Jake Sullivan Wants To Build On the Biden Administration's Industrial Policy

In a recent piece in Foreign Affairs entitled "How to Reindustrialize America: The Case for a Strategic Investment Fund," former National Security Adviser Jake Sullivan makes the case for building on the Biden administration's economic policies, putting forward an argument and a detailed plan for an even broader and more comprehensive industrial policy than what we saw under Biden. Here are a couple excerpts.

First, he describes the industrial policy threat coming from China:

[China has constructed] a vast, decentralized system of state-backed innovation finance, channeling subsidized capital into priority high-tech sectors and encouraging firms to compete ruthlessly for scale. The result is a market systematically tilted by state intervention, one in which Chinese firms can overbuild capacity and flood markets before American and allied competitors can scale up production.

Then he explains what he thinks a U.S. version of industrial policy that responds to the Chinese threat should look like:

But Washington should not aim to copy Beijing’s state-backed playbook wholesale. After all, the United States has plenty of advantages over China, including its entrepreneurs, universities, and capital markets, which are the deepest in the world. But those markets optimize for efficiency, not resilience or security. The challenge, then, is to turn capital into capability, to channel investment toward the industries that anchor modern national strength and economic vitality: advanced computing, biotechnology, robotics, critical minerals, pharmaceutical precursors, advanced manufacturing, and the electric-energy backbone. And the solution is an ambitious national strategic investment enterprise, headlined by a federal Strategic Investment Fund.

...

Throughout its history, the United States built institutions that channeled capital toward a national strategy. Resurrecting that tradition today would mean establishing a new kind of public investor: a U.S. Strategic Investment Fund (SIF), a federally chartered, market-facing public investor with its own balance sheet, designed to invest alongside private capital in strategically critical industries, both mature and emerging, where markets alone have proven insufficient.

He offers a lot of detail in support of his plan, a key element of which is to try to institutionalize industrial policy rather than have it be carried out in an ad hoc way (as has been the case).

From what I can tell, Sullivan's views on industrial policy reflect the conventional wisdom among many establishment Democrats these days. However, after the experience with these kinds of policies during the Biden administration, it may be time for a rethink. I have several specific criticisms of Sullivan's piece that could help move things in this direction (for any Democrat who is interested!): (1) he gets some of the history of U.S. economic policy wrong; (2) I'm not sure he's learning the right lessons from China's successes; (3) his proposals could lead to an international subsidy race, and that hasn't been a great outcome generally for the economy; and (4) the Biden administration tried a more limited version of his proposal and it didn't work out very well politically for the Democrats. Let's go through each one. (I'll have more to say about all this at some point, but it's going to have to wait.)

Learning the right lessons from U.S. economic history

First, Sullivan tells a story of U.S. economic history in which most of our industrial success is based on state capitalism. However, the history he presents is a bit dubious at times.

For example, he says "U.S. shipbuilding ... collapsed after the 1980s, when government subsidies were withdrawn, ... ." But as shown here, the U.S. shipbuilding situation is more complicated than that. From 1974 to 1978, the U.S. built 14 to 24 ships per year. It's true that after subsidies were cut in 1981, production declined to between 5 and 12 from 1981 to 1986, and continued to fall after that, so maybe this is what he has in mind by "collapse." To put these figures in perspective, however, in 1978 Japan delivered 471 ships. And for additional perspective, note that in 1981 the U.S. ranked 15th worldwide in shipbuilding, while last year the U.S. ranked 19th. So basically, without the subsidies, U.S. shipbuilding went from small to tiny, which doesn't feel like a "collapse." (A 1980 NY Times headline makes clear that serious problems existed in the industry even before the subsidy cuts: "U.S. Shipyards in the Doldrums; Orders Down Sharply")

Learning from history is always a good idea, but we need to make sure we have an accurate understanding of what happened. 

China's subsidies are a problem but let's not idealize them too much

Second, a key element of the policy vision Sullivan sets out is that it is a response to China: China provides massive subsidies for its industries, he says, and therefore the U.S. needs to adopt its own version of these subsidies in order to compete.

China does provide a lot of subsidies. Something missing here, though, is an evaluation of why exactly China has been successful in certain industries, and how much of a role the subsidies played in the success. In my view, it's an open question as to whether subsidies have been the driving force, as there are a wide range of factors other than subsidies and state interventions that help explain China's economic success. Having a 1.4 billion person internal free trade area as a market certainly seems like a plus!

Furthermore, evaluations of China's industrial policy are not always very glowing, and there are sectors where China gave lots of subsidies and still isn't competitive.

Having said that, by all means, the U.S. and other countries should challenge China on its subsidies. But just like with our own history, we should make sure to learn the right lessons from China's successes and failures.

(And speaking of history, keep in mind that back in the 1980s, people were talking about Japan overtaking the U.S. economically, but by the late 1990s it was clear that their predictions had missed the mark. Along the same lines, the situation with China could look very different in 10 years.)

Does anyone really win a subsidy race?

Third, it's important to think through the likely international response to a further expansion of industrial subsidies. China and the U.S. aren't the only players here. What is likely to follow from a ratcheted up U.S. industrial policy is that other countries will increase subsidies to their industries as well. At the end of all the ratcheting, the countries that can afford to participate in this subsidy race would be back on somewhat equal ground in terms of competitiveness (while less developed countries would fare badly), with taxpayers having funded the race for little if any advantage. That outcome does not seem ideal. In past decades, we saw the impact of similar developments on industries such as steel, and it's not great.

A better approach would be agreements not to subsidize, or at least to limit subsidies or to regulate the economic harm they may cause. As it happens, we have something along these lines in place at the WTO, but for some reason people haven't been enforcing it. I think I have a sense of why the Trump administration didn't enforce the WTO's subsidy rules. I'm not sure I understand why the Biden administration didn't do so though. If Sullivan is going to make the case for industrial policy, I think it's worth pushing him to explain how he thought about this issue while he was in the Biden administration. Why didn't he argue for challenging China's industrial policies? And how, in his view, are the U.S. and the world better off with China, the U.S., and many other countries competing with subsidies rather than competing in a more market-oriented system? Is the future he envisions for many industries something like the endless Airbus-Boeing subsidy battle (which was on a brief hiatus but now could be back), and is that really where we want to go with all of the industries that have been declared strategic? If so, it's going to cost taxpayers a lot of money, and it's not clear that any country will improve its position in the end. (And with the current state of the budget deficit/debt, it seems like a bad time for the U.S. to go down this road.)

Didn't we already try all this?

Speaking of things that happened during the Biden administration, my final point here is that, as I read it, Sullivan's proposal is basically to take the Biden administration's approach to economic policy and go a step or two further, turning industrial policy from an ad hoc effort to an institutionalized one. Before we go that route, however, I think we should ask whether this approach worked the first time, either in terms of policy outcomes or politics. Given the results of the 2024 election, there's a strong argument that it did not work out politically for those who pushed it.

Of course, Sullivan might argue that things didn't work out because of Biden personally, and that it would all go much better with a different Democratic president (i.e., Bidenomics would work better without Biden). Or perhaps he would say the efforts needed to have been undertaken more vigorously and comprehensively, and the institutional aspects of his "Strategic Investment Fund" proposal would make everything go more smoothly the next time around.

It's difficult to evaluate hypothetical arguments like these. However, if I were a Democrat thinking about a post-Trump economic policy, rather than just press forward with more of what they did last time, I would do a thorough post-mortem on the Biden administration's economic policies and think about the results of those earlier efforts to revive industrial policy. Figuring out what went wrong is essential for not ending up in the same place next time.