For much of the late 20th century, the global economy was guided by a neoliberal consensus that championed free markets, privatization, deregulation, and globalization. Governments, especially in advanced economies, were urged to retreat from “picking winners” and allow market forces to determine the allocation of resources. Industrial policy—the practice of governments actively supporting certain sectors or industries for strategic, economic, or security reasons—was often viewed as outdated, inefficient, and distortionary.
But in the 21st century, this orthodoxy has begun to crumble. From Washington to Brussels, from Beijing to New Delhi, governments are increasingly intervening directly to shape economic outcomes. Whether it is semiconductor manufacturing, clean energy, rare earth minerals, or pharmaceuticals, strategic industries are once again at the center of national policy. The COVID-19 pandemic, rising geopolitical tensions, supply chain disruptions, and the green transition have accelerated this shift.
The return of industrial policy is not just a matter of economics; it represents a profound rethinking of globalization, national security, and the role of the state in shaping the future. This article explores the drivers of this revival, the tools governments are using, the sectors most affected, and the implications for global competition and cooperation.
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The Decline of Industrial Policy and the Neoliberal Era
To understand the current revival, it is important to trace the decline of industrial policy in the late 20th century. After World War II, many governments embraced industrial strategies to rebuild economies and foster growth. Japan’s Ministry of International Trade and Industry (MITI), South Korea’s chaebol-centered model, and European state-led strategies were often cited as successes. These policies helped countries transition from agrarian or war-torn economies into industrial and technological powerhouses.
However, by the 1980s and 1990s, industrial policy came under attack. Critics argued that government intervention distorted markets, encouraged cronyism, and often failed to produce globally competitive industries. The Washington Consensus, championed by institutions like the IMF and World Bank, advocated for liberalization, privatization, and minimal state intervention. As globalization deepened, many governments rolled back subsidies, privatized state-owned enterprises, and embraced the idea that markets—not governments—should decide winners and losers.
For a while, this model seemed to work. Global supply chains flourished, multinational corporations spread production across borders, and consumers enjoyed lower prices. Yet the fragility of this system would eventually become clear.
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The Shocks That Revived Industrial Policy
Several key events in the 21st century exposed the vulnerabilities of a hyper-globalized, market-driven system and revived interest in industrial policy:
1. The 2008 Global Financial Crisis
The crisis revealed the dangers of excessive reliance on financial markets and deregulation. Governments worldwide bailed out banks, intervened in industries like automotive manufacturing, and recognized that “free markets” could not always deliver stability.
2. The Rise of China
China’s state-led model has been perhaps the most significant driver of industrial policy’s return. Through initiatives like Made in China 2025, Beijing invested heavily in semiconductors, electric vehicles, artificial intelligence, and renewable energy. Its success in scaling up strategic industries challenged the notion that liberalized markets were the only path to development. Western nations, worried about dependence on Chinese supply chains, began to rethink their strategies.
3. The COVID-19 Pandemic
The pandemic exposed the fragility of global supply chains. From shortages of personal protective equipment (PPE) to semiconductor bottlenecks, governments realized the risks of relying too heavily on global markets for essential goods. Calls for “reshoring” or “friend-shoring” production became widespread.
4. Geopolitical Tensions
The U.S.-China rivalry, Russia’s war in Ukraine, and broader concerns over economic security have heightened the focus on self-sufficiency in critical sectors. Sanctions, export controls, and resource weaponization have underscored the importance of domestic industrial capabilities.
5. The Green Transition
The urgent need to transition to low-carbon economies requires massive investments in renewable energy, battery storage, hydrogen, and critical minerals. Governments see industrial policy as essential for achieving climate goals while creating jobs and maintaining competitiveness.
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Tools of Modern Industrial Policy
The new wave of industrial policy does not look exactly like its 20th-century predecessor. While direct state ownership still exists in some countries, many governments use a mix of tools:
Subsidies and Grants: Governments are offering billions in subsidies to attract investment. The U.S. CHIPS and Science Act allocates $52 billion for semiconductor manufacturing, while the EU’s Green Deal Industrial Plan provides support for clean-tech.
Tax Incentives: Tax credits for renewable energy, electric vehicles, and domestic manufacturing are increasingly common.
Public-Private Partnerships: Governments are partnering with firms and universities to fund R&D in areas like AI, biotechnology, and quantum computing.
Export Controls and Tariffs: Protectionist measures, particularly in semiconductors and critical minerals, are being used to safeguard domestic industries.
Strategic Reserves: Some countries are building reserves of rare earths, lithium, and other critical resources.
