New Report Calls for Major Shift in U.S. Economic Policy to Meet China Challenge, With Holistic Focus on ‘Strategic’ Industries

WASHINGTON—Across the federal government, virtually every policy area affecting the U.S. economy has long been grounded in the neoclassical economic framework intended to support efficient allocation of goods and services. That must change if America is going to meet the challenge of China’s mercantilist, state-directed economy, according to a new report from the Information Technology and Innovation Foundation (ITIF), the leading think tank for science and technology policy.

Most major areas of U.S. policy that affect the economy—from tax policy to trade to research and development—must integrate a concerted focus on bolstering the competitiveness of strategically important industries, according to ITIF’s report. A piecemeal approach to economic competitiveness will not be sufficient for the United States to avoid continuing its long slide into UK-like industrial decline.

“The two major competitiveness bills working their way through Congress right now are a major step forward compared to what we have had in the past 30 years—but they are only table stakes compared to what we need for the future,” said ITIF President Robert D. Atkinson, who authored the report. “If the United States is going to increase its competitive and strategic-industry position, especially vis-à-vis China, then Congress and the administration will need to incorporate a strategic industry competitiveness focus across most federal agencies and major policy areas.”

With the rise of China and its mercantilist, state-directed economy, the United States faces its most profound competitive challenge since the founding of the republic, according to ITIF. Effectively addressing this challenge will require more than creating a few freestanding competitiveness initiatives. The government needs to adopt a holistic policy approach to bolster the competitive position of dual-use, traded-sector industries, meaning it must abandon the view that all industries are created equal, and government should never “pick winners.”

To that end, the report lists seven policy areas where Congress and the administration should implement a competitive focus:

1. Trade: This policy would embrace an increased focus on enforcement and target limited enforcement resources toward the countries that pose the most significant threat to U.S. strategic industries.
2. Antitrust: This policy would ensure that antitrust authorities include a competitiveness screen into their decisions, abandon the practice of attacking large U.S. companies in traded sectors due to their size, and provide an understanding that the competitive landscape for most traded-sector firms, especially for strategic ones, is global.
3. Tax: An updated competitiveness-based tax code would recognize that taxes have a more considerable negative impact on firms in traded industries, would try to lower the effective tax rate on companies that compete in international markets, and would not reduce the rate of the foreign-derived intangible income deduction.
4. Financing: This policy would focus on supporting high-growth firms in traded sectors and manufacturing, would restructure the Small Business Administration to where there is a greater focus on small firms in traded industries and high-growth, technology-focused start-ups, and would involve equity or debt programs focused explicitly on one or more strategic sectors.
5. Research and Development: This policy would provide more funding to industrially relevant research, particularly for traded sectors, the research policy and the role of universities would change, and establish a national advanced industry innovation foundation, as more than 50 nations have done, and fund applied research through that agency.
6. Statistical: This would focus on improvements in international statistics data that is disaggregated to reflect state and local differences, collect much better national industry data, including better measures of information technology adoption, and process technology, innovation, and production capabilities of firms and their supply chains.
7. Regulatory: This would mean that all major regulatory legislative proposals and administrative actions would automatically incorporate a competitiveness screen to identify potential competitiveness impacts and identify how to achieve the regulatory goals with minimal effects on competitiveness.

“With the rise of China, the United States faces its toughest competitiveness challenge since the days of the founding of the Republic,” said Atkinson. “It is time for Congress and the administration to overhaul a wide array of policy areas and operations and embed in them a focus on strategic-industry competitiveness. Doing so would mean a significantly different trade policy, a significantly different tax policy, a significantly different antitrust policy, and so on.”

Read the report.