We need an honest discussion between East and West about industrial policy

In the 1970s, my grandfather, an electrical engineer in China, received an unusual job offer: would he be willing to commute from his home city to the foothills of a remote Buddhist mountain, a half-day truck ride away, to contribute to a project of national importance?

What sealed the deal was that my grandmother would also get a good job in the state, and my mother, uncle, and aunt would go to schools designed specifically for company children. And so my family became part of the first push of Chinese industrial policy to create a domestic semiconductor sector.

Fifty years later, the United States and the European Union made a new foray into semiconductor industrial policy with the American Chip and Science Act and the European Union Chip Act. But in the decades that followed, industrial policy never really went away. Western and Eastern governments have used a range of tools to structure economic production and promote technological innovation. Failures are mostly forgotten, while successes have shifted the paradigm so much that it is easy to overlook their origins.

In the east, Taiwan has made a foray into semiconductors by funding research institutes and spurring the acquisition of foreign technology. The most successful result was TSMC, the world’s chip giant whose annual research and development budget today rivals that of Europe’s richest governments. In the West, the United States funded defense research and spurred countless innovations from its Apollo program, while Germany helped auto pioneer Volkswagen with regional government subsidies and equity investment.

What has now changed is the scale of industrial policy discussion, and its perceived urgency by Western governments. In China and Taiwan, the priority has always been: a consequence of the need to survive in an industrialized world with richer enemies. Catching up with technology was essential to building a successful country. My grandparents and their colleagues were proud of their choice of mission: “Build 64 from scratch” (referring to 64 important raw materials, including silicon).

In the developed West, the impulses of industrial policy did not come as a great escalation toward modernization, but in cycles of turbulence and calm, culminating in periods when one power feared losing to another. The American space race against Soviet Russia is a prime example, as is the American panic over the rise of Japan in the 1980s.

Now that we are back in the period of world order shaking, the loud discussion is back. The West’s fear of the rise of China, and concerns about supply chain security in the wake of pandemic shortages, have all spurred new chip policies in the European Union and the United States.

As a result, governments in the West abandon their taboos on talking about industrial policy, or make them East as only suitable for East Asia. Economist Dani Rodrik noted that the American Chip Act was significant because it is “a sign that we have largely moved beyond market fundamentalism and because it shows that there is now bipartisan support for industrial policies.”

Hopefully, this means that we can begin to have a more honest global discussion about the existence and role of such policies. By no means all of them were successful, but they were essential to the success of the East Asian “tigers”. Even as developed governments pursue industrial policy, the World Bank has warned developing countries not to do the same. The United States has long accused China of creating an uneven playing field for foreign companies, helping to forget its earlier history in the 20th century.

Now Korean officials and Taiwanese chipmakers are criticizing the US for trying to pursue industrial policies they began two generations ago. And why don’t they? As Ha-jun Chang, professor of economics at Soas, puts it, the tech leader benefits from “taking off the ladder.”

My grandparents’ factory, which co-located with China’s first semiconductor materials research institute, sat at the beginning of the chipmaking process: refining crystalline silicon, the material from which chips are made. Today’s politics are concerned with the sexier ends of the supply chain: the EU wants cutting-edge chip design and manufacturing.

The EU and the US now face the problem of creating an institutional capacity to target funding strategically and to hold accountable those who receive it. Political economist Doug Fuller, who studies Taiwanese and Korean semiconductor politics, points to building policy-making capacity in those countries.

But those who scoff at European ambition should not judge too soon. Two generations after my grandparents’ factory building, China now produces more than 80 percent of the world’s solar panels, aided by its dominance in crystalline silicon.

yuan. yang@ft.com

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