To counter China, some Republicans are abandoning free-market orthodoxy

China has spent years providing its companies with a vast web of government support, helping build them into formidable exporters of high-tech goods. U.S. conservatives have often criticized the approach, saying it wastes resources that would be better allocated by a free market. But some are starting to call for more government involvement in the economy — and more federal spending — to help the United States compete against a rival that is pumping out patents, engineering graduates and a host of high-tech goods, from electric vehicles and telecommunications equipment to industrial drones.

“Ultimately, capitalism is the best economic model. It will always yield the most efficient outcome. But there are times where the most efficient outcome is not the best outcome for America,” Sen. Marco Rubio (Fla.), one of the Republican sponsors of the semiconductor legislation, said in an interview.

For the past year, Rubio has been arguing that the government must identify the industrial sectors most critical to national security and economic growth, and spur investment in them, an approach he calls a “21st-century pro-American industrial policy.”

That kind of language is more often associated with Democrats, who have long endorsed the government taking an active role in shaping the economy, from Franklin D. Roosevelt’s New Deal to Alexandria Ocasio-Cortez’s Green New Deal. Sens. Elizabeth Warren (D-Mass.) and Sherrod Brown (D-Ohio) are big proponents of the approach, and Democratic presidential candidate Joe Biden has peppered his platform with industrial-policy proposals to revive the economy, including spending an extra $400 billion of federal money on American-made goods.

Since the Reagan years, Republicans have taken the opposite view — that government should stay small and out of the way and not engage in what has been derisively referred to as picking winners and losers. But China’s rise is forcing them to rethink that.

China’s central and regional governments are investing heavily in high-tech fields such as aircraft and electric-car manufacturing, semiconductors and robotics, by some estimates providing hundreds of billions of dollars to domestic companies through subsidies and other support.

At the same time, U.S. federal research and development spending has steadily declined as a percentage of gross domestic product, from 1.23 percent in 1976 to 0.71 percent in 2020.

U.S. businesses also aren’t investing as much as they used to on new equipment and manufacturing, a trend that critics say will undermine innovation. Under constant pressure from Wall Street to cut costs and return money to shareholders, corporate executives have off-shored manufacturing to China and other countries, cut spending on expensive equipment and factories at home, and made investors fat through dividend payments and share buybacks, Rubio argued in a report last year.

That has caused parts of the U.S. manufacturing base to shrink, a predicament that worries proponents of industrial policy for several reasons. For one, it can leave the United States unable to produce essential goods during an emergency, Rubio said, pointing to shortages of masks and other medical equipment during the coronavirus crisis.

And weak manufacturing over time will undermine American innovation because it is often the people who make things who have the best ideas for new products, argues Oren Cass, a former policy expert at the right-leaning Manhattan Institute who recently founded a new think tank that is advising Rubio and others on industrial policy.

“Where the engineering goes, that’s ultimately where the R&D goes,” Cass said in an interview. He and others point to a 2010 essay written by former Intel chief and Silicon Valley legend Andy Grove, who urged the United States to rebuild tech manufacturing or risk losing its innovation edge.

Rubio’s proposals to revive domestic industry include boosting federal loan programs for small manufacturing companies and offering federal loan guarantees to help producers of medical equipment borrow money.

In a recent bill with Warren and others, Rubio also called for stronger rules to ensure that drugs bought by federal health-care systems such as Veterans Affairs are made entirely in the United States. And he has proposed eliminating a tax break on share buybacks to discourage companies from conducting them.

Other Republican lawmakers who support elements of industrial policy include Sen. Tom Cotton of Arkansas, who helped sponsor the subsidies-for-semiconductors legislation, and Sen. Todd C. Young of Indiana and Rep. Mike Gallagher of Wisconsin, who together with Democratic colleagues proposed $10 billion to establish regional tech hubs that would aim to create new companies and boost manufacturing.

The semiconductor measure is something no Republican would have supported a decade ago, according to Rob Atkinson, president of the Information Technology and Innovation Foundation, a think tank that promotes industrial policy. “Not in a million years. They would have been pilloried for picking winners,” he said.

President Trump has helped open the door to this conservative shift by repeatedly speaking about the importance of American manufacturing and by raising alarms about the competitive threat China poses, Atkinson said.

But for the most part, he said, “these views and sentiments have not really translated into an industrial policy that is supported by any real spending.”

In an interview, Peter Navarro, a trade adviser to Trump, said the White House has sought to support domestic industry by slapping higher tariffs on imports, by boosting defense spending on combat-vehicle production and by devoting federal funding to domestic manufacturers of medical supplies including drugs and N95 masks.

Trump has released few details about his plans for a second term, but in a list of bullet points this week he proposed tax credits for companies that bring back jobs from China and a ban on federal contracts for companies that outsource to China.

Proponents of the new semiconductor legislation say the United States has lost too much chip manufacturing to other countries that offer big subsidies to attract the factories, which are among the most expensive manufacturing facilities to build. Maintaining domestic production is important, they say, because the chips are at the heart of most high-tech equipment, including weapons systems.

U.S. semiconductor companies account for 47 percent of global chip sales but only 12 percent of manufacturing, because they outsource much of the manufacturing overseas, according to the Semiconductor Industry Association, which welcomed the new legislation. China is investing heavily in chip production and is rapidly gaining ground, the association said.

