“Homeland economics” will make the world poorer

Industrial policy and protectionism could endanger trade, without making Western economies safer

Workers on an assembly line in a chicken processing plant, in Dehui City, Jilin Province, China.
image: edward burtynsky/courtesy flowers gallery. manufacturing #17, deda chicken processing plant, dehui city, jilin province, china.

In 1987, industry bigwigs and civil servants noted that American semiconductor manufacturing was struggling. Japan was stealing market share and jobs, threatening national security and economic growth. In partnership with industry, the government pledged $100m ($250m in today’s money) in annual subsidies to form an r&d consortium called Sematech, to boost production.

The plan, in large part, did not work. Research by Douglas Irwin of Dartmouth College and Peter Klenow of Stanford University, published in 1994, “cannot find any evidence that Sematech changed investment plans in the semiconductor industry”. But it holds lessons for politicians today. Once again they are keen on chips, with governments across the rich world offering subsidies worth $400bn in the coming years to boost capacity. The eu wants 20% of global chip manufacturing by 2030. Governments also want to incentivise production of rare earths, batteries and solar panels. These ambitious plans will soon collide with reality. It is hard for governments to create viable industries, and the economic costs of industrial policy tend to be high.