Beginning with the Trump administration, and accelerating under the Biden administration, U.S. trade and industrial policy has prioritized relocating manufacturing production back to the United States. For all their differences, both administrations disregarded other countries in this pursuit. Both also attacked international trade and investment as harmful to U.S. economic and national security, even though the rules for that very system were established by the United States and serve its interests. Along with members of Congress from both parties, the Biden administration has sought to take away production from others in a zero-sum way—explicitly from China and a bit more courteously from others.
This policy approach, while having considerable popular appeal at home, is based on four profound analytic fallacies: that self-dealing is smart; that self-sufficiency is attainable; that more subsidies are better; and that local production is what matters. Each of these assumptions is contradicted by more than two centuries of well-researched history of foreign economic policies and their effects. Neither the real but exaggerated threat from China nor the seeming differences of today’s technology from past innovations change underlying realities.
Industrial policy—government subsidies and protections to promote domestic capacity in a favorite sector—is nothing new in U.S. or global economic history, and it can be useful. The Biden administration’s renewed push for public investment in infrastructure, research, and innovation is welcome, if oversold in its direct employment benefits. Targeted export and investment controls on China, Russia, and other military rivals on a limited number of well-defined high-tech goods could also be sustainable and worth the economic cost. But the protection and promotion of U.S.-located manufacturing against foreign competition is not only unnecessary for industrial policy’s success—it will defeat the worthy purpose of it.
THERE IS NO QUESTION THAT MANY CHINESE POLICIES, including economic ones, are aggressive. They pose a threat to China’s immediate neighbors, to U.S. national security, and more broadly to human rights and democratic sovereignty. But the extent to which China poses a direct threat to U.S. economic security is overblown. This is especially true since commerce with China yields significant benefits, Beijing is no longer massively undervaluing its currency against the dollar, and many of its supposedly self-serving, even cheating, tactics in trade have backfired. For example, subsidizing steel until it reached vast overcapacity has been a sinkhole rather than a success for China, contributing to environmental degradation and helping to ensure an uncompetitive workforce.
Nonetheless, those involved in U.S. economic policymaking face two difficult questions: First, what parts of the economic relationship are fueling Chinese military aggressiveness, either in capacity
