Advanced Industries Are Essential for US Competitiveness

Until recently, the United States was the global technology and economic leader. Those days are gone. America’s principal geopolitical adversary, China, has a larger advanced technology base than the United States, and has overtaken it in a host of advanced industries, including telecommunications equipment, high-speed rail, solar panels, drones, shipbuilding, and industrial machinery.

This matters because techno-economic capabilities are increasingly the key to global power. Chinese President Xi Jinping showed that he understands this when he stated: “Technological innovation has become the main battleground of the global playing field, and competition for tech dominance will grow unprecedentedly fierce.” Unless Washington grasps this reality and responds with a coherent, advanced industrial strategy, the US is likely to continue to lose both the global technological advantage and its global leadership standing overall. Both are vital to its competitiveness.

How the United States Became the Leader

Conventional history holds that America became the world’s industrial leader based on entrepreneurial giants like Thomas Edison, Andrew Carnegie, Henry Ford, and, more recently, Bill Gates, and Steve Jobs.

In reality, the United States has been a developmental state for most of its existence, meaning there has generally been strong economic intervention and regulation from the government. Federalists, Whigs, and Republicans like Alexander Hamilton, Henry Clay, Abraham Lincoln, and Teddy Roosevelt all were determined to ensure that America led the world industrially. Among the first acts signed by the first Congress was a subsidy for domestic industry through the Tariff Act of 1789, and it wasn’t until after World War II that tariffs fell. Washington’s Treasury Secretary Alexander Hamilton produced his landmark “Report on Manufacturers” to ensure that America was not dependent on Britain. 

As Michael Lind wrote in Land of Promise, under Thomas Jefferson’s presidency, the US government established a state-owned manufacturing industry—the federal arsenals. These arsenals in Harpers Ferry, Virginia, and Springfield, Massachusetts, played a central role in enabling the American system of production, which is based on interchangeable parts. It took Europe another half century at least to catch up.

In 2000, the US led in telecommunications equipment. Today, it has no companies. The same dynamic occurred in other sectors.

Even Thomas Jefferson, who initially opposed Hamilton’s efforts, recognized the need for such an approach after the War of 1812. In 1816, he wrote:

You tell me I am quoted by those who wish to continue our dependence on England for manufactures. There was a time when I might have been so quoted with more candor, but within the 30 years, which have since elapsed, how are circumstances changed!

He went on to argue that the federal government had to play a key role in industrial development.

Half a century later, it was no accident that the Civil War years—when the Democratic, agrarian South had no members in Congress—were the most productive in American history for national development policy. During that time, the country saw the passage of the Pacific Railway Act, the Homestead Act, the National Banking Act, the Morrill Land Grant Act, the Department of Agriculture Act, and the Morrill Tariff.

Then, starting in World War II, the federal government dramatically ramped up its support for advanced industry. By the early 1960s, the federal government spent more on research and development for business and government than the rest of the world combined. This fueled an enormous array of breakthroughs, including computers, semiconductors, jet aviation, lasers, numerically controlled machine tools, satellites, relational databases, and the internet.

In the 1980s, President Ronald Reagan actively supported the creation of the R&D tax credit, and the establishment of Sematech, a government-industry R&D partnership that helped restore US leadership in semiconductors. His National Science Foundation director launched a series of programs to link university and industry research. And his trade representative threatened the Japanese with tariffs if they did not open up the computer chip market.

None of this is to say that government alone drove US leadership. America’s vast market enabled mass production industries to take off. Our risk-taking culture, enabled in part by immigrants from Europe who wanted new lives and opportunities, was critical. And the fact that, as Calvin Coolidge said, “the business of America is business” meant that there were fewer restrictions on US businesses than European ones. But still, without an active developmental state, America’s progress would have been much more limited.

How America Lost Its Lead

Unfortunately, America has lost its lead. The United States is now highly dependent on the rest of the world for many industrial products. In 2021, the United States ran a $1 trillion overall trade deficit and a $205 billion trade deficit in advanced industrial goods. America produced more than 40 percent of the world’s semiconductors in the 1970s; today it’s about 12 percent. In 2000, the US led in telecommunications equipment. Today, it has no companies. The same dynamic occurred in other sectors, including machine tools, consumer electronics, and solar panels. And it’s easy to imagine the same pattern for emerging technologies such as quantum computing, robotics, 6G equipment, and gene editing.

China is a particularly worthy competitor. Using an array of indicators, including R&D spending, patents, STEM workers, and output in advanced industries, China went from having 78 percent of US capabilities and output in 2010 to 139 percent in 2020.  

