Industrial Policy vs. Free Trade: Ian Fletcher on Rebuilding High-Value Industries

Industrial policy has long been controversial in economics. It is often viewed as governments attempting to “pick winners” in the economy. In a recent conversation on the Economics Explored podcast with Adept Economics Director Gene Tunny, economist and author Ian Fletcher called for a strategic, well-implemented industrial policy to foster high-value industries, drive economic growth, and secure good jobs. Fletcher is an Advisory Board Member of the Coalition for a Prosperous America.

Coauthor of Industrial Policy for the United States: Winning the Competition for Good Jobs and High-Value Industries, published by Cambridge University Press, Fletcher argues that free trade isn’t always the best approach for national prosperity. In this discussion, he explains the limitations of free trade, the necessity of government intervention in his view, and the lessons policymakers can learn from countries that have successfully implemented industrial policies. You can watch a video recording of the whole conversation here:

The Impacts of Free Trade

One key theme in Fletcher’s argument is that, while beneficial in some ways, free trade can have significant downsides that some economists overlook. Traditionally, free trade is seen as a way to lower consumer prices and improve efficiency. However, Fletcher argues that this perspective ignores job losses, regional economic decline, and national strategic concerns.

He points to the China Shock, a concept popularised by MIT economist David Autor, which demonstrated that opening U.S. markets to China led to large-scale job losses in American manufacturing, with many regions never recovering. The assumption that displaced workers would quickly find new well-paid jobs proved false—many remained unemployed or were forced into lower-wage service jobs.

While Fletcher doesn’t mention it in the conversation, his argument is consistent with the well-known Stolper-Samuelson theorem in international economics, which predicts that a tariff on a commodity that is produced intensively by a country’s relatively scarce factor of production, say low-skilled labour, will increase the wages of workers involved in the production of that commodity. The overall economy is generally better off under free trade, with higher GDP. There is the potential to make everyone better off if the gains from free trade can be redistributed–e.g. via tax cuts for workers or additional social security or health benefits. But there is no guarantee that all groups, particularly lower-skilled factory workers, will be better off.    

What is Industrial Policy?

Industrial policy is based on the idea that some industries are more valuable than others and that free markets alone will not necessarily lead a country to specialise in those industries. Fletcher argues that governments must proactively foster industries with high wages, strong innovation, and national security benefits.

According to Fletcher, industrial policy involves a mix of tools, including:

  • Targeted government investment in innovation (e.g., R&D funding for emerging industries).
  • Trade policies such as tariffs to protect critical domestic industries.
  • Strategic procurement policies, where governments prioritise purchasing from domestic manufacturers.
  • Financial incentives, such as concessional loans.

He emphasises that industrial policy is not just about subsidies or tariffs but about building an economy where high-value industries can thrive.

Lessons from Around the World

In the conversation, Fletcher presents case studies from various countries highlighting what works and what doesn’t in industrial policy.

Success Stories: Taiwan, Germany, and Japan

  • Taiwan successfully built its world-leading semiconductor industry through targeted government support, particularly through institutions like the Industrial Technology Research Institute (ITRI), which helped companies develop cutting-edge innovations.
  • Germany has long maintained a manufacturing and engineering powerhouse, thanks, in Ian’s view, to its focus on vocational education, research partnerships, and industrial clusters.
  • Japan leveraged government-backed R&D and export-oriented policies to develop its advanced manufacturing base in sectors like automobiles and electronics.

Failures: The UK and Argentina

  • After World War II, the UK failed to modernise its economy, allowing its industrial base to decline. The UK government funded unsuccessful projects, such as the Concorde supersonic jet, which was economically unviable.
  • Argentina, instead of developing high-value industries, relied too heavily on protectionism without fostering real innovation, leading to stagnation.

Fletcher argues that the key to success is not just government intervention, but smart and strategic intervention. Of course, that is easier said that done, and there is no doubt many economists will remain sceptical of the benefits of industrial policy. While there have been some successes, there have been many failures, and it comes with the risk of losing significant amounts of public money. 

The Role of Technology and Innovation

A significant concern Fletcher raises is the loss of U.S. technological leadership due to poor industrial policy. He notes that while many groundbreaking innovations—such as the internet, jet engines, and pharmaceuticals—originated in the U.S., other countries often dominated the manufacturing and commercialisation of these technologies.

To address this, Fletcher emphasises the need for a strong technology pipeline—a system where government-funded research translates into domestic industrial success. He points to initiatives like Manufacturing USA, a U.S. government program to bridge the gap between innovation and production. However, he notes that such programs in the U.S. remain underfunded compared to those in Germany or East Asia.

Can Tariffs Help?

One of the most contentious tools of industrial policy is tariffs. Fletcher argues that while tariffs are often criticised as protectionist, they are sometimes necessary to prevent the collapse of critical industries. He defends recent tariffs on Chinese electric vehicles (EVs), arguing that it would be nearly impossible to establish a competitive domestic EV industry without such measures. 

Incidentally, Adept Economics Research Economist has recently analysed the rationale and implications of the EV tariff in the U.S., highlighting that policymakers must strike a balance that fosters innovation, backs viable domestic industries, accelerates the global shift toward sustainable transportation solutions, and provides a greater variety of goods to consumers at minimum costs.

Fletcher argues that tariffs alone are not a complete solution, but combined with investment in R&D, workforce training, and supply chain development, they can help strategic industries gain a foothold.

Final Thoughts

Fletcher’s argument is not against trade or markets but for a balanced approach that acknowledges the limits of free trade and what he sees as the need for strategic government action. He believes that if the U.S. is to remain competitive in the 21st century, it must take industrial policy seriously—investing in innovation, ensuring fair trade, and fostering industries that create high-value jobs. 

Whether you are supportive or sceptical about industrial policy, there is no doubt the coming years will see many new industrial policy interventions. Policy advisers need to ensure they are as well thought through as possible, and Fletcher’s book should serve as a good reference for that. 

Published on 30 January 2025. For further information, please contact us via contact@adepteconomics.com.au or by calling us on 07 3085 7417.

Free Economic Updates

Subscribe to receive our monthly economic e-newsletter, packed with the latest insights, hints and tips from our leading economists.
  • This field is for validation purposes and should be left unchanged.