The Western policy establishment has fallen into a dangerous trap of envy. Watch any congressional hearing or European Union summit, and you will see the same underlying anxiety: a fear that state-directed capitalism is simply better at building things than the free market.
The lazy consensus among modern pundits is that the West needs to fight fire with fire. They look at China’s massive subsidies for electric vehicles, solar panels, and lithium-ion batteries and declare that the only way to compete is to build our own mirror-image state apparatus. They want a Western playbook written by bureaucrats, funded by endless debt, and guided by industrial policy.
This is a profound misunderstanding of economic mechanics.
When the West attempts to replicate the Chinese economic playbook, it is not adopting a strategy for victory; it is importing a structural crisis. The core of China’s economic model is not magic state efficiency. It is the systematic suppression of domestic consumption combined with an unsustainable over-allocation of capital into heavy industry and infrastructure.
Trying to run that playbook in a democratic society with high labor costs and consumer-driven economies is a recipe for industrial ruin.
The overcapacity mirage
The standard narrative warns that China’s state-backed firms are hyper-efficient juggernauts overtaking Western competitors through sheer technological superiority. This is a myth.
What the West misinterprets as industrial dominance is actually a massive capital dumping mechanism. In China, local governments and state-owned banks channel cheap loans into favored sectors regardless of market demand. When every province builds its own massive electric vehicle or semiconductor supply chain to meet state mandates, you get an catastrophic level of overcapacity.
Consider the domestic reality. Chinese lithium-iron-phosphate (LFP) battery plants frequently operate at utilization rates below 40%. In a standard market economy, a factory running at less than half capacity burns through its cash reserves and files for bankruptcy. But under a state-directed system, survival is decoupled from profitability. State banks roll over the bad debt, and local officials provide hidden energy subsidies to keep the lights on so local employment numbers look stable.
The resulting torrent of cheap exports isn't a sign of economic health; it’s an emergency relief valve for an overheated domestic engine.
When Western nations attempt to counter this by passing massive subsidy packages like the U.S. Inflation Reduction Act (IRA) or Europe's Green Deal Industrial Plan, they miss the entire point. They are subsidizing domestic production in sectors where global supply is already structurally artificially inflated. By forcing capital into these specific verticals, Western governments are creating their own mini-bubbles of overcapacity, guaranteeing that taxpayer money will be trapped in permanently unprofitable industries that require perpetual state life-support.
The high price of low consumption
You cannot copy China’s production model without also copying its consumption model—and no Western electorate will ever tolerate that.
China’s industrial policy functions because the domestic consumer takes a back seat to the factory. According to World Bank data, household consumption in China hovers around 38% of GDP. To put that in perspective, the global average is roughly 63%, and the United States sits near 68%.
Household Consumption as a % of GDP (Approximate Visual Distribution)
[█████████████░░░░░░░░░░░░░░░░░░░░] China (~38%)
[█████████████████████░░░░░░░░░░░░] Global Average (~63%)
[█████████████████████████░░░░░░░░] United States (~68%)
How does a state keep consumer spending that low? By suppressing wages relative to productivity, maintaining a weak social safety net that forces citizens into high precautionary savings, and using a financial system that pays low interest rates on household deposits to provide cheap credit to state-owned enterprises.
If Western governments want to match China’s manufacturing scale through state direction, they must structurally alter where capital flows. I have advised corporate boards that poured hundreds of millions into domestic manufacturing projects based on government promises, only to realize the math doesn't work. You cannot pay Western wages, fund comprehensive social safety nets, maintain high regulatory standards, and somehow produce commoditized hardware at a price point that competes with a system built on consumer suppression.
When a Western state heavily subsidizes an industry, it does not lower the cost of production; it merely shifts the cost from the consumer's invoice to the taxpayer's bill. This creates a distortion where capital is stripped away from dynamic, high-margin sectors—like software, specialized biomedical engineering, and advanced services—and thrown into low-margin, capital-intensive manufacturing lines where the West lacks a structural comparative advantage.
