US industrial policy has worked best when used to fund research and development

Gary Clyde Hufbauer (PIIE) and Euijin Jung (formerly PIIE)

US industrial policy has worked best when used to fund research and development


US industrial policy since 1970 has had a mixed track record. An analysis of 18 episodes of industrial policy shows that initiatives to support individual firms or protect domestic industries through trade restrictions are much less likely to improve US producers' competitiveness in global markets, generate advances in technology, or create jobs at a reasonable cost to consumers than initiatives that subsidize research and development (R&D) costs for an entire industry.

Trade measures to protect American industries have seldom paid off. Almost none of the industries that benefitted from trade protections between 1970 and 2020 became internationally competitive, and if jobs were created or saved—as in the steel and textiles and apparel sectors—they came at a spectacularly high costs to consumers.

Initiatives that subsidized a single firm's production operations also yielded mixed returns. Government support for solar cell manufacturer Solyndra Corporation, for example, was an outstanding failure. The firm filed for bankruptcy in 2011 after having failed to advance solar technologies, despite receiving a federal loan guarantee.

Industrial policy has worked best when subsidizing R&D across a whole sector. The Defense Advanced Research Projects Agency (DARPA), for example, used federal R&D funding to boost the competitiveness of the US semiconductor industry and deliver an employment boom. Funding multiple firms' R&D costs encourages competition. When grant distribution is left to industry experts without political interference, the most promising, high-risk projects that would otherwise struggle to attract private sector funding can benefit from government support. Future industrial policy initiatives should heed lessons from these episodes and adopt a pro-competition approach through R&D tax credits and government grants, maximizing their chance of success.

This PIIE Chart is based on Gary Clyde Hufbauer and Euijin Jung's research, Scoring 50 years of industrial policy, 1970–2020.

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