Speaker Johnson caused a fuss Friday concerning CHIPS Act subsidies for semiconductors. This followed former President Trump claiming, naturally, that tariffs are a better choice. It would be a very bad idea to repeal CHIPS mid-stream, but Trump might be partly right. Reducing China's role in our market can revitalize parts of US manufacturing without heavy government spending. In such efforts, quotas have advantages over tariffs.
If Vice President Harris wins tomorrow, there could be more industrial policy efforts aimed at low-end semiconductors, new green energy applications, and shipbuilding. If it's Trump, fossil fuels may get boosted, as may steel and possibly non-electric cars. To be effective, industrial policy must be bipartisan. That may sound absurd right now, but both parties want to boost manufacturing. The differences are in where and how.
When adopted, industrial policy has multiple drawbacks. The first is an accurate cliché: When governments pick winners and losers, they make mistakes. The mistakes may occur at the sector level -- at least one party's wrong right now about which kind of energy to support and the best idea is the government should stay away. Mistakes may also occur at the firm level, as with Intel's struggles after becoming a CHIPS darling.
An immediate problem, of course, is money. Industrial policy advocates want hundreds of billions of dollars spent on new programs. Not nearly as important, apparently, is raising revenue to pay for these programs or controlling the growth of other programs or that the federal government has spent well beyond its means for four decades.
That's the big picture. Moving in closer, industrial policy wastes money compared to what the private sector could potentially do. The whole idea is government taking action the private sector won't take due to lack of profitability or can't take due to a market distortion. Either government policies are truly costly or they seem costly because, in other industries, the private sector is much more efficient.
So what's the justification? It comes when the industries being considered are widely seen as vital to the national interest -- not just by those directly involved -- and have been ruined or face ruin at the hands of a hostile foreign actor. China's coercive acquisition of intellectual property and multi-dimensional subsidies have left a trail of dead manufacturers in its wake, worldwide.
The most important, yet often ignored, component of Chinese subsidies is anti-competitive regulation: Centrally-controlled state-owned enterprises and a variety of locally-controlled firms are not permitted to go out of business due to commercial competition. Less overwhelming but still harmful: Import competition is often heavily discouraged, as well. What's China's is China's, what's yours is endangered.
If there were large US government-sponsored players in energy, steel, and other industries discouraging or outright blocking private firms from entering markets, most economists would be rightly calling for break-ups. Yet the state-provided advantages that enable many Chinese enterprises to attain their competitiveness and scale selling here are all but ignored in favor of denouncing countervailing intervention by the US.
That's why, what about how. If there are more industrial programs, government spending might be considerably lower if our subsidies weren't pushed to be larger than the PRC's. The logic behind Biden-Harris administration tariffs on electric vehicles and parts is to reduce the impact of the PRC's subsidies. Tariffs may be part of any bid to revitalize steel or a future response to inevitable low-end semiconductor dumping by China.
In such efforts, quotas limiting China's share of markets are probably more useful. Tariffs invite Beijing to increase its own spending to compensate, quotas nullify this option. Quotas can be used to block increases in imports from third parties due to transshipping, without penalizing existing imports that genuinely originated in these countries. Quotas would immediately neutralize the effect of any Chinese decision to devalue the RMB.
Quotas can be more distorting than tariffs but in this case their greater effectiveness better reduces the more harmful distortions caused by Chinese predation. More generally, cutting China out even while using otherwise unwise US government intervention is likely to reduce market distortion, since Beijing employs far more in the way of intervention tools on a near-constant basis.
Quotas certainly have costs. When industrial policy is worthwhile -- a hostile foreign actor controls or seeks to control a key sector -- quotas curb the need for other government action to overcome Chinese subsidies, and thus cut overall costs. A quota aimed at, for example, limiting Chinese market share to 10 percent, may leave 90 percent determined by genuine market competition, a much more desirable outcome than picking out firms for huge handouts.