National Industrial Policy: How the US Can Compete with China in Emerging Technologies
The US recently passed the CHIPS and Science Act, one of the first national industrial policies in 50 years, in order to support the semiconductor industry. However, in the context of great power competition with China, there is much work to be done. China has been leading the charge in national industrial policy while the US has been hesitant to intervene in the market. In order to compete with China in emerging and disruptive technologies, the US needs to adopt a comprehensive national industrial policy.
National Industrial Policy: US vs. China
China manages its industrial policy via top-down 5-year plans, which focus on prioritizing critical emerging technologies that will drive economic and military growth. In the US, industrial policy has traditionally been left to the forces of the market, driven by the economic theory of the Chicago School of Economics. This approach has resulted in the offshoring of manufacturing, divestment in important industries, and an over-reliance on private equity and venture capital firms to steer industrial policy.
China, on the other hand, invests heavily in an ecosystem of public and private financing, funneling funding into regional investment funds and tightly coupling critical civilian companies to their defense ecosystem. This has resulted in the advancement of strategic technologies, including semiconductors, supercomputers, and biotech, with the goal of surpassing the US both commercially and militarily.
China’s Ambition and Strategic Surprises
China is making a concerted effort to surpass the US in all critical technologies in the 21st century. While the US was focused on non-nation state threats like ISIS and Al-Qaeda, China has been pouring resources into technology to challenge the US on all fronts. Their investment in emerging technologies has resulted in a series of strategic surprises to the US, positioning China to lead in critical technology areas such as hypersonics, ballistic missiles, and biotech.
Limits and Obstacles to China’s Dominance
The US still has advantages over China, including capital markets that can be incentivized, innovation talent, and world-class research at universities and corporations. Moreover, there are cracks in China’s ambitions, such as their crackdown on “superfluous” tech and a slowdown in listings on the Chinese stock exchange. In the US, venture capital firms and billionaires have started their own initiatives to boost research in emerging technologies.
Billionaires and Venture Capital Funding Defense Innovation
In recent years, billionaires in the US have started their own initiatives to boost research into emerging technologies. Defense innovation is also being driven by venture capital firms and a series of defense-focused venture funds. This approach, however, is not sustainable in the long term. Venture capital firms invest in businesses that can become profitable in 10 years or less, which means they lack the patience to invest in deep technologies that may take decades to mature.
America’s Frontier Fund
Gilman Louie, the founder of In-Q-Tel, has started America’s Frontier Fund (AFF) to invest in critical deep technologies and help the US compete with China. He plans to raise $1 billion in “patient private capital” from public and private sources. AFF will focus on identifying critical technologies and making strategic investments.
The US needs to adopt a comprehensive national industrial policy in order to compete with China in emerging and disruptive technologies. The CHIPS and Science Act is a good start, but there is much work to be done. With the launch of America’s Frontier Fund, there is hope that the US can match China’s investment in critical technologies and maintain its position as a global leader.