State-Owned Enterprises (SOEs): In countries like China, SOEs remain crucial actors in strategic industries.
This toolkit represents a blending of market incentives and state intervention, designed not just to boost competitiveness but also to ensure resilience and security.
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Strategic Industries in Focus
1. Semiconductors
Perhaps no industry illustrates the new industrial policy better than semiconductors. Chips power everything from smartphones to fighter jets, yet their production is concentrated in East Asia—particularly Taiwan and South Korea. Concerns about geopolitical risks have spurred the U.S., EU, Japan, and India to invest heavily in domestic chip manufacturing.
2. Clean Energy and Green Technology
Solar panels, wind turbines, batteries, and hydrogen technologies are at the heart of climate strategies. China currently dominates many of these industries, leading other nations to step up subsidies and domestic production efforts. The U.S. Inflation Reduction Act, for example, provides hundreds of billions in incentives for clean tech.
3. Rare Earths and Critical Minerals
These materials are essential for electronics, renewable energy, and defense technologies. China controls a large share of global supply and processing capacity, prompting others to invest in mining and refining domestically or in friendly countries.
4. Defense and Aerospace
National security considerations have always justified industrial policy in defense, but now governments are integrating dual-use technologies (e.g., drones, AI, satellite systems) into broader strategies.
5. Pharmaceuticals and Biotechnology
The pandemic underscored the risks of relying on global supply chains for medicine and vaccines. Governments are now investing in domestic pharmaceutical capacity and research.
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Industrial Policy as National Security
A defining feature of the current industrial policy revival is its strong link to national security. Unlike the past, when industrial policy was largely about economic development and jobs, today’s strategies are deeply entwined with security concerns. Policymakers see control over semiconductors, energy, and critical minerals not just as economic issues but as matters of sovereignty and strategic autonomy.
This framing has allowed industrial policy to gain bipartisan political support, particularly in the U.S., where both Republicans and Democrats view competition with China as a priority. Similarly, the European Union speaks of “strategic autonomy,” emphasizing the need to reduce dependence on external suppliers.
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Risks and Criticisms of the New Industrial Policy
Despite its growing popularity, industrial policy is not without risks:
1. Inefficiency and Waste: Critics argue that subsidies may go to politically connected firms rather than the most innovative ones.
2. Trade Wars: Protectionist policies risk sparking retaliatory measures, fragmenting global trade.
3. Global Inequality: Wealthier countries have more fiscal space to subsidize industries, leaving poorer nations at a disadvantage.
4. Greenwashing Risks: Subsidies for “clean energy” could be captured by fossil fuel lobbies or used inefficiently.
5. Overcapacity: If multiple countries invest heavily in the same sectors, it could lead to gluts, as seen in the past with steel or solar panels.
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Global Competition or Cooperation?
The return of industrial policy raises the question: will it lead to destructive competition or new forms of cooperation?
Competition: The U.S. and China are clearly locked in a race for technological supremacy. Europe fears being squeezed between the two, while emerging economies worry about being sidelined.
Cooperation: At the same time, industrial policy could drive cooperation in areas like climate change, where collective investment in green technology benefits all. International institutions may evolve to coordinate industrial strategies and prevent trade wars.
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The Future of Globalization
The revival of industrial policy suggests that globalization is not dead but being reshaped. Instead of efficiency-driven supply chains, the future may see resilience-driven networks, with production concentrated in “trusted” nations. Concepts like “friend-shoring” (building supply chains among allies) and “near-shoring” (bringing production closer to home) are gaining traction.
This shift represents a middle path: neither a return to autarky nor a continuation of unfettered globalization, but a more politicized, strategic form of economic integration.
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Conclusion
The return of industrial policy marks one of the most significant shifts in global political economy in decades. What was once dismissed as outdated or inefficient is now seen as essential for ensuring resilience, competitiveness, and security. Nations are racing to secure strategic industries, reshaping globalization and redefining the role of the state in markets.
Yet the road ahead is fraught with challenges. Industrial policy must balance national interests with global cooperation, avoid inefficiency, and ensure inclusivity. If done right, it could drive innovation, green transformation, and greater resilience. If mishandled, it risks deepening rivalries, trade wars, and global inequality.
Ultimately, industrial policy’s return is less about nostalgia and more about necessity. In a world of climate change, geopolitical rivalry, and technological disruption, governments cannot afford to stand aside. The state is back in the driver’s seat of economic strategy—and the race to secure the industries of the future has only just begun.
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