We need an honest east-west discussion about industrial policy

In the 1970s my grandfather, an electrical engineer in China, received an unusual job offer: would he be willing to move from his city to the foothills of a remote Buddhist mountain, a half-day’s truck ride away, to contribute to an enterprise of national importance?

What clinched the deal was that my grandmother would also be given a good state job, and my mother, uncle and aunt would go to schools specially built for the children of the enterprise. And so my family became part of the first Chinese industrial policy push to create a domestic semiconductor sector.

Fifty years later, the US and EU have made a new foray into semiconductor industrial policy with the US Chips and Science Act, and the EU Chips Act. But in the intervening decades, industrial policy never went away. Western and eastern governments have used a range of tools to structure economic production and to nurture technological innovation. The failures are mostly forgotten, while the successes have been so paradigm-changing that it is easy to overlook their origins.

In the east, Taiwan made its foray into semiconductors by funding research institutes and spurring the acquisition of foreign technology. The most successful outcome was TSMC, the world’s chipmaking titan whose annual research and development budget today rivals those of Europe’s wealthiest governments. In the west, the US funded defence research and spurred countless innovations from its Apollo programme, while Germany helped its car champion Volkswagen with regional government subsidies and equity investment.

What has changed now is the volume of the industrial policy discussion, and its perceived urgency by western governments. In China and Taiwan, it was always a priority: the consequence of the need to survive in an industrialised world with much richer foes. Technological catch-up was a necessity for successful nation-building. My grandparents and their fellow workers were proud to have been selected for a mission: “to build from scratch the 64” (referring to 64 important raw materials, including silicon).

In the developed west, industrial policy pushes have come not as a grand crescendo towards modernisation, but in loud and quiet cycles, peaking during periods when one power is afraid of losing out to the others. The US space race against Soviet Russia is a prime example, as well as American consternation over Japan’s ascendancies in the 1980s.

Now that we are back in a period of global order-shaking, the discussion is back on loud. Western fear over China’s rise, and concerns over supply-chain security in the wake of pandemic shortages, all spurred the new EU and US chips policies.

As a result, governments in the west are abandoning their taboos around talking about industrial policy, or orientalising it as only fit for east Asia. The economist Dani Rodrik remarked that the US Chips Act was significant for being “a sign that we have moved well beyond market fundamentalism and because it shows there is now bipartisan support for industrial policies”.

Hopefully this means we can start to have a more honest global discussion about the existence and role of such policies. By no means do they all succeed, but they have been necessary for the success of the east Asian “tigers”. Even while developed governments practised industrial policy, the World Bank warned developing nations off doing the same thing. The US has long accused China of creating an uneven playing field for foreign firms, helpfully forgetting its own earlier 20th-century history.

Now Korean officials and Taiwanese chipmakers are criticising the US for its attempt at industrial policies that they embarked on two generations ago. And why wouldn’t they? As Ha-Joon Chang, professor of economics at Soas, puts it, the technological leader benefits from “kicking away the ladder”.

My grandparents’ factory, which was co-located with China’s first semiconductor material research institute, sat at the very start of the chipmaking process: refining crystalline silicon, the material from which chips are made. Today’s policies are concerned with the sexier ends of the supply chain: the EU wants cutting-edge chip design and fabrication.

The EU and US now face the problem of creating institutional capacity to strategically target funding and to hold accountable those who receive it. Political economist Doug Fuller, who studies Taiwanese and Korean semiconductor policies, points to the build-up of policymaking capacity in those countries.

But deriders of European ambition should not cast judgment too early. Two generations after my grandparents’ factory was built, China now produces more than 80 per cent of the world’s solar panels, aided by its dominance in crystalline silicon.

yuan.yang@ft.com