CHICAGO – U.S. political leaders have long tried to counter Chinese industrial policy. And now they seem to have decided that the best way to do that is to emulate it. But their agenda betrays a profound lack of understanding of the unique challenge posed by China’s coupling of an authoritarian political regime with a dynamic market economy.
Denationalizing under Zhu In fact, the private firms that now dominate the Chinese economy took off only after former Premier Zhu Rongji closed or privatized hundreds of thousands of state-owned companies in the early 2000s. The closures released capital to private firms and cleared the way for them to grow.
Such outcomes are all too common when governments subsidize industrial sectors, perhaps owing simply to a lack of accountability. After all, who is held responsible when billions have been wasted and the officials who allocated the funds have moved on to other posts? The support of local governments is particularly crucial for private Chinese firms. For example, the East Hope Group became the largest private aluminum producer in China with the support of the small city of Sanmenxia in Henan Province, despite the fierce opposition of the state-owned giant Chinalco.
But U.S. strategy instead seems focused on emulating the worst aspects of Chinese industrial policy. One example is the Facilitating American-Built Semiconductors Act, recently introduced in Congress, which would provide investment tax credits to U.S. chip manufacturers. This follows the Senate’s approval in June of a $52 billion investment in the sector as part of the U.S. Innovation and Competition Act.
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