All of this does not bode well. A tit-for-tat industrial policy distorts relative prices and reduces economic efficiency by emphasizing political whims over comparative cost advantage. As more countries introduce subsidies, it reduces the impact of government aid elsewhere. In other words, industrial policy burns taxpayers’ money.
Also read: Get out of the agony – for a new economic and industrial policy
Another reason why industrial policy fails is that politicians cannot resist the temptation to use public money to promote completely different goals. In February, for example, the Biden administration required companies that received federal subsidies for semiconductor manufacturing to also provide affordable childcare for their workers. But what if there are not enough workers immediately available in the vicinity of such chip factories to ensure day care for the children? Such additional regulations reduce the effectiveness of the subsidies.