China’s industrial policy has worked better than critics think

EARLY IN ITS trade dispute with China, America declared that Chinese industrial policy was a form of “economic aggression”. America’s negotiators hoped to rein it in. No such luck. The very week in December that America and China announced a mini-deal on trade, China’s president, Xi Jinping, vowed that the Chinese government would do more in 2020 to support strategic sectors, ranging from robotics to biomedicine. Having seen its vulnerability to American export controls, China is more determined to build up its domestic abilities than it was before the trade war began.

This raises an obvious question: does industrial policy work? Since at least Jean-Baptiste Colbert, France’s finance minister under Louis XIV in the 17th century, governments have used taxes, tariffs and subsidies to cultivate national champions. Colbert worried about the dominance of Venetian glassmakers; Mr Xi worries about the dominance of American chipmakers.

In principle industrial policy looks attractive. When markets are highly imperfect—a fact of life in developing countries—governments can use their muscle to stimulate activities that would otherwise be unthinkable for private entrepreneurs. When such policies succeed, the targeted sectors flourish, as South Korea’s chemicals industry did in the 1970s. That, in turn, can lead to technological...

via The Economist: Finance and economics Business Feeds

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