Industrial Policy Needs an Immigration Policy

As the face-off between former President Donald Trump and Vice President Kamala Harris draws nearer, the United States is awash in partisan rancor, with the candidates and their supporters fighting bitterly over abortion, the southern border, taxes, health care, and more. Yet even though Democrats and Republicans are miles apart on most policy matters, they have nevertheless demonstrated a common renewed faith in one particular tool of economic statecraft: industrial policy.

During his presidency, Trump championed tariffs on billions of dollars of exports bound for the United States to bolster the fortunes of the U.S. manufacturing sector. President Joe Biden, focused on squeezing China’s trade advantage, has kept many of those tariffs in place. He has also spent the last three and a half years putting in place “Bidenomics”—a bundle of “industrial and innovation” policies that break with free-market orthodoxy. Harris has given every indication that she will continue this approach. Regardless of who wins the White House this November, the idea that the state needs to wield a heavier hand to guide the market is here to stay.

But this twenty-first-century industrial policy is unlikely to succeed unless policymakers pair it with a twenty-first-century immigration policy. The United States has ambitious plans to enhance its supply chain resilience, reduce its external dependence in critical sectors, and outcompete China on emerging technologies. Yet achieving these laudable objectives in a meaningful time frame will require a deep, highly skilled talent pool currently in short supply in the U.S. labor force. Without a more flexible and adaptive immigration policy, even the United States’ best-laid plans will run aground. As the political economist Robert Wade presciently noted more than two decades ago, “Immigration policy is the new frontier of industrial policy.”

THE NEW WASHINGTON CONSENSUS

Industrial policy—the use of active government policies that target specific sectors, industries, firms, and technologies in order to achieve some economic or strategic objective that the market alone cannot—is hardly new in the United States. Alexander Hamilton, the first treasury secretary, was a vocal proponent of using state power to stimulate investment. In the 1920s, Commerce Secretary Herbert Hoover leveraged the power of the federal government to standardize a raft of product sizes, from building materials to hand tools and electrical outlets. The historian Colleen Dunlavy has argued that this standardization had a greater impact on scaling up American manufacturing than Henry Ford’s mass production model did. Today, industrial policy is ubiquitous. According to the International Monetary Fund, in 2023, countries enacted 2,500 industrial policy interventions, of which 1,800 were deemed to be “trade-distorting.” China, the United States, and the European Union were responsible for half of those trade-distorting policies.

Nevertheless, industrial policy has long been considered verboten in the United States and in other industrialized democracies that have habitually preached free-market orthodoxy to both their own citizens and the populations of developing countries. The Trump administration broke with the status quo by imposing tariffs on a wide variety of imports—especially those from China. The Biden administration went one step further in boosting industrial policy by enacting new “Buy America” laws, the CHIPS and Science Act, and the Inflation Reduction Act, directing several hundred billion dollars in public money to promote advanced manufacturing technologies, especially semiconductor production. As National Security Adviser Jake Sullivan put it in April 2023, the Biden administration’s strategy “identifies specific sectors that are foundational to economic growth, strategic from a national security perspective, and where private industry on its own isn’t poised to make the investments needed to secure our national ambitions.”

Two motifs have featured prominently in justifications for this new consensus. The first is the Biden administration’s ambition to craft a “U.S. foreign policy for the middle class,” based on the perception that the traditional tools of U.S. foreign policy, such as free trade, have benefited American elites while doing little for—if not actively harming—most Americans in the middle.

The second motif relates to enhanced U.S. competitiveness and supply chain resilience. Pandemic-era supply chain shocks and their adverse impacts on inflation stoked policymakers’ anxieties by revealing a deep reliance on Chinese supply chains in areas as diverse as solar panels, rare earths, and electric vehicle batteries. In response, the Biden administration is making sizable new investments in high-technology sectors to build U.S. capabilities in sectors such as green energy and has embraced trade and investment restrictions through a “small yard and high fence” approach, curbing trade and investment in domains in which U.S. national security interests are at stake.

A PEOPLE PROBLEM

As the election nears, the U.S. economy’s remarkable “soft landing”—a recovery from the COVID-19 pandemic that has been marked by waning inflation, strong economic growth, and a healthy employment picture—stands in sharp contrast to the experience of other industrialized countries. Economists have concluded that strong immigration has been the United States’ secret sauce, contributing to higher-than-expected growth and an overall reduction in inflation since mid-2022. The Congressional Budget Office has predicted that between 2024 and 2034, with more people working, mostly as a result of higher net immigration, U.S. GDP will be $7 trillion larger and revenues $1 trillion higher than they would be without such labor force growth. New restrictions on immigration would not only hurt the United States’ bottom line; they would also generate labor shortages and increase supply chain backlogs, much like the country experienced during the pandemic when borders were shut.

Even with current immigration flows, U.S. businesses struggle with persistent labor shortages. In June 2024, there were 8.1 million job openings in the United States and only 6.8 million unemployed Americans. The U.S. Census Bureau has projected that by 2030, one-fifth of all Americans will be over the age of 65, testing the solvency of Social Security and exerting new stresses on the country’s health-care system. Moreover, these demographic pressures will apply most to those sectors in which industrial policy is presently focused. For example, the U.S. Bureau of Labor Statistics has estimated that the United States will need one million more workers in STEM (science, technology, engineering, and mathematics) fields in 2032 than it did in the decade prior, not even considering the workers who will retire during that timespan.

