Vulnerabilities in crucial supply chains in the US, Europe and East Asia came into sharp relief during the Covid-19 pandemic. Given that many of the gaps in medical supplies could only be filled—in the acute phase of the crisis—by China also underscored larger and systemic dependencies on Chinese suppliers which had been unfolding for decades. The growing recognition that such vulnerabilities were in large part the result of a long-term Chinese ambition to displace Transatlantic and East Asian technology and primary material industries, and to achieve a large measure of self-sufficiency, has broadened concern regarding the impact of what can be described as a Chinese strategy of “decoupling” from the West.
One important result of these developments is a growing political effort, especially in the Transatlantic sphere, to question the neo-liberal consensus of recent decades, which favored the economic efficiencies of dispersed, or globalized, supply chains over concerns related to self-sufficiency and local production. One set of initiatives is to revive efforts to deploy national industrial policies and public-private partnerships (with the public as senior partner) to reduce such vulnerabilities related not only to health and defense-related security, but also to the development of technologies of the future deemed important to longer term prosperity and economic security.
In the United States perceived threats to national security have been in the past met largely by various forms of public-private partnerships. One early example is the Communications Satellite Corporation (COMSAT), formed in the wake of the “Sputnik Moment” at the height of the Cold War. COMSAT facilitated joint research by competing private firms. It also benefitted from limited government financial and regulatory support to the venture and resulted in shared technology to promote the domestic growth of this industry after the late 1950s.
Similarly, when Japanese industry (with aid from its government) threatened the leadership of US integrated circuit and specialized semiconductor producers at the dawn of the Internet Age, a similar research consortium, SEMATECH, was established in 1987.The joint research structure was (and remains today) open to non-American firms. It contributed to the revival of the US semiconductor industry by performing basic research on production materials and techniques, with the resulting intellectual property open to all participants.
In response to the acute crisis of the pandemic, the US Federal government worked with the dynamic US pharmaceutical industry by offering purchase agreements and financial assistance to ramp up production. The result is of course well known. Pfizer partnered with a German biotech leader and targeted early production in Europe as well.
The hybrid public-private model in the US is being expanded in the Biden era by massive efforts (with significant bipartisan support) to help not only industries related to security of health care supplies but to a much broader (and at this point ill-defined) set of industries threatened by the Chinese mercantilist juggernaut. Biden domestic policy adviser Brian Deese in a speech recently stated baldly: “Strategic public investments to shelter and grow champion industries is a reality of the 21st century economy.”
The US semiconductor industry is likely to see over $50 billion in direct support for building leading-edge fabrication plants, as well as expanded, Washington funded basic research in technologies and materials required for future advances in this sector. The electric and autonomous vehicle sectors are targeted for Federal help in the form of tax rebates, building of new infrastructure, and battery technology development. The crucial rare earths industry is benefitting from regulatory and financial support for both mining and processing phases of production. This effort is following in many respects the SEMATECH precedent in encouraging joint research and international cooperation. Australian firms have received Federal support for perfecting rare earths processing technology. The rationale for such efforts is straightforward: China now has leverage over Western countries in this critical sector due to overwhelming dominance in both mining and processing, and has demonstrated its willingness to use this leverage in the past.
One additional area of intensified US Federal investment in critical technology is in 5G systems, and early research on 6G. Support is being made available for virtualized and Open RAN (radio access networks) systems which could provide cost-effective and more flexible alternatives to Chinese giants Huawei and ZTE. European and East Asian participation in 5G public-private partnerships has been welcomed.
In Europe the European Commission recently announced a public-private “Semiconductor Alliance” to stimulate investment in fabrication and other parts of the supply chain in a sector in which the EU has fallen well behind American and Asian leaders. Intel is also courting European support for expanding production in this sector, which could target less sophisticated chips for industrial applications in the important auto sector, but also look to those for higher-end applications such as artificial intelligence and computing. Additionally, the Commission, but more importantly German and Italian (and British) telecom operators, have indicated interest and modest financial support for development of Open RAN systems.
In a broader perspective the post-Covid environment has spurred in Europe a growing interest in supporting national champions in numerous technology and materials sectors. The European Recovery Fund envisions significant support for research and development in targeted industries where the continent is dependent on Chinese (in some cases US or East Asian) suppliers. The European response does not represent as radical a change in direction as that of the US, as experiments with national industrial policies have long been a feature of governance. What is perhaps more significant is the move toward more direction and funding at the EU level.
One can also observe that, after several decades of moving away from central government-led industrial policy, which had been deemed a major contributor to the long stagnation in the economy after 1991, Japanese leaders are encouraging the return of supply chains to national territory or at least away from China. The Suga government is exploring cooperation with like-minded allies in key technologies such as semiconductors, batteries, 5G networks and rare earths production, but also more support for developing indigenous industry.
Whether these developed economy efforts are centrally led and financed industrial policies or hybrid, yet targeted, public-private partnerships, they do represent a clear step away from the widely-agreed neoliberal economic synthesis characteristic of the period from the 1980s at least through the first decade of the 21st century. It is also clear that a growing recognition of the long-term Chinese strategy to achieve self-reliance in a “dual circulation” economy has been a powerful incentive to pursue these new initiatives in the West and East Asia.
Chinese direct investment in both the US and Europe fell by over 75% and 45% respectively after 2016, and Chinese funding for the BRI (Belt&Road Initiative) fell from $75 billion in 2016 to $4 billion in 2019, numbers which corroborate Chinese efforts to become more self-reliant. It is unclear if the new political trade off favoring more domestic autonomy over Pareto-optimal efficiency in a globalized world will prove to be a wise choice.
Policymakers in the Transatlantic and East Asian sphere should at a minimum reflect on the unhappy history of autarchic economic policy in the 1930s and the mixed success of industrial policies in Japan more recently and on failed industrial policies such as the Concorde and Minitel in Europe and solar and electric truck experiments in the US. A better strategy would be to emphasize cooperation among traditional allies and treat resilience as a shared responsibility.