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What is industrial policy and why does it matter?
A brief look at some of the top questions businesses should consider as they navigate this new era of industrial policy.
Shortly after President Joe Biden signed the CHIPS and Sciences Act, he boasted that the “groundbreaking” bill would bring “hundreds of billions of dollars” worth of semiconductor investment into America.
“We learned that companies will follow if the federal government will invest in industries that we know we need and we’re prepared to help in,” Biden said.
As it turns out, America’s trade partners thought this formula was a pretty good idea too. Over the past two years, Biden’s domestic manufacturing push has propelled a global wave of industrial policy measures that have allocated more than $300bn in investments toward the global semiconductor industry.
In this environment, businesses need to understand the consequences of industrial policy to both benefit from, and avoid, the negative externalities of transformative government measures like the CHIPS and Sciences Act.
Here is a brief look at some of the top questions businesses should consider as they navigate this new era of industrial policy.
Industrial policies include targeted interventions such as subsidies, export incentives, and favorable public procurement rules.
What is industrial policy?
The phrase “industrial policy” is a catch-all term for a range of government interventions that seek to shape the economy, often by developing or supporting domestic manufacturing. A key feature of industrial policies is that they are selective, meaning they favor specific sectors, technologies, firms, and even stages of the value chain.
Industrial policies include targeted interventions such as subsidies, export incentives, and favorable public procurement rules. Industrial policies also include punitive measures aimed at protecting domestic production from foreign rivals, such as export restrictions, tariffs, and other import barriers.
What are some examples of industrial policies?
In recent years, the world’s largest economies have put tens, sometimes hundreds of billions of dollars on the table in the form of financial incentives, grants, low-interest loans, and other forms of subsidies. Examples include:
- The US Inflation Reduction Act provided an estimated $369bn in tax breaks and federal spending to promote a range of domestic priorities, including energy security and climate change mitigation.
- The Made in China 2025 initiative provided government subsidies to improve China’s industrial manufacturing capacity for 10 industries, including robotics, aerospace, shipping, and automobiles.
- The European CHIPS Act mobilizes €43bn ($46.8bn) to help improve Europe’s capacity to manufacture advanced semiconductors.
- India’s $2.3bn Green Hydrogen Mission aims to boost India’s role as a leading manufacturer and exporter of hydrogen.
- The New Industry Brazil plan provides 300 billion reais ($60bn) in state funding to bolster Brazilian industries like health, defense, and agribusiness.
industrial policy's goal is to support domestic manufacturing of goods and associated services to achieve economic and non-economic objectives.
What is the aim of industrial policies?
In general, industrial policy’s goal is to support domestic manufacturing of goods and associated services to achieve economic and non-economic objectives. These can include structural transformation of economies, promoting public health, enhancing national security, climate change mitigation, increasing supply chain security, support for regions that have fallen behind, and management of scarce resources like critical minerals.
Does this mean governments are picking winners and losers?
In many cases, yes. Industrial policy is often framed by advocates as supporting the development of innovative firms and sectors. But the same policy tools can just as easily be used to prop up underperforming and failing firms.
Low-complexity industries, such as raw materials and basic agricultural goods, are more likely to face trade barriers such as tariffs and other import restrictions.
Which sectors are most impacted by industrial policy?
It depends. Industrial policies focused on public procurement, localization, and domestic subsidies tend to cover more complex goods such as advanced machinery, electronics, and chemicals. Low-complexity industries, such as raw materials and basic agricultural goods, are more likely to face trade barriers such as tariffs and other import restrictions.
What are the implications for executives?
Tracking incentives available to firms – both your own as well as your rivals – is more important than ever. Recognizing government priorities opens the door for some companies to align their corporate objectives with national interests, which, in turn, can foster a competitive advantage. Some firms may get a leg up on their rivals by accepting state subsidies to develop the next generation of products and services for their customers.
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