US Must Harness Entrepreneurial Capitalism, Not Mimic China's Industrial Policy, Argues Pethokoukis

James Pethokoukis, a senior fellow at the American Enterprise Institute (AEI), recently asserted that the United States should prioritize its inherent entrepreneurial capitalist strengths rather than emulate China's state-driven industrial policies in global competition. In a widely shared social media post, Pethokoukis questioned Washington's current strategic direction, stating, > "Mimicking China isn't how the US should race against China. America should lean harder into its own entrepreneurial capitalist strengths. Why doesn't Washington realize this?"

Pethokoukis, known for his focus on US economic policy and innovation, advocates for a robust market-led approach. His critique comes amid a growing debate over the US government's increased adoption of industrial policies, such as the CHIPS and Science Act and the Inflation Reduction Act, which involve significant subsidies and targeted investments in strategic sectors like semiconductors and clean energy. Critics argue that such interventions risk mirroring China's model, potentially leading to inefficiencies and distorting market signals.

China's industrial policy is characterized by extensive state intervention, including massive subsidies, cheap loans, and centralized planning aimed at dominating key industries. This top-down approach has enabled rapid scaling in sectors like electric vehicles, solar panels, and 5G technology. However, some analysts point to potential downsides, such as overcapacity, price wars, and a lack of genuine disruptive innovation, which can lead to an "unprofitability problem" for Chinese firms.

Proponents of Pethokoukis's view argue that America's competitive edge lies in its dynamic private sector, venture capital ecosystem, and robust intellectual property protections that foster breakthrough innovation. They suggest that excessive government intervention could stifle this natural dynamism, lead to political favoritism, and create "zombie companies" sustained by state support rather than market viability. Instead, the focus should be on foundational investments like basic research and development, and creating an environment conducive to private sector growth and risk-taking.

While some level of industrial policy is deemed necessary by many to address national security concerns and supply chain vulnerabilities, Pethokoukis and like-minded economists emphasize that the US approach should fundamentally differ from China's. They advocate for policies that strengthen the broader innovation ecosystem and human capital, rather than picking specific industrial winners or attempting to "out-China" China in a subsidy race. The debate underscores a pivotal moment for US economic strategy in navigating intense global competition.