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The New Industrial Policy and Its Critics

For many years, industrial policy was considered taboo in the United States and many other advanced economies, owing to assumptions that it is inherently protectionist and market-distorting. But context matters, and in today's world, state interventions to address market failures are exactly what is needed.

BERKELEY – Industrial policy has surged to the top of the national agenda in the United States and other advanced industrial economies. This represents a radical departure from recent economic history, and it has revived an older debate in which we both participated more than 30 years ago.

In the US, the CHIPS and Science Act, the Inflation Reduction Act (IRA), and the Bipartisan Infrastructure Act have set significant national-security and climate goals. Each leverages subsidies, tax credits, loan guarantees, and other standard industrial-policy tools to foster research, production, and employment by the private sector in key areas of the economy.

These instruments are being used today under very different conditions than 30 years ago. National self-sufficiency – often with mercantilist objectives – was the goal of industrial policy in the past. Now, as a result of the rise of complex global supply chains and China’s emergence as a formidable geopolitical and economic competitor, national sovereignty, understood as a vertically integrated domestic capacity by nationally-owned firms in targeted sectors, is simply infeasible.