There are two obvious responses to this conundrum. The first is to nourish domestic human capital, which requires strengthening K–12 education and boosting underrepresented groups in STEM fields. The new industrial policy push includes billions of dollars for educating and retraining the country’s domestic workforce under programs such as the American Rescue Plan, which provided $170 billion in school rescue funds for public schools; the Apprenticeship Building America initiative, which funds public-private partnerships to expand apprenticeship opportunities in priority sectors such as information technology, clean energy, and the care economy; and American Workforce Hubs, which offer training in critical areas such as construction and semiconductor manufacturing in nine cities, including Baltimore, Columbus, Milwaukee, and Pittsburgh. These new investments are crucial, but the development of a labor market with the right mix of skills for twenty-first-century sectors such as artificial intelligence, green technology, and semiconductors will take time to bear fruit.

Attracting foreign-born talent is essential for boosting innovation and economic prosperity.

Consequently, the United States will also need to adopt a second response to the labor shortage: attracting global talent. On the surface, this approach may seem to conflict with a core goal of the renewed embrace of industrial policy: to reshore by creating solid, well-paying jobs at home. After all, how can policies enacted to “bring jobs home” justify increasing the number of job opportunities for foreign-born workers?

Concerns about immigrants displacing native-born workers are natural, but an emerging body of empirical scholarship suggests that immigration is not a zero-sum game. First, foreign-born high-skilled workers do not necessarily have native-born substitutes. Although U.S. universities awarded 29 percent more bachelor’s degrees in science and engineering in 2021 than they did in 2012, the overall number is still relatively modest. In 2021, the United States produced 812,000 college graduates majoring in STEM fields—just one-fifth of the 4.5 million that China and India collectively produced that year. Since 2019, China has awarded the highest number of science and engineering doctoral degrees. Although the quality of training in the United States is markedly superior (large numbers of STEM graduates in China and especially India are poorly trained), it is not sufficient. Second, a decline in the number of foreign workers does not necessarily mean that more native workers get hired. When visa quotas for high-skilled workers were cut in the first decade of this century (after a temporary increase was allowed to lapse), the sharp decline in foreign workers was not met with a corresponding increase in the hiring of native workers. Instead, dramatic decreases in the supply of highly skilled immigrant visas can drive multinational firms to simply offshore labor. Third, immigration has also lowered consumer prices, raised the output of the technology sector, and boosted firms’ profits, contributing to a larger and more vibrant economy for all Americans.

It is hard to overstate the importance of attracting and nurturing foreign-born talent as a method of boosting innovation and economic prosperity. Thirty-six percent of all Nobel Prizes awarded to Americans in the fields of chemistry, medicine, and physics since 1901 have gone to immigrants. Immigrants represent 16 percent of all U.S.-based inventors, and one-quarter of the aggregate economic value created by all patents filed between 1990 and 2016 was generated by patents filed by immigrants.

The immigrant advantage also extends to broader measures of economic prosperity. In 2022, 55 percent of the startup companies in the United States valued at over $1 billion had been founded by immigrants, for a total of 319 companies with a collective value of $1.2 trillion. Among more established technology companies, 60 percent of the top 25 firms were founded by immigrants or Americans with at least one immigrant parent; just under half of Fortune 500 companies were founded by immigrants or their children.

NO ENTRY

The United States risks losing its unsurpassed capacity to attract talent. Although international student enrollment has rebounded from the twin shocks of the Trump administration and the pandemic, the U.S. share of international students worldwide decreased from 23 percent in 2000 to 15 percent in 2020. Maintaining a comparative advantage among the pool of internationally mobile students is essential because such students make up a significant share of the United States’ STEM talent. In 2022–23, more than half of all international undergraduate students and two-thirds of international graduate students enrolled in U.S. colleges and universities were studying in STEM fields. Among higher education institutions experiencing declining international enrollment, three-quarters identify visa hurdles as the principal culprit.

But attracting the best international students will pay off only if they stay and work in the United States after graduation. The United States’ international student retention rate is well below the average for other industrialized countries. Even those students who complete undergraduate degrees in the United States are eligible to live and work in the country only for up to one year, with the option of a two-year extension for those in STEM fields.

Once this period lapses, immigrants who wish to continue working legally typically apply for an H1-B visa, a temporary visa category that allows employers to petition for work authorization for college-educated immigrants working in “specialty occupations.” By law, there is a hard cap of 85,000 H1-B visas each year (employees with universities, governments, and nonprofits are exempt from this cap). This visa cap is routinely maxed out within the first few days of each fiscal year, and because demand far outstrips supply, the United States uses a lottery system to determine which sponsors can file an H1-B petition with immigration authorities. For fiscal year 2025, applicants had a one-in-four chance of being selected.

