2022: The Year of Strategic-Industry Realism?

Robert D. Atkinson January 3, 2022
January 3, 2022

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2021 may have ended in political gridlock, with the Biden administration’s signature Build Back Better initiative now appearing to be doomed, but the year also proved that gridlock is not endemic, as evidenced by the passage of the stimulus and infrastructure bills, among other achievements. Congress clearly can get things done, especially things seen as broadly in the national interest.

The question is what will be seen as broadly in the national interest? My hope is that 2022 will be the year policymakers definitively recognize and act on the realization that the federal government desperately needs to shore up the competitive position of key strategic industries if America is to continue to be the leading global power and outcompete China militarily, economically, and technologically.

There have been tangible signs that such a collective realization is possible. Indeed, the National Defense Authorization Act for Fiscal Year 2021 included the CHIPS for America Act, which recognized the semiconductor industry’s strategic importance for the country’s economic and national security. And the Senate later passed the Innovation and Competition Act to strengthen U.S. leadership in critical sectors such as artificial intelligence, high-performance computing, and advanced manufacturing. But while those are positive steps, what the country needs is more of a leap. It is long past time for the federal government to put in place not just ad hoc competitiveness programs, but a coherent set of policies specifically tailored for all of the country’s most strategically important industries.

Overall economic growth policy—and even generic competitiveness policy—is not enough. With the rise of China and the increased dependence of national defense on commercial sectors, the United States needs a strategy, policies, and institutional capabilities to ensure it has adequate production and innovation capacity in key dual-purpose industries, especially technologically sophisticated ones. That means abandoning the postwar conceptual and institutional framework based on the view that market forces should be the principal driver of the U.S. economic structure. Policymakers need to accept that while market forces should continue to guide non-strategic industries, for strategic industries government needs explicit sector-based strategies implemented through industry-led public-private partnerships. In other words, it is time for dual economic policies and policymaking apparatuses: one focused on the regular, mostly non-traded economy, and one focused on the strategic, traded economy.

There is a wide array of critical industries beyond such narrow, weapons-based industries as armaments in which the United States must be able to maintain leads in innovation and production. As the Department of Defense’s (DOD’s) Office of Industrial Policy points out, these include, among others, advanced materials, drones, autonomous systems, artificial intelligence (AI), quantum computing, biotechnology, energy storage systems, lasers, optical equipment, space technology, machine tools, shipbuilding, and advanced wireless systems. These strategic industries are all in traded sectors where the ability to restore lost production would be time-consuming and technically difficult when the need arises.

The Senate took an important step in the direction of strategic industry policy with the passage of the U.S. Innovation and Competition Act, but the House needs to step up, and then appropriators will need to write the checks. Even then, the USICA would represent only a modest down payment on the kinds of investments and steps the nation will need to take if it hopes to outcompete China by 2049, the 100th anniversary of the Chinse communist revolution.

There are two main political challenges policymakers will need to overcome for the federal government to make this once in a half-century change, one from the left and one from the right. On the left, some progressives dismiss the China threat, in part because they rightly believe it distracts from the social policy agenda they champion to address what they believe are the nation’s largest challenges. Some would reject a strategic-industry agenda because they would rightly surmise that it implies helping industry, including big business, and as such it would weaken support for their cause by undermining their argument that corporations are the root of most evils.

On the right, some remain ideologically committed to laissez-faire economics, seeing any prioritization of industry as the first step down the “road to serfdom,” as Hayek wrote in 1944. For them, any explicit government intervention to ensure strategic-industry leadership, including in clearly dual-use (military-civilian) technologies, would be a misguided threat to free-market principles, even if the government maintains a commitment to those principles for the rest of the economy.

These political forces cannot be discounted. But reality has a habit of intruding in ways that can sway even the most strongly held ideological convictions. As John Maynard Keynes once famously said, “When the facts change, I change my mind. What do you do, sir?”

If China were to successfully invade Taiwan, America’s extreme dependence on a core technological input—advanced computer chips—would force a wake-up call to adopt a robust strategic industry policy. Does the United States really have to wait until the hammer falls to act? Hopefully, the answer is no.

But beyond partisan ideology, there are also interest group challenges to advancing a strategic-industry agenda. Most in the science and university research establishment will resist the necessary changes—as they did with the Endless Frontier Act (the predecessor of USICA)—because their core goal is to obtain federal funding for unrestricted basic research, and they would see a shift to strategic-industry-focused applied research as a threat. Some industries and related trade associations whose members try to compete on low costs also might resist necessary provisions (such as an expanded R&D credit) in favor of hands-off policies that generate a better overall “business climate”—meaning fewer regulations, more low-skill immigration, and lower taxes.

Nonetheless, it should be clear to progressives by now that there is insufficient political support for a largely redistributionist agenda, at least in the current Congress, and it is likely there will be even less support after November’s midterm elections.  No doubt some on the left will demand that the president double down on Build Back Better, but the White House can accomplish more for the American people by pivoting to the center with a robust strategic-industry agenda. Done right, will serve triple-duty: creating good, middle-class jobs; enhancing growth in the heartland; and ensuring U.S. global leadership.

For their part, if there is one lesson Republicans should learn from President Trump, it’s that it is good politics to focus on American greatness by pushing back against unfair Chinese trade practices and supporting U.S. manufacturing, especially in strategic sectors. Indeed, more and more Republicans have made it clear that they are ready to move beyond old party doctrine that eschews industry strategy for laissez-faire economics, at least when it comes to key strategic industries, and to actively support a strong, dual-use, advanced-industry base.

So, to start the nation on this road, I would encourage President Biden to meet with congressional leaders before the State of the Union Address to start reimagining building back better as a strategic-industry policy that a bipartisan majority could support, then seek commitments from all four House and Senate leaders to make real legislative progress in 2022 with USICA and much more. The future of America as a world leader is at stake.