China would be "winning" the semiconductor manufacturing race by now.

In the rush to copy China, American policy makers may have missed what actually brought China to near the top of the global economy in the first place. It greatly liberalized its economy in the 1990s and early 2000s, and success followed.

"If the government targeted specific industries, this was done at the local and provincial level, as in the U.S," wrote columnist Noah Smith in his Substack newsletter today. "In other words, the leftist story that China's economic growth was a victory for central planning just doesn't make any sense for that period." China's industrial policy, he concludes, has mostly been "a flop."

Unfortunately, American policy makers were in such a rush to copy China's success that they didn't stop to ask whether they were ripping off the right part of the country's recent economic history. What started out as a nonsense plan to counter China is looking more and more like an excuse to simply provide piles of corporate welfare to domestic chipmakers.