Looking at national output in a set advanced industries—including biopharmaceuticals, aerospace, computers and semiconductors, machinery and equipment, motor vehicles, electrical equipment, and software—paints a similar picture. In 2018, the United States produced $1.6 trillion in advanced industry output, and China produced $1.5 trillion (see figure 1). But when viewed in terms of the share that these industries make up of national economies, US performance is lagging. In fact, these industries make up a smaller share of the US economy than they do globally. In contrast, their share of the Chinese economy is 34 percent higher than the global average—and in Japan, they are 43 percent larger; in Germany, they’re 74 percent higher; and in South Korea and Taiwan, they are more than double. In other words, the US economy is less specialized in advanced industries than the rest of the world.

Moreover, when omitting the “IT and other information services” sector, where the US is strong, the United States’ relative share of global advanced-industry falls to 80 percent of the global average. The very real strengths of the US software and information sector (e.g., Microsoft, Alphabet, and Meta) mask serious weaknesses in most of the rest of America’s advanced industries.

Figure 1. Total Production and Global Market Shares in Advanced Industrial Sectors, 2018

Source: Information Technology and Innovation Foundation

This is important because competition in advanced industries is over a “fixed pie,” where if other nations win, the United States is likely to lose. This is especially true vis-à-vis China, where the Chinese Communist Party has firmly set its sights on increasing its global market share in all advanced technology sectors. We see this tug-of-war in the fact that there is a strong negative correlation (–0.78) between the change in the respective shares of global output that China and the United States held in advanced industries from 1995 to 2018. In other words, the more ground China gained in these industries, the more ground the United States lost.

America’s Neoliberal Economic Policy Trap

For most of America’s history, economists and policymakers understood that the state needed to play a supportive role in industrial development. But just when US global economic and technological leadership started to falter in the 1980s, economists and policymakers began their embrace of free market economics and unfettered globalization—what some have termed the Washington Consensus. The idea was that the formula for economic success consisted of limited government intervention combined with deep global integration.

To restore advanced US industrial leadership over China elected officials, business leaders, think tank and university scholars, and the media must view losing the global lead to China as the single greatest threat to America’s future.

Rejecting the notion of economic competition between nations, this new consensus embraced the Ricardian notion of comparative advantage, where countries specialize in that in which they naturally excel. This let them be indifferent to America’s industrial composition. Indeed, in their model, there is no difference between computer chips and potato chips. In fact, one Washington-based international policy think tank leader said in an off-the-record conversation that America could lose all its manufacturing to global competition and still be perfectly fine. When this is the view, there is no need for an advanced industrial strategy: anything markets produce is fine.

This model also held that trade deficits do not matter, and that one-way free trade was better than two-sided protectionism. But trade deficits do matter, if they are caused by hollowing out key productive capacity. It’s not really a problem for the United States to run a trade deficit in apparel because the industry consists of mostly low-skilled products not central to US leadership. But running a large trade deficit in an advanced industry like semiconductors comes at the cost of US industry’s decline.

Holders of this dominant view also believe that as long as the US practiced free trade, then all was well, even if some US trading partners did not think so. In this view, the fact that China practiced innovative mercantilism to distort trade and reduce US advanced industrial sales was viewed with indifference.

However, other nations didn’t get the memo—or if they did, they ignored it. Southeast Asian nations like Japan, Taiwan, Singapore, and South Korea all eschewed this advice, and used industrial policies to move up the value chain and grow their advanced industries, often at the expense of US firms and capabilities. Now China is doing this too, but is supplementing it with a vast array of unfair and predatory trade and economic practices.

Advanced industries are critical for US power. Most important, they support national defense, either through direct production for the US Department of Defense or through dual-use production. They also provide the United States with leverage over other nations, as it showed by cutting off semiconductor exports to Russia after Putin’s invasion of Ukraine. Finally, the United States must be competitive in these sectors to reduce its chronic trade deficit.

Failure Is Not an Option

Failure cannot be an option for the United States if it wants to remain the world’s hegemon. And a lack of robust action cannot be an option if the nation wants to avoid failure.

As such, the single most important step for restoring advanced US industrial leadership over China is for elected officials, business leaders, think tank and university scholars, and the media to view losing the global lead to China, including in advanced industries, as the single greatest threat to America’s future. Until this happens, other pressing policy priorities—such as social welfare spending, tax cutting, budget balancing, and climate change—will crowd out attention and budgets.

The reality is that absent an invasion of Taiwan by mainland China, such a consensus is unlikely to emerge. It is important to remember that it was not until Stalin gave Kim Ill Sung the green light to invade South Korea that the United States realized it must prepare for the long Cold War, including technologically. Only then did it begin to dramatically ramp up support for advanced-technology industries.

