For a long time, the US was regarded as the citadel of free trade. This was best illustrated in the famous Radio Address to the Nation on “International Free Trade” by President Ronald Reagan on November 20, 1982, where he said categorically, “The United States took the lead after World War II in creating an international trading and financial system that limited governments’ ability to disrupt free trade across borders. We did this because history had taught us an important lesson: Free trade serves the cause of economic progress, and it serves the cause of world peace”.

Despite its twists and turns, the most apparent rift in the US-professed policies towards free trade is discernible from another Republican President nearly after 35 years. Donald Trump, during his 2016 presidential campaign, promised to reduce the US trade deficit with China. In the context of the China-US trade war and the US move towards protectionism, reflecting the spirit of mercantilism, Trump tweeted in March 2018, “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good and easy to win”.

Surprisingly, similar policies continued under the Biden administration, and some new policy measures have been introduced, which possibly suggest the ushering of an era of even more active state intervention in industrial and trade policies in the US.

In February 2023, the Biden government launched the first ‘Chips for America funding opportunity’ to incentivise the manufacturing of semiconductors or chips in the US. The funding opportunity is a fiscal incentive given to US firms “for projects to construct, expand, or modernise commercial facilities for the production of leading-edge, current-generation, and mature-node semiconductors.” This policy marks a radical change in how the semiconductor industry has operated since the 1970s.

The semiconductor or chip industry is at the cutting edge of technology, and the US has a dominant presence in this industry. However, the US semiconductor firms like Intel, Micron, Qualcomm, and Global Foundries have traditionally depended on other lower-wage countries for manufacturing and fabrication of the chips. Most top US firms have subsidiaries or contract manufacturers in countries like Taiwan, South Korea, and increasingly China to produce semiconductors.

The rapid rise of China as a global manufacturing base has led to concerns that it has led to substantial job losses in the US. More importantly, as China and the US are currently engaged in a battle for dominance in the advanced technology field, depending on China for manufacturing of semiconductors has become a tricky issue for the US from multiple angles, like maintaining trade secrets and intellectual property rights and securing supply chains at right prices.

During the Covid years, the disruption in the supply chain due to production lockdowns in China has only aggravated the problem. Against this backdrop, the ‘Chips and Science Act’ of August 2022, which operationalised the ‘Chips for America funding opportunity’, says that this is an “industrial strategy to revitalise domestic manufacturing, create good-paying American jobs, strengthen American supply chains, and accelerate the industries of the future.”

What is also remarkable here is a change in the approach of US policymakers towards industrial policy and their willingness to engage in a more active role of the state in supporting particular industries. Since the 1980s, the US policymakers have been ardent advocates against an active role of the state in the industry.

According to this doctrine, a state-led industrial policy favours certain industries and distorts the efficiency of market economics.

Supply-side economics

Instead, ideologically they propagated supply-side economics where the role of the government is to act as a facilitator to improve the overall business environment, which should induce more private investment without directly supporting any particular industry. Though it can be argued that the US government has always played an important role in the US economy through its huge research and development expenditures, government purchases and subsidy programmes, it so far did not announce any explicit industrial policy helping specific industries.

The new ‘Chips and Science Act’ marks a possible ideological shift in the approach of the US policymakers towards industrial policy, and interestingly, this new shift in policy has driven to a large extent, to counter the state-led industrial policy of China.

It is important to highlight that the WTO regime was designed to take the world towards “freer trade”, and state intervention in industrial and trade policies was discouraged. WTO rules reduced the policy space available for late-industrialising developing countries to a large extent.

While many developing countries, including India, have voiced their concern over this issue in WTO, the ideological support for free trade mainly came from the developed countries, particularly the US.

The stance of the US has changed since the Trump administration and the return of industrial policy in the US may spell a very uncertain future for the WTO in the coming years. This is already foreshadowed by the US refusal to elect appellate body members in the WTO, which has crippled the dispute settlement mechanism of the WTO system.

Interestingly, such ideological shifts in industrial and trade policies are not seen in the financial world, where Wall Street and the US Fed can dictate gyrations in financial markets the world over. Long back, David Hume said, “Nothing is more usual, among states which have made some advances in commerce, than to look on the progress of their neighbours with a suspicious eye, to consider all trading states as their rivals, and to suppose that it is impossible for any of them to flourish, but at their expense”. Has a time come for the US to reread Hume?

Pal is Professor, IIM Calcutta, and Ray is Director, NIBM, Pune. Views are personal