Dismantling the standard policy questions
The public debate around this issue is broken because people are asking the wrong questions. The "People Also Ask" columns on search engines are filled with variations of flawed premises. Let's dismantle three of the most common.
Can industrial policy revive the Western middle class?
No. The assumption that building factories via government decree automatically generates stable, high-paying jobs is stuck in 1970. Modern advanced manufacturing is deeply automated. A multi-billion-dollar semiconductor fabrication plant or a state-of-the-art battery facility employs remarkably few assembly-line workers; instead, it requires highly specialized automated systems and software engineers. The raw headcount of blue-collar jobs created per billion dollars of subsidy is incredibly low. If your goal is broad middle-class wealth generation, tying up immense capital in heavily automated manufacturing plants is an extraordinarily inefficient mechanism.
Won't the West lose its technological edge without manufacturing subsidies?
This conflates invention with assembly. The value in almost every modern technology stack resides in the intellectual property, the architecture, the design, and the software integration—not the physical stamping of metal or the chemical coating of substrates. Apple commands massive margins because it owns the iOS ecosystem and the design of its silicon chips, while Foxconn operates on razor-thin margins assembling the physical hardware. Forcing Western economies to focus on the low-margin assembly portion of the value chain through subsidies is a strategic step backward.
How do we protect domestic industries from state-backed competition?
The conventional answer is broad, sweeping tariffs. But tariffs are a blunt instrument that often backfires on the industries they are meant to protect. If you place a massive tariff on imported steel or solar cells, you artificially raise the input costs for every domestic company that uses those materials to build final products. You end up protecting a few thousand upstream commodity jobs while crippling the competitiveness of tens of thousands of downstream workers who actually innovate and add value.
The strategic alternative: Play to your own strengths
Stop trying to beat China at a game designed for its specific, top-down political architecture. The West possesses unique economic advantages that cannot be replicated by bureaucratic command: deep capital markets, decentralized innovation, a robust legal framework for intellectual property, and a culture that tolerates creative destruction.
Instead of subsidizing specific physical factories, the correct path is to double down on foundational inputs:
- Fund basic R&D, not commercial deployment: Governments are horrific at picking winners in commercial markets (Solyndra and various European clean-tech initiatives are proof enough). Government should fund the hyper-risky, long-horizon scientific research that private venture capital won't touch—the raw materials science, quantum computing fundamentals, and basic biology. Leave the commercialization, scaling, and factory construction to private capital that risks its own skin in the game.
- Permit at scale: The greatest bottleneck to Western industrial agility isn't a lack of government money; it is a paralyzing thicket of environmental reviews, local zoning laws, and bureaucratic red tape. It takes close to a decade to open a new mine or build a major transmission line in the United States or Europe. China builds entire industrial complexes in eighteen months. You do not close that gap with subsidies; you close it by aggressively reforming NEPA (National Environmental Policy Act) and local permitting frameworks.
- Weaponize capital efficiency: Accept that certain commoditized manufacturing processes are best done elsewhere. Focus domestic capital on the highest-value nodes of the global economy. If a foreign state wants to spend its own taxpayers' money to subsidize the solar panels or batteries used by Western consumers and businesses, let them. Use those cheap inputs to lower costs across your own economy, freeing up domestic capital to build the next generation of high-margin technology.
The downside to this contrarian approach is obvious: it requires political courage. It means accepting that some legacy factories will close, that supply chains will remain global rather than entirely localized, and that economic growth will look messy and uncoordinated rather than neatly planned by a ministry.
But the alternative is worse. If the West continues down the path of matching state-directed capitalism with its own watered-down version of industrial policy, it will inherit all the pathologies of the Chinese model—bloated national champions, misallocated capital, mountain-high corporate debt, and stagnant productivity growth—without any of the centralized authority required to manage the fallout.
Stop building state-sponsored mirrors of your competitors. Run your own race.
