After decades during which the very concept was taboo and the reality swept under the rug, the world has now rediscovered industrial policy.
But too much of it is reactive, scattered, and driven by whichever crisis has the attention of the moment. What is needed instead is a systematic approach that recognizes that the issues we face are interconnected – and rooted in real places.
The dangers of ad hoc policy are as follows:
Danger #1 of Ad Hoc Industrial Policy: Never Getting Beyond Crisis Response
Not every problem meriting an industrial policy response takes the form of a looming catastrophe. Sometimes the danger is just decades of suboptimal performance in a particular industry. And some industrial policy needs do not derive from possible negative outcomes, but from opportunities worth seizing. Some of the most important technologies of the future, for example, will require years of government-funded nurturing before the private sector can take over.
Danger #2 of Ad Hoc Industrial Policy: Solving Only the Obvious Problems
An ad hoc approach risks addressing only sectors where the problems are obvious. Other sectors will languish. Consider how, in recent years, industrial policy attention has been lavished on new technologies that everyone is aware of, like electric cars or artificial intelligence, while it has not (outside the East Asian states) been given to less glamorous technologies that may prove almost as important in coming decades, such as new materials.
Danger #3 of Ad Hoc Industrial Policy: Waiting Too Long
The loss of industrial capabilities and their recovery are very different processes. Industries can be killed off fast if starved of sales revenue by predatory foreign competition, but they will not spring back up fast if conditions change. Most important industries have a large minimum viable scale, which means the investment required to start or restart them from scratch is huge. Capital investments, supplier networks, skills bases, customer relationships, and financing channels interlock, often presenting “chicken and egg” problems.
Danger #4 of Ad Hoc Industrial Policy: A Lack of Systems Thinking
Industries have complex internal structures and exist in larger ecosystems of suppliers and customers outside themselves. They often depend on resources supported by other industries. They also depend on innovation ecosystems – the often-long pipelines, whose structure varies by industry – that bring innovations from scientific discovery to marketable product.
Danger #5 of Ad Hoc Industrial Policy: Failing to Use All Appropriate Tools
Industrial policy is often caricatured as just tariffs and subsidies. But its toolbox is much larger, including tariffs, quotas, local-content rules, stage-differential tariffs, procurement requirements, export controls, investment screening, publicly funded R&D, tax credits, loan guarantees, equity stakes, technological standards-setting, workforce development, infrastructure investment, local and permitting reform, regional cluster cultivation, technology extension services, currency management, and demand guarantees. All have their place.
Danger #6 of Ad Hoc Industrial Policy: Failing to Co-ordinate Tools
Industrial policy works best when its tools reinforce one another. Tariffs, exchange-rate conditions, R&D support, infrastructure investment, permitting rules, and energy policy all affect firms’ incentives. When designed in isolation, their effects can be diluted, or the tools may counteract one another.
For example, US AI strategy is both ambitious and complex, combining R&D co-ordination, university-led institutes, semiconductor support, safety initiatives and faster permitting for data centers. At the same time, meeting the industry’s rising energy and water demands requires an alignment across industrial, energy and infrastructure policies that has not occurred.
Danger #7 of Ad Hoc Industrial Policy: Ignoring Trade-Offs
Ad hoc policymaking will never be able to handle trade-offs honestly or efficiently. Industrial policy at meaningful scale inevitably imposes costs on the rest of the economy, and whether a given policy is worthwhile depends upon understanding both costs and benefits. This remains true even when these costs are widely diffused, poorly understood, or otherwise unnoticed.
Danger #8 of Ad Hoc Industrial Policy: Lacking Institutions and Legitimacy
Rational industrial policy decisions require institutions. Industrial policy cannot be handled as a succession of one-off projects, but instead needs permanent analytic capacity, technical expertise, institutional memory, and career officials. This is the only way it can become what it needs to be: a standing national mission comparable to defense, energy, transportation, or environmental protection.
Industrial policy at meaningful scale also requires genuine political legitimacy at all levels, rather than just passive public acceptance. In a democracy, that legitimacy must hold with both policymakers and the electorate at large. Voters do not need to become experts in the technical details, but they do need to understand the basics of why industrial policy is being pursued, the different ways it can work, and how it serves their interests.
Danger #9 of Ad Hoc Industrial Policy: Lack of Discipline
Industrial policy must be disciplined: The state must have the capacity not only to support industry, but also to demand performance from it. Firms should be required to invest, upgrade, train, export where appropriate, and meet measurable milestones, such as increasing market share and job creation. When they do not deliver, support should be withdrawn or redirected. Industrial policy must not become an open-ended subsidy machine or a set of programs continued out of mere institutional inertia.
Danger #10 of Ad Hoc Industrial Policy: Ignoring Place
Industrial policy affects particular communities, labor markets, and regional production systems – and yet ad hoc policies are often viewed only through national aggregates. This can obscure whether investments build upon the right existing assets, address the right growth barriers, and happen in the right geographic locations. A systematic approach would make regional objectives explicit from the outset and track outcomes such as local job creation, supplier development, workforce capabilities, and research capacity.
From Ad Hoc Intervention to Systematic Strategy
Taken together, the above dangers are why good intentions and isolated interventions are not enough. Ad hoc industrial policy tends to be reactive, incomplete, poorly coordinated, and inattentive to where its benefits and costs ultimately land.
A more systematic approach would mean developing the institutions, expertise and co-ordination needed to identify priorities, deploy complementary tools, manage trade-offs, and hold recipients accountable.
It would also mean treating place as an innate part of industrial strategy, so that new capabilities, productive investment, and good jobs are supported by local conditions and don’t merely help already-advantaged regions. In short, industrial policy must become systematic and firmly embedded in economic policy to truly deliver for people and places.
Marc Fasteau is a retired banker, entrepreneur, and real-estate developer. He is a vice-chair of the Coalition for a Prosperous America (CPA), a think tank and lobby group composed of labor, agricultural, and industrial interests that supports trade and industrial policies favoring domestic producers. Years ago, he was a congressional economic staffer. He is a graduate of Harvard College and Harvard Law School, where he was on the Law Review. He lives in New York City and Santa Fe, NM.
Ian Fletcher was Senior Economist for CPA from 2010 to 2012 and is currently a member of its Advisory Board. Before that, he was a Research Fellow at the U.S. Business and Industry Council, an economist in private practice, and an IT consultant. He predicted the demise of free trade in his 2010 book Free Trade Doesn't Work: What Should Replace it and Why. He was educated at Columbia University and the University of Chicago and lives in San Francisco.