Some might say that gradual decline vis-à-vis China will be enough to wake Washington from its stupor. But just look at the United Kingdom, whose economy has been hollowed out by global competition over the last half century. It remains incapable of developing a consensus on and strategy for industrial renewal.

Some will argue that Washington has in fact turned a corner, and that US industrial policy has arrived, largely because Congress passed the CHIPS and Science Act in 2022. But alas, this overstates and misreads what happened. The act’s chips portion—subsidies to reduce the cost gap between building a semiconductor factory in the United States and overseas—was largely motivated by national security concerns. It was less industrial policy than defense policy.

And the “science” component of the act contained a number of proactive provisions to spur US competitiveness in advanced technology, even after it was watered down by the university research community seeking more money with no strings. But when push came to shove, budget appropriators were miserly, so they provided only minimal funding compared with what was authorized in the legislation.

This is too bad, because big, bold action is needed. This includes passing and funding a “Super-Chips Act” to provide generous financial and tax incentives for companies to build advanced production facilities in an array of key industries and technologies. It means boosting federal research-and-development spending by at least $50 billion per year, and targeting most of it toward strategic technologies and industry partnerships. It means dramatically expanding the research-and-development tax credit, and generous funding of advanced manufacturing programs.

However, such action is unlikely, at least for now. This suggests that, at least for a while, any advanced industrial strategy will need to be less ambitious and more incremental, and, most important, not very costly.

But this doesn’t mean complete inaction. Congress could reform trade policy to make it easier to block imports of Chinese products that are supported by unfair trade practices. It could increase the research-and-development tax credit, which, compared with US competitors, is quite modest in size. It could liberalize STEM immigration, especially through the issuance of more green cards for scientists and engineers. It could ensure that universities and federal labs do a better job of transferring technology to entrepreneurs and existing companies. It could abide by the “do no harm” principle, and ensure that US antitrust and regulatory policies, including on emerging technologies like artificial intelligence and facial recognition systems, limit harm to innovation. It could modestly expand lending authority to the US Export-Import Bank.

The United States should also work more with allies, especially on technology cooperation. In 2020 the United States—government and business—invested 18 percent more in R&D than China. But allied nations that also belong to the Organization for Economic Cooperation and Development collectively invested 166 percent more than China. So the United States and its allies need to cooperate more closely on technology development in a host of areas, such as semiconductors, drug development, batteries, and defense.

But Washington also must be judicial when considering its partners. If a country or region is focused on limiting US access to their markets—as the European Union is now with its protectionist “digital sovereignty” plan—they should not be invited to participate. Likewise, if a country will not work with the United States to impose export controls on certain key technologies to China, they should also be excluded. But even with these limitations, many nations are likely to want to join, including Australia, Canada, Japan, and the United Kingdom.

Conclusion

For more than 200 years, America’s leaders—public and private—sought US economic and technological global leadership, and they attained it—only to see it slip away in the last decade. It’s not too late to regain this leadership, provided that Washington takes the right steps. Unless policymakers and other US leaders accept that the nation is engaged in a fierce global competition for fixed market share for advanced industries, especially with China, and that winning this competition is critical for America’s future, it will be difficult, if not impossible, for the federal government to act.

In the last several years, Washington has shown a much greater awareness of Beijing’s economic and technology challenge, and this does make it somewhat easier for advanced industries policies to be put in place. But as Winston Churchill stated in 1942 as Rommel’s forces were in retreat in North Africa, “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” We can say the same today about US-China economic and trade competition. It is the end of the beginning, but much more hard work lies ahead.

Robert D. Atkinson is founder and president of the Information Technology and Innovation Foundation (ITIF). He is an internationally recognized scholar and a widely published author. He has worked across several US administrations: President Bill Clinton appointed Atkinson to the Commission on Workers, Communities, and Economic Change in the New Economy; the Bush administration appointed him chair of the congressionally created National Surface Transportation Infrastructure Financing Commission; the Obama administration appointed him to the National Innovation and Competitiveness Strategy Advisory Board; as co-chair of the White House Office of Science and Technology Policy’s China-US Innovation Policy Experts Group; to the US Department of Commerce’s National Advisory Council on Innovation and Entrepreneurship; and the Trump administration appointed him to the G7 Global Partnership on Artificial Intelligence; and the Biden administration appointed him as a member of the US State Department’s Advisory Committee on International Communications and Information, and a member of the Export-Import Bank of the United States' Council on China Competition.

Cover photo: High speed train in China. Shutterstock/THINK A.