Risk or opportunity: How businesses can win in the new era of industrial policy

Businesses are now under pressure to anticipate what's ahead for industrial policies, and discern how to best capitalize on shifting circumstances. In our view, the difference between success and failure will hinge on the ability of companies across sectors to effectively position themselves to address related changes. This will require more than short-term, reactive decision-making with limited time horizons; it demands longer-range, sustainable strategies designed to leverage the many complex developments underway.

In 2009, Global Trade Alert tracked a total of 90 government interventions related to industrial policy, including the protection of infant industries, subsidy support of priority domestic industries, tariff and non-tariff trade actions, and trade-related investment actions. Fast forward to the period between January 2023 and June 2024, when over 2,500 new industrial policy measures were documented – bringing the grand total since 2009 to more than 15,000 implemented interventions.

To be sure, this represents a dramatic escalation. But the wider ramifications transcend the numbers. This transformation comes amid a shift to global multipolarity, new levels of geopolitical volatility, escalating national rivalries, rapidly changing nuclear and conventional military balances, the rise of nationalist and populist policies in support of post-pandemic mercantilism, hyper-competition in both traditional and new strategic sectors, and the looming prospect of increased global economic fragmentation. It also reflects the growing trend among major governments to regard international companies as important elements of their security, foreign relations, and economic programmes. Welcome to the new era of industrial policy.

It is extraordinary how much things have changed since the rapid political and economic liberalization after the end of the Cold War. At the time, this seminal “end of history” moment seemed like an irrefutable renunciation of the many failed statist interventions of previous years. Governments largely stood aside as large corporations put into place extraordinarily ambitious and complex global operations and underlying supply chains, to maximize comparative advantage. Economies relied significantly more on free markets to identify and pursue growth opportunities. Through the promotion of global economic and financial integration, they set the stage for the remarkable progress – as uneven as it was – that defined the trajectory of economic development the world over for three decades.

In recent years, this approach to free markets has been reconsidered – as reflected in the global proliferation of new industrial-policy measures. It needs to be emphasized that the jury is still out on this approach. Sure, many economists point to the inherently non-economic nature of government intervention, especially when dominated by political rather than market-driven considerations. Many point to the threat of economic autarky and the costs associated with the loss of comparative advantages. But even the most vociferous critics of industrial policy would concede that it has played a key role in national economic development in diverse regions of the world, and under equally diverse conditions.

The current spectrum of industrial policies differs from that of the past. Over the years, the rationale for government intervention has grown from stimulating national economic development, to protecting national security interests, to promoting and/or maintaining national economic competitiveness. More recently, it has focused on the need to support “new productive forces”: the sectors and industries governments consider critical for future national development. And while the efficacy of these new policy approaches may vary across countries and sectors, businesses must nonetheless prepare for the changes they bring.

Private-sector leaders need to pre-position for change – especially in these three broad categories:

Crucially, businesses alone are unlikely to be able to do what’s needed. Instead, we are likely to see a new level of domestic collaboration as the public and private sectors come together in pursuit of new opportunities.

Countries have become increasingly reliant on public-private partnerships to strengthen strategic domestic sectors, and protect themselves from foreign competition. Examples include the US CHIPS and Science Act, enacted to conserve the country’s semiconductor industry; Japan’s Fukushima Hydrogen Energy Research Field; the Strategic Partnership Model launched by India to promote self-reliance in defence capabilities; and the European Battery Alliance, formed to develop a competitive and sustainable value chain for battery cell manufacturing across the EU and other interested European countries.

Cross-sector collaboration is another tool that can enhance industrial policy efforts, mitigate some of its ill effects, and help countries act in times of crisis. The most recent prominent example was the way organizations of all stripes came together to tackle the COVID-19 pandemic, including partnerships to accelerate vaccine development, to produce critical medical and personal protective equipment, and to facilitate data-sharing for contact tracing.

Both types of collaboration can help businesses avoid the decline associated with foreign competition – unfair or otherwise. Combined with the right policies, they also hold the potential to boost infrastructure and skills development, promote more sustainable practices, and support the cultivation of advanced technologies.

As the current sources of international instability continue to intensify, governments and businesses will each face the challenge of having to pursue strategies that are at once economically sound, and practically effective. The industrial policy genie is out of the bottle – again – for the foreseeable future.