The Problem With Subsidies

The United States government is waging a “chip” war with China. The war is fought on two fronts: one is preventing China from accessing the latest artificial intelligence chips and manufacturing tools, and the other is subsidizing large firms to bring manufacturing back to the United States. But as Yu Zhou points out in “Competing with China” (Issues, Fall 2022), “whether [the CHIPS and Science Act] will improve US global competitiveness and prevent the rise of China is uncertain.”

A race to subsidies as America’s solution is uncertain and problematic because it is based on a misunderstanding of how innovative Chinese firms advanced their technologies. Contrary to the popular belief that China built its technology industry through massive subsidies, China’s records of state-sponsored technology investments are often spotty. The prime example is the semiconductor industry, with billions of dollars invested by the state over the last three decades; the industry’s advancement consistently fell short of government targets. The real secret of the Chinese high-tech industry is indigenous innovation—that is, innovative Chinese firms sense unfulfilled domestic demands, innovate to generate localized products at a lower cost, build on access to the vast Chinese market to scale up, and eventually accumulate problem-solving capabilities to approach the technological frontier. Ironically, the US government’s chip war is creating a space for indigenous innovation for Chinese semiconductor companies, which was previously absent when China relied on American chips.

Taking the wrong lessons from China could have unintended consequences for the US industry. Since leading American high-tech firms have spent some $633 billion on stock buybacks over the past decade, it can hardly be assumed that their lack of enthusiasm for investing in semiconductor manufacturing is because of a lack of cash. But showering money on business, as China’s experience showed, would certainly lead to unhealthy state-business relations. Already, the CHIPS and Science Act has created perverse incentives for lobbying for more and more subsidies.

Instead of competing on subsidies, the United States should compete with China in areas where it excels, namely innovation in emerging technologies. Historically, the United States has had few successes in reviving mature industries through subsidies, whether it was steel, automobiles, or memory chips. But it has consistently led the world in new technological revolutions over the past century. In a world facing a climate crisis, the United States should compete with China to bring innovations to solve the nation’s existential problems and win the ultimate prize of technological leadership that benefits all humankind. After all, the subsidy war benefits few but corporate bottom lines.

Yin Li