Industrial Policy Considers Infant Industries: What About “Injured Industries”?

In his 1791 Report on Manufactures, Secretary of the Treasury Alexander Hamilton referred to “infant manufactures.” He argued that new manufacturing industries, as most were in the young republic, needed protection (tariffs), subsidies (bounties), or both to enable them to survive cutthroat British competition until they were strong enough to stand on their own.

Since then, this idea has become widely understood in development economics. Friedrich List, in his 1841 classic The National System of Political Economy, expanded and popularized the theory. Later, Paul Krugman, before he became a reflexive free trader, helped articulate strategic trade theory, which held that learning by doing and scale economies could give incumbents a key advantage that could deter firms in other countries from entering the industry.

While some neoclassical economists have unfairly impugned this idea, making unfounded claims that infant industry policies could lead to permanent protection, the concept still has an intellectual foundation. As such, considerable policy work has been done on how to grow infant industries in the face of robust incumbents in other nations.

It’s time to add a new concept to this framing. In this case, not infant industries but “injured industries.” The West needs a modern framework for how to think about viable industries that have been injured by predatory PRC competition. These include, for example, solar panels, displays, and steel, with many others on the horizon, including potentially autos, machine tools, and semiconductors.

The problem is that many economists tell policymakers to treat these kinds of firms as decrepit—best left to die a merciful death—and perhaps help retrain their workers. They hold that either the firms are incompetent or the industry is dilapidated. Either way, let them go.

This sanguine position is based on two views. The first is that competition is fair, and the losers lost fair and square. The second is that nations do not compete against each other, and therefore the loss of any industry is not a problem. Rather, it might be a sign of strength.

We must reject this ivory tower thinking, or at least distinguish between the two kinds of senescent industries: those displaced by better technology and those that were mugged by PRC “thugs.” If the department store industry dies, it will likely be because of a better mousetrap (online commerce). But if Boeing loses market share to China’s COMAC, unfair competition will likely be the reason. That is a different problem from the emergence of supersonic space planes.

So, how should policymakers think about industries injured by Chinese techno-economic warfare?

First, they should be proactive and work to prevent the injury. This means overhauling U.S. trade remedies to make preventive action faster and more effective.

Case in point: Letting subsidized Chinese EVs into the U.S. market at scale risks injuring the U.S. auto industry. Just look at the EU, where EV imports from China are hurting domestic producers by suppressing prices and eroding their market share. So, America, say no.

Second, for industries already injured, policy needs to focus on renewal. Think of it as physical therapy for industries hurt in a metaphorical car crash.

That requires a sector-by-sector strategy grounded in a deep understanding of how each industry operates, how it is evolving, and what is holding it back. Rebuilding a supplier base, achieving scale, and developing a new production process are different challenges that call for different responses. There is no one answer, and applying a few programs here and there is no substitute for a strategy. Industrial strategy must include sector-specific policies, not just generic ones.

We need to focus on the factors that characterize each industry, using numerous frameworks such as Vernon’s product life cycle theory, Pisano and Shih’s modularity-maturity matrix, Teece’s framework on dynamic capabilities, Christensen’s theory of disruptive innovation, and Abernathy and Utterback’s model of process and product innovation.

Other useful lenses include Porter’s barriers to entry, Perez’s techno-economic paradigms, Pisano and Shih’s notion of the industrial commons, Tushman and Anderson’s competence-destroying versus competence-enhancing discontinuities, and Arthur’s notion of increasing returns and lock-in, among others.

But as I explain, the expertise to apply these firm-level concepts to entire economies and innovation systems remains as scarce as hen’s teeth.

The astute reader will note that the frameworks above reach beyond traditional economics. Prescribing solutions for an injured industry requires more than making obvious assertions that lower prices will lead to higher sales or repeating other bromides that economists offer. Having economists with such a limited toolkit prescribe the solutions for injured industries is like having chiropractors treat cancer.

The missing expertise is in mesoeconomics: understanding how industries, supply chains, technologies, and supporting institutions interact and evolve. Effective industrial strategists must connect that knowledge to sector-specific policies that can restore an injured industry’s ability to compete. Yet Washington too often has political appointees to set priorities and grant managers to administer programs, with too few strategists in between.

That is why we need federal support for specialized industrial policy graduate programs, training for federal employees, and a permanent institutional home for industrial analysis and competitiveness strategy. We cannot renew injured industries without rebuilding Washington’s ability to understand them.

ITIF will bring together experts to explore how to embed this thinking in Washington at the National Economic Power Industry War Conference on November 17. I encourage you to join us.