Warnings from history for a new era of industrial policy

“Free trade is almost dead,” declared Morris Chang, the founder of tsmc, dampening the mood at an event in December to celebrate a milestone in the building of the Taiwanese chipmaker’s new fab in Arizona. The remark was not out of character. In July he called America’s effort to bring chipmaking home an “exercise in futility”. Until recently, rich-world governments mostly shared his judgment. But worries about supply-chain security in a fraught world are prompting experimentation. History provides some reasons for optimism—as well as many for concern.

Industrial policy is just about as old as industry itself. Scarcely had Britain’s Industrial Revolution got going when Alexander Hamilton, America’s first Treasury secretary, argued for protection of his country’s industry, declaring that Adam Smith’s arguments in favour of free trade “though ‘geometrically true’ are ‘practically false’”. America, France and Germany industrialised behind tariff barriers. After the second world war scores of governments tried to help industrialisation along, with seeming success in places like Japan and South Korea, and rather different results elsewhere. Policy today is of a different sort: pursued by countries already at the technological frontier, in a world of complex global supply chains. Yet past research still holds valuable lessons.