Industrial Policy and the Growth Strategy Trilemma

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Industrial policy is gaining momentum amid challenges such as the COVID-19 aftermath, vaccine nationalism, global supply-chain instability, net zero transitions, and geopolitical competition.
Renewed debate centers on the role of government support for firms and industries deemed strategically important and whether to rebalance state intervention versus market forces.
Several recent policy actions and figures cited:
- The US is allocating $39 billion in funding from the $280 billion CHIPS Act to support the development of advanced semiconductor manufacturing capability.
- The Biden administration's industrial policy includes $370 billion in subsidies for clean energy in the Inflation Reduction Act.
- More than 90 percent of advanced chips come from Taiwan Province of China.
- At least two semiconductor manufacturing clusters are planned by 2030 in the US.
- Funding recipients face conditions such as a 10-year ban on expanding advanced chip capacity in China and a commitment to affordable childcare.
- Japan is providing subsidies worth more than $500 million to 57 companies to encourage domestic investment.
- The European Union is setting aside €160 billion of its COVID-19 recovery fund for digital innovations such as chips, batteries, and climate adaptation.

Definition: Government efforts to shape the economy by targeting specific industries, firms, or economic activities using tools such as subsidies, tax incentives, infrastructure development, protective regulations, and research and development support.
Common objectives behind establishing national champions:
- Enhancing national security by promoting self-sufficiency in key industries.
- Supporting job-rich and inclusive growth.
- Revitalizing left-behind communities.
- Voter optics associated with reviving the manufacturing sector.
Examples of targeted national-champion sectors:
- Semiconductors in Taiwan Province of China.
- Renewable energy in Germany.
- Aerospace in France.
Economists’ concerns: Picking winners and losers can lead to market distortions and inefficient allocation of resources.

Framework: Policymakers face a trilemma balancing three objectives—economic growth, financial and fiscal stability, and the establishment of national champions. Pursuing any two objectives tends to partially sacrifice the third.
Strategy A — Support safe champions:
- Prioritizes financial and fiscal stability and support for safe national champions.
- Emphasizes national security, prudence, and resilience over aggressive growth.
Strategy B — Support bold champions:
- Emphasizes economic growth and selection of risk-taking national champions.
- May reduce attention to stability concerns, increasing the risk of costs to the financial system and fiscal costs.
- Governments pursuing this strategy accept higher risk of instability to pursue higher growth.
Strategy C — Fair-market capitalism:
- Prioritizes stability and economic growth without focusing on national champions.
- Emphasizes dynamic markets, free entry, and fair and competitive marketplaces.
- Offers an alternative path to national security goals via diversified global supply chains, open and fair trade, and international cooperation.
Trade-off insight: Choices lie on a continuum; contextual factors (state of the economy, financial system health, electoral pressures, geopolitical environment) determine the best approach.
Author’s normative view: Efficiency gains may make it sensible to move toward the fair-market capitalism strategy, though governments are often tempted to establish national champions.

Political pressures:
- Need to deliver economic growth to maintain political power, provide jobs, and ensure social stability.
- “Growth anxiety” drives leaders to prioritize short-term performance and quick wins.
Psychological dynamics:
- Clinical psychology studies suggest anxiety makes decision-makers fixated on immediate concerns at the expense of long-term goals.
- Industrial policy can reduce leaders’ growth anxiety by providing a sense of control over economic outcomes.
Competing fear of instability:
- Leaders may pursue safe champions to safeguard national security and financial/fiscal stability, seeking control and risk mitigation.
Net effect: Growth anxiety and fear of instability can motivate leaders to choose national-champion strategies despite awareness of long-term economic costs and inefficiencies.

Airbus:
- Cited as often-hailed model of successful government intervention; creation of Airbus in late 1960s involved government subsidies, commitments to absorb losses, and financing fixed development costs.
COMAC C919 (China):
- China invested up to $70 billion in the Commercial Aircraft Corporation of China (COMAC).
- The C919 project has been delayed by more than five years due to regulatory, technological, and supply-chain hurdles.
- Special licensing requirements for technology parts exports to China were imposed by the Trump administration in 2020.
- The C919 has not been certified yet by any major aviation authority outside China, partly due to safety issues.
- Despite past industrial-policy success with its domestic high-speed rail network during the 2010s, China has not replicated that success in commercial aviation.
Broader lesson:
- Promoting national champions can sometimes be effective but is not a guaranteed recipe for success.
- Multiple countries engaging in industrial policy can trigger a race to the bottom in subsidies and protections, reducing chances of success for any single country and creating an unstable global economic environment.
- Quotation attributed to former US Treasury Secretary Lawrence Summers: “The best generals are the ones who hate war the most but are willing to fight when needed. What I worry is that people who do industrial policy love doing industrial policy.”

Trilemma guidance: Policymakers should use the Growth Strategy Trilemma to strike a balance among economic growth, stability, and national champion objectives.
Recommended stance:
- Take a cautious approach to industrial policy.
- Focus on long-term growth, stability, and international cooperation.
- Use industrial policy sparingly—“Just like salt in cooking, a pinch of industrial policy can be helpful, but too much can overpower, and prolonged excess can harm.”

Source: Industrial Policy and the Growth Strategy Trilemma — Ruchir Agarwal, F&D Magazine, Published on March 21, 2023.