Does "strategic-industrial policy" have to revolve around national security considerations?
No., preferably not.
The Information Technology and Innovation Foundation (ITIF) released what is essentially a manifesto for strategic thinking in industrial economic policy. I say it is a manifesto because it reads like one, calling out the continued failures of leading economists to recognize that nations need to invest in their competitiveness and think about their industrial mix. The article begins with a now famous quote from the head of the White House Economic Advisors in 1992 regarding the industrial make up of the United States, stating: “Potato chips, computer chips—what’s the difference?” Now all car manufacturers in the U.S. and the U.S. car-consuming public is seeing the result of that type of advice as our manufacturers cannot source the computer chips they need to build their products.
The ITIF does a fine job explaining the need for a national industrial policy and even pushes policy makers to think a little bigger than just a broader DOD contractor base. The manifesto is very light on details for a framework for such a strategy. While securing essential industries for defense is helpful for DOD reasons, it is not economic strategy. In other words, identifying industries tied to defense is insufficient. Such criteria will either engulf all of industry or only protect the periphery of DOD contractor suppliers without protecting their suppliers, etc.
The starting point for the framework matters. Unfortunately, the ITIF keeps national defense as the basis for a national strategic economic policy stating: “It is time for a fundamentally new approach to U.S. economic policy, one that recognizes the need for two separate and distinct economic approaches; one for the non-strategic sector and one for the strategic sector.” This is a division without meaning. A nation’s strategy defines it’s strategic sectors. For example, Russia finds the arctic to be strategic and invests in research (core samples, monitoring satellites, scientific expeditions) as well as shipping ports and rescue ships to make the northern passage economically viable. Canada does not have the same strategy and does not make the same investments. Likewise, China has made biotechnology one of their key industries in their most recent 5 year plan, which means it is a strategic sector to them, but not necessarily for defense. As I explained in this article on the cost/benefit of a national industrial investment, one of the key goals of such industrial policies is to establish a global monopoly and drive exports.
The following are far better starting points for a national strategy than looking at the inputs to national defense:
Natural resource availability. What are the natural strengths of a country? Playing to natural strengths results in more bang for your buck. The United States is energy independent, which cannot be said for China or Europe. This gives the U.S. a huge advantage in power intensive industries (chemical and materials industries). Meanwhile, China clearly recognizes their weakness on this front and is committing considerable resources just to reduce dependence. Similarly, China is using its advantages in raw minerals and rare earth minerals to dominate sectors reliant on those materials (e.g., electric vehicles).
Possibility of establishing global dominance in the sector. For instance, the U.S. has long pursued airplane manufacturing, space launch, and communications as national monopolies for export. This is not due to the fact that Congress created a strategic plan like the Chinese do, but rather because these are entrenched industries with powerful lobbyists that manage to demand the needed investment from Congress. The exportability of the end product is important for these types of investments.
Necessity of the input. Rather than looking at the inputs to the defense industry, what are the essential inputs of a modern economy? Wiring is essential not just to defense, but also utilities, housing, and communication. Food is an essential input to soldiers and civilians alike. Not all such inputs can be a part of a national sector strategy, but where there is weakness, that weakness must be addressed and not only for defense. A military cannot be effective if the homeland broadly cannot function due to shortages. China is aggressively addressing its energy weaknesses; the U.S. needs to do the same for its weaknesses, and so should Europe.
Accordingly, to a certain extent a nation should be self-sufficient in that broadly necessary inputs, the absence of which could cripple multiple industries, are inherently strategically important. This is the distinction that makes computer chips more important than potato chips. Even the ITIF does not address the input problem, likely because their article also actively avoids advocating self-sufficiency. The availability of inputs needs to be secured, period. Fortunately, the U.S. has few weaknesses on this front; the EU is not so lucky.
Another key concept is the flexibility of the manufacturer. A semiconductor manufacturer like TSMC that can manufacture chips for aerospace, cars, PCs, servers, telecom, etc. is in advantageous position, whereas their consumers are not. The ability to serve many consumer industries from the same capital investment is an industrial dream. Fortunately, what is the consumer’s nightmare (multi-channel supplier going to the highest bidder) is advantageous for national strategic policy. Namely, a multi-channel supplier can be invested in and sustain itself on non-DOD contracts, but can be relied upon in war to supply defense needs with little re-tooling. These types of teach-to-fish industries do not require constant investment from DOD or Congress. At the same time, without the national capability the same industry can hamstring the nation and DOD, where the nation is a mere consumer.
Therefore, to develop a framework for a national industrial policy, the strategy needs more fundamental starting points than “inputs to defense.”