The legislation, which also won the unanimous support of Democratic senators, calls for federal grants of up to $3 billion for the construction of domestic chip-making factories or R&D facilities and the training of workers to staff them.

It also directs the White House to establish a national strategy for semiconductor research and manufacturing. And it calls for the private sector and government to jointly found and operate a National Semiconductor Technology Center, tasked with conducting research and funding semiconductor start-ups.

The Senate measure, and a similar one in the House, passed as amendments to the National Defense Authorization Act and will now head to a conference committee to be reconciled.

Parts of the conservative think-tank world are unimpressed by this shift in Republican thinking.

Scott Lincicome, senior fellow at the libertarian Cato Institute, criticized the semiconductor legislation as an unnecessary giveaway to a profitable industry. In an interview, he also panned the measure for subsidizing any type of domestic chip manufacturing instead of focusing incentives on the most high-tech chips.

“You’d be giving handouts to companies that aren’t planning to operate at the bleeding edge of technology,” he said.

And in a recent opinion piece titled “America Doesn’t Need an Industrial Policy,” Thomas J. Duesterberg, a senior fellow at the Hudson Institute, argued that “history records few examples of democracies in which political leaders have successfully steered their economies by targeting industries for support.”

But other conservative thinkers say it’s time to embrace more government direction of the economy.

“We think standard libertarian views about laissez faire, the idea that the market will spontaneously structure itself in an ideal way, we think that’s naive,” said Will Wilkinson, vice president for research at the Niskanen Center, a think tank he described as housing former libertarians who have come to endorse a government role in fixing some economic problems. For example, Wilkinson said he’d like to see more generous unemployment benefits and worker training to help laid-off Americans find rewarding and productive jobs.

His colleague at Niskanen, Samuel Hammond, said conservatives over the years have unfairly characterized any sort of government involvement in the economy as equal to Soviet-style central planning. “It’s one thing to think we can collectivize agriculture,” he said. “It’s another to propose public investment in manufacturing. The latter does not lead to bread lines.”

Cass, the Rubio adviser and founder of American Compass, favors a variety of steps to strengthen domestic manufacturing, including legislation that would require some businesses to buy technology that is made in the United States. If telecom companies were required to buy domestically made equipment for 5G wireless networks, he said, it would strengthen U.S. manufacturers and counter Chinese suppliers such as Huawei.

Huawei’s dominant global position in wireless network equipment — and the absence of U.S. manufacturers — has alarmed U.S. officials, who have tried to stop Huawei’s rise. Economists and telecom experts say the United States lacks domestic suppliers in part because U.S. companies and venture capitalists have shied away from the expensive work of developing hardware, which they generally see as a commodity, preferring instead to focus on more profitable software products. U.S. policymakers also undermined domestic producers by not enforcing a single standard for wireless communication, even as China bolstered Huawei with hefty state support.

Cass said the government needs to offer matching funds to encourage private-sector investment in strategic industries.

“The government will invest in plenty of things that will be a boondoggle and a waste,” he said. “But if we go after 10 things and we get three, that gets us ahead.”

Critics of industrial policy often point to Solyndra, the solar-panel manufacturer that went bust after receiving federal support through a $535 million loan guarantee from the Department of Energy during the Obama administration. But a counterexample is electric-car manufacturer Tesla, which received a $465 million federal loan in 2010 and went on to achieve considerable success.

Cass and other conservatives say there is strong precedent for industrial policy in the United States. Alexander Hamilton, the country’s first treasury secretary, encouraged the United States to use import tariffs and “bounties,” or subsidies, to foster a strong manufacturing sector, which he saw as crucial to maintaining independence.

The federal government took command of U.S. manufacturing during World War II and still maintains an Office of Industrial Policy at the Pentagon, which coordinates with the private sector and recommends legislative policies to ensure the military has a steady supply of weapons and equipment.

Even during the Reagan era, Congress appropriated hundreds of millions of dollars to a government-industry consortium called Sematech that was founded to help U.S. semiconductor companies catch up to Japanese rivals.

Several recent industrial-policy proposals have attracted bipartisan support, even if Republicans and Democrats tend to advocate government intervention for different reasons.

“Republicans want to talk about national security and China and maybe your left-wing people want to talk about inequality. But from my perspective, you get to the same place,” said Julius Krein, editor of American Affairs, who has written about the bipartisan phenomenon.

The bill from Sen. Young and Rep. Gallagher proposing $10 billion for regional tech hubs was co-sponsored by Senate Minority Leader Charles E. Schumer (D-N.Y.) and Rep. Ro Khanna (D-Calif.), whose district includes Silicon Valley. The measure also proposes expanding the National Science Foundation into a renamed National Science and Technology Foundation, and giving it $100 billion over five years to invest in everything from university research to small manufacturing sites for the testing of new products.

Democrats’ proposals are typically more ambitious. Biden has pledged to spend $400 billion during his first term on additional federal purchases of American-made goods, in what he calls the “largest mobilization of public investments in procurement, infrastructure and R&D since WWII.” That purchasing would include electric vehicles, steel, medical supplies and telecommunications gear, Biden said.

He has also proposed an extra $300 billion in federal funding of R&D into new technologies, a federal loan program to help small manufacturers and a tax credit to spur the modernization of manufacturing facilities.

And he’s pledged to spend big on infrastructure to support new industries, including a promise to build 500,000 charging stations for electric vehicles.