Governments have always sought to influence corporate choices and market outcomes. In recent years, however, governments have tilted the commercial playing field to a degree not seen in decades. Industrial policy –once a taboo in many market-based economies – has returned with a vengeance.
Business leaders can no longer ignore the reach of “new” industrial policy. For those executives wary of state incentives, at a minimum defensive planning is needed, because your rivals might not be so particular.
Monitoring industrial policies is imperative as they have become a prominent feature of contemporary globalization. While markets traditionally dictated manufacturing and selling locations based on efficiency, national governments are now expressing heightened concerns. These concerns stem from the need to secure critical technologies and components domestically and address the repercussions of crises such as sluggish economic growth after the Global Financial Crisis, the COVID-19 pandemic, and associated supply disruptions.
Geopolitical tensions and conflicts further underscore the centrality of geopolitics in the global marketplace, encompassing issues such as territory, resources, and leadership in new technologies. Governments also face the challenge of meeting public demands for climate mitigation and adaptation strategies. So they turn to targeted policy interventions – that is, to industrial policy. Sometimes such policy is framed by officials as a strategic response; other times as a risk mitigation strategy against vulnerabilities arising from unexpected events.
The new wave of industrial policies has created trade tensions in key sectors: semiconductors, renewable energy, and AI, to name a few. This adds further to corporate exposure to political risk as governments compete for capital and know-how.
Keeping all this on corporate radar screens is a bewildering task for executives. No international organization tracks industrial policy actions, compounding the uncertainty.
We decided to fix this.
The New Industrial Policy Observatory (NIPO) database is a monitoring initiative by the Global Trade Alert (GTA) team that is designed to track developments in next-generation industrial policies. We’ve written up its initial findings in a paper co-authored with Adam Jakubik and Michele Ruta, which is available here.
The primary objective of this undertaking is to enhance transparency regarding the implementation of industrial policies. While governments and analysts may find this information useful to evaluate the impact of industrial policy, corporate executives will find the contents a valuable input to strategic and operational decision-making.
Government action is recorded in the NIPO database if it meets the following criteria:
To facilitate the use of the NIPO database, where possible, policy intervention is linked to pre-specified groups of products in strategic sectors, namely medical, semiconductors, critical minerals, military/civilian dual-use, low-carbon technology, and other advanced technology.
For nearly 15 years, the GTA team has systematically tracked government trade, investment, and subsidy policies. A combination of digital tools and human expertise has been used to build a database of over 64,000 policy interventions worldwide, making this the largest publicly available inventory of commercial policy interventions available. Companies, business associations, international organizations, and governments frequently refer to GTA findings. From the beginning of 2023, that machinery was directed towards tracking the uptick of industrial policy action by governments.
As of 4 January 2024, the NIPO database contains information on more than 2,500 novel industrial policies undertaken by 75 jurisdictions. Notably, 71% of these policies explicitly tilt the commercial playing field in favor of national or local firms. That is, these measures distort trade and investment flows and will be viewed by some critics as protectionist.
Already, certain patterns are emerging in industrial policy response.
Industrial policy initiatives have primarily centered around major economies, with China, the European Union, and the United States collectively accounting for 48% of these measures. Handing out subsidies to companies is the predominant form of industrial policy. Still, regional disparities are observable in the choice of industrial policy instruments. Figure 1 shows that countries in Europe, Central Asia, and North America resort more to national and local firms compared to other regions. Conversely, governments in the Asia Pacific, Latin America and the Caribbean, and South Asia exhibit regions rely more on erecting barriers to imported goods. While the utilization of localization measures – such as Buy America rules – is not widespread, South Asian and North American nations employ them relatively more frequently than their counterparts in other regions. When it comes to resorting to restrictions on exports, the Asia Pacific and Europe regions, along with Central Asia, are the most active users.
Examining the stated goals behind industrial policy interventions, it is evident that governments cite promoting competitiveness as the primary objective for more than a third of the measures. Motives related to climate change mitigation are linked to 28% of industrial policy interventions in 2023, while those centered on enhancing supply chain resilience are associated with 15% of measures. Approximately one in five measures are motivated by a combination of national security and geopolitical tensions.
At the outset of 2023, the medical goods sector was the primary focus of industrial policies; however, it was quickly surpassed by so-called dual-use products (which can have both civilian and military uses) and advanced technology products. As the months went by in 2023, more and more industrial policies targeted sectors such as low-carbon technology, semiconductors, and their upstream inputs, including critical minerals.
The total value of corporate subsidies associated with industrial policy measures that were announced since 2023 reached $1.7tn. As shown in Table 1, by far the largest portion of these subsidies, amounting to $1.1tn, is allocated towards meeting climate change mitigation goals. It is important to note that these financial allocations can be distributed over multiple years, and the total subsidy value is anticipated to increase as additional subsidy records become public. Still, governments have put over $600bn on the table to advance firm and sectoral competitiveness. For all the talk of geopolitics, less than $200bn was allocated towards advancing national security goals through industrial policy interventions.
When interpreting these industrial policy trends, bear in mind that many governments reveal their subsidy decisions with a lag, if they reveal them at all. This means that as the NIPO database is updated through 2024, the totals reported in Table 1 for subsidies announced in 2023 will rise. No one should be surprised if the total amount of money governments put on the table during 2023 reaches $2tn.
The return of aggressive industrial policy lays to rest any notion that there is a level commercial playing field in many sectors of national economies. Competition is less and less on the merits; how firms gain an advantage over rivals has a growing state component.
A combination of digital tools and human expertise has been used to build a database of over 64,000 policy interventions worldwide, making this the largest publicly available inventory of commercial policy interventions available.
That such a large proportion of industrial policy intervention is motivated by governments seeking to promote competitiveness ought to grab the attention of C-suites. After all, firms, not governments, create and deliver competitive goods and services. Ultimately, the success or failure of any new industrial policy will depend largely on the decisions taken by corporate boards and senior executives.
Widespread resorting to industrial policy will alter how firms in many sectors compete. In practice, this means that many firms will compete for contracts against rivals whose governments are standing behind them. For all the state borrowing of recent years, very few firms have the deep pockets that governments have. Those rivals may be national or foreign – not every local firm is assured of state support. The upshot: price-based competition will intensify, putting a premium on non-price factors as a way to win customers and retain them.
Interestingly, many governments offer greater financial support for R&D and other forms of corporate innovation, lowering the cost of shifting strategy towards attribute competition. This matters more as the cost of capital faced by firms rises and shareholders demand greater returns. State support will likely occupy a larger part of the financing mix of many firms.
Executives and corporate boards should have their eyes wide open when seeking state support, however. First, securing such support can take time and involve lots of bureaucratic hassle, including extensive reporting requirements. We’ve been told by senior executives that securing government support is much faster in the United States than in Western Europe.
Second, government favors often come with strings attached. Some of those strings may raise costs and so eat into the value of the state support. Others may limit a company’s room for maneuver, such as promises to keep production going at locations even if sought-after productivity increases don’t materialize.
Third, so much of recent industrial policy action is company-specific. That is, governments are prepared to back certain firms over others in their own country. As geopolitical rivalry intensifies, so many debates are framed as “us versus them.” When it comes to new industrial policy, the reality is more like “us versus us.” In practice, nationality may matter less than many think. Instead, what matters are the strength of a company’s ties to government and their willingness and capacity to exploit those links effectively.
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