Even those who manage to procure a work visa are not guaranteed permanent resident status, with only 140,000 green cards available for immigrant workers each year—a number that has not been adjusted since the Immigration Act of 1990 was passed—and no country can account for more than seven percent of legal permanent resident admissions each year. In 2023, the skilled worker green card backlog grew to 1.8 million cases. The tortuous green card line, in turn, drives a sizable number of talented individuals to give up and leave the country for more hospitable climes.

RACE FOR THE TOP

If the United States wants to succeed in the global competition for talent, there is little time to waste. Other countries are already rushing to poach workers that are unable (or unwilling) to settle in the United States. Last June, Canada unveiled a new Tech Talent Strategy, which grants a three-year work permit to up to 10,000 people who hold H1-B visas in the United States to come to Canada, with work or study permits for accompanying family members. The program reached 10,000 applications in less than 48 hours. Germany, for its part, has rolled out a job seeker visa that grants temporary entry for foreign workers so that they can find employment.

In the past year, the Biden administration has taken modest steps to streamline processing for highly skilled workers. In October 2023, the Department of Homeland Security announced several changes to the H1-B program, including extending the grace period for graduates seeking to stay in the United States as they transition from student to work visas. The administration also issued an expansive executive order providing guidance to simplify visa applications and processing times for noncitizens with experience in critical and emerging technologies.

For years, Democrats and Republicans on Capitol Hill have been unwilling to consider high-skilled immigration reform outside of a comprehensive immigration solution. Biden deserves credit for waking up to the United States’ talent crunch. But his administration’s tepid position is no longer tenable. Any viable solution will require both executive and legislative action.

If congressional leaders can break this impasse, there is plenty of low-hanging fruit to grab. For starters, Congress could increase the annual cap for H1-B visas. There is precedent for this. In the 1990s, Congress temporarily increased the annual cap from 65,000 to 115,000 visas and later to 195,000, as the United States scrambled to find computer programmers to address the dreaded “Millennium Bug,” a computer flaw that experts worried could wreak havoc because the original code used by most machines could not deal with dates beyond December 31, 1999.

The United States risks losing its unsurpassed capacity to attract talent.

Even if the number of temporary visas were increased, the H1-B lottery has other shortcomings: it creates significant uncertainty for job seekers and lacks any sense of prioritization. No private-sector firm would randomly select its future employees, nor does it make sense for the U.S. government to do so when admitting its workers. The U.S. government should set up a system that prioritizes individuals working in sectors or possessing skills that are uniquely in high demand in any given year, a system made possible by the growing sophistication of AI-driven predictive analytics.

Even without congressional action, the executive branch could provide automatic work authorization for the spouses of H1-B workers, who currently must apply separately for permission to work in the United States. One study has shown that 90 percent of H1-B spouses have at least a bachelor’s degree, and half those degrees are in STEM fields. The Department of Homeland Security has the authority to immediately extend work authorization to H1-B spouses, an action it could take if it wanted to.

When it comes to permanent residency, it is unlikely that there will be much political appetite to increase the overall number of green cards. It is easier, however, to envisage a change that would reduce the number of family-reunification-related green cards and increase the number of work-related green cards—a rebalancing that would enhance the larger national interest.

Another relatively simple fix would be to reform or remove the country-specific caps built into the green card process. The statistics, compiled by the economist William Kerr, are undeniable: Chinese and Indian inventors are responsible for 20 percent of all U.S. patents; around half of all international students come from China and India and are disproportionately concentrated in STEM fields; and immigrants from these two countries account for eight in ten H1-B visas issued each year. In the face of these numbers, and with China and India accounting for one-third of the world’s population, limiting each country to seven percent of the United States’ total annual pool of green cards makes little sense.

Another idea that has been proposed is the “recapturing” of unused green cards, another move within the executive’s purview. For bureaucratic, financial, or other reasons, including pandemic-era delays, there have been years when green card caps have not been met. Some experts have called for the administration to recapture those unused green cards (more than 200,000 in number), which would make an immediate dent in the backlog. There is precedent for this maneuver, and, best of all, it would not require legislative action, although explicit congressional approval could expand the total number of unused green cards put back into circulation.

WITHIN REACH

For the past several decades, the political class in Washington has been obsessed with managing and controlling illegal immigration. It is high time policymakers devoted the same degree of attention to legal—and especially high-skilled—immigration.

Just as there is a bipartisan consensus behind industrial policy among politicians, there is also a bipartisan consensus among voters that the United States should do more to encourage high-skilled immigration; three of four respondents in a December 2022 Bipartisan Policy Center survey embraced expanding high-skilled immigration, including 68 percent of Republicans, 74 percent of independents, and 85 percent of Democrats. And in the past, Democratic and Republican lawmakers have joined forces to adjust immigration rules that would strengthen the United States’ standing at a time of geopolitical stress and technological upheaval.

Today is another such time. In a globalized world, top talent goes to the highest bidder. In the nineteenth and early twentieth centuries, the United States’ unique ability to attract immigrant labor facilitated the country’s rise as a manufacturing powerhouse. In the twenty-first century, maintaining a position of technological dominance will require the United States to retain its status as the destination of choice for the most skilled workers. The bipartisan “Made in America” vision can become reality, but only if it is built by harnessing the talent of immigrants.