The Hidden Cost of China’s Industrial Policy

America should not respond in kind

Letter to The WSJ.

"Pleading for U.S. industrial policy (“China Hit Some Bumps on Its Road to Semiconductor Dominance,” op-ed, Sept. 21), Rick Switzer and David Feith commit an error famously described by Frédéric Bastiat: They are enchanted by that which is seen while they ignore that which is unseen.

One can question Messrs. Switzer and Feith’s claim that China’s industrial policy unfairly hamstrings U.S. companies; see, for example, research by Scott Lincicome and Alfredo Carrillo Obregon showing that investment in U.S. semiconductor production is robust. But even if the claim is accurate, it follows neither that Chinese industrial policy is successful nor that America should respond in kind.

What these authors don’t see is that which the Chinese sacrifice by diverting resources to politically favored producers. Which firms in China are artificially weakened, or annihilated altogether, by having resources stripped away from them by Beijing’s industrial-policy mandarins? Which advanced industries are failing to thrive in China because high-tech workers are directed by bureaucrats into semiconductor production?

Only by ignoring such questions can Messrs. Switzer and Feith conclude that “Beijing’s policy is finding success.” Because there’s no doubt that particular industries can be sustained with tariffs sufficiently high and subsidies sufficiently profuse, it’s not news that industries so favored in China are growing. But there’s also no doubt that these “successes” are bought at the terribly high price of the many unseen Chinese firms and industries whose growth is artificially stymied.

Since resource allocation is more wasteful when done by government officials spending other people’s money than when done by markets in which entrepreneurs and consumers spend their own money, industrial policy is a recipe for economic decline. We Americans shouldn’t mimic China’s economic self-destruction.

Prof. Donald J. Boudreaux

Mercatus Center, George Mason U.

Fairfax, Va."