Written in conjunction with Ian Wan. You can read Part I here.

Industrial policy has recently regained prominence in policymakers’ minds, and not in small part due to China. Whilst industrial policy has always been contentious in an era dominated by capitalist market economies rather than state planning economies, its success in East Asia in the 1980s in tandem with a growing literature on market failure and increasing global competition has put industrial policy back on the agenda. As the World Trade Organization (WTO) warns of increasing distortions of competition, China’s driving role in inciting competition has become undeniable. 

This is Part II in a two-part series analyzing the arguments behind industrial policy; its rationale, application, and results in China; as well as the impact of China’s successful industrial policymaking on the increasingly competitive global outlook. This part outlines the global industrial policy outlook in a new era of global industrial policy competition, framing the recent resurgence of global industrial policies in developed countries as reactionary to the sustained Chinese efforts, recommending actions and approaches for international organizations in facilitating continued global growth. 

Industrial policy is hereby defined as government policy aimed at altering the sectoral structure of an economy under some level of market competition. This encompasses both vertical (sectoral) policies such as sectoral tax credits and subsidies, as well as horizontal (cross-sectoral) policies such as infrastructure development and educational policy.

Made In China 2025 is a clear indicator that China’s use of industrial policy will only grow in the years to come. As the EU, its member states, and the US turn to industrial policy, the global policy landscape has intensified. Growing competition on international standards and trade channels are becoming increasingly worrisome, inducing new arbitration procedures and international regulations as a result.

Global Industrial Policy as a Reaction to China

Whilst industrial policy’s usage never died in developing economies, recent economic disruptions combined with perceptions of China as an economic competitor have nudged advanced economies to reshape their approaches. This shift can be seen as a reaction to Chinese efforts, with industrial policies targeting similar sectors as “Made in China 2025” in addition to sectors with a China-dependent supply chain. Industrial policy’s reintroduction has further come with a growing acceptance of distortionary vertical policy initiatives rather than the more commonly used horizontal approaches. National security policy, aiming to boost R&D and supply chain self-reliance, is further integrated into industrial policy responses. In this sense, China’s industrial policy has formed the building blocks of Western policy responses.

In the United States, both the Trump and Biden administrations have increasingly pursued industrial policy, at times explicitly as a reaction to the perceived Chinese threat. The Trump administration targeted China through import tariffs, while the Biden administration passed landmark national investment legislations in the “CHIPS and Science Act” and the “Inflation Reduction Act” (IRA) as part of the “Build Back Better” initiative. The IRA has emerged as a broad macroeconomic tool promoting the US as a primary investment location, whilst including elements clearly aimed at fostering national technological innovation in response to increasing Chinese competition. The CHIPS Act, targeting American Semi-Conductor Development and Production, aims to vertically affect a specific sector in which the US faces increasing Chinese – but also broader Asian – competition. Presented as pandemic recovery measures, both policies have increased not only Sino-American, but also broader global investment competition.

European Industrial Policy initially focused on pandemic recovery, prioritizing the European Green Deal as well as increasing the competitiveness of Europe as a 21^st-century industry hub, with a specific focus on the “digital future of Europe.” Since its inception, the policy has been repeatedly adapted by the European Commission and member states, increasingly emphasizing the strategic autonomy of the European single market, both as regards key primary inputs and technological innovation. China’s role in incentivizing these strategic adaptations have become increasingly clear, considering Europe’s co-dependency with China as a long-time economic partner. Germany especially has adopted China-targeted industrial policies of de-risking in vital economic sectors, whilst strengthening domestic R&D as a reaction to China’s attempted technological leapfrogging. A key rhetoric underscoring the policy, however, is the prevention of distortions of competition by other countries within the multilateral order, promoting international regulatory frameworks surrounding the application of industrial policy.

This rhetoric resonates with China’s neighbors, Japan and Taiwan especially, who have long competed with the weaponization of China’s economic power. As a result, national security has strongly affected economic policy making, focusing especially on the safeguarding of technology. With increased state involvement in emerging technologies, policies regarding super-national research efforts are increasingly shaped by a rhetoric of allies and competitors. Policy is thus increasingly values-based and focused on the promotion of national economic sovereignty, whilst fostering an increasingly competitive environment beyond national borders.

Implications of Global Industrial Policy & Possible Regulations 

Industrial policy competition on a scale not seen since the 1970s has raised alarm bells with regulatory institutions of global trade and state-market relations including the WTO and Organization for Economic Co-Operation and Development (OECD). As states increasingly intervene in their market economies, economic protectionism has led to investment screenings in Europe and North America, with further European legislation on the way. Maintaining a level playing field in this increasingly competitive environment has become a key objective. 

The WTO, however, has already faced the consequences of increasing competition, with the disempowerment of its Appellate Body and the establishment of a Multi-Party Interim Arbitration Agreement (MPIA). Furthermore, key measures including the General Agreements on Tariffs and Trade (GATT) and on Trade in Services (GATS), as well as the Agreements on Subsidies and Countervailing Measures (SCM) and on Agriculture (AoA) have barely been updated since their 1994 (re-)ratification. The limited regulatory ability of the OECD as an alliance with little formal authority is a further limitation.

International rules should therefore adapt to ensure that negative effects of increasingly competitive industrial policy can be avoided. Whilst restricting industrial policy entirely is impossible in the competitive landscape, a level playing field can still be achieved. Regarding subsidies, re-defining areas where government funding is actionable and non-actionable is a priority, as are expanding the lists of prohibited subsides when distorting trade and investment in both industrial and non-industrial sectors. Service sector subsides remain especially underregulated, whilst international cooperation on and notification of subsides has become desired yet unachievable. Stricter rules regarding SOE and state-favored firm actions as commercial or non-commercial, whilst developing shared codes on SOE governance (as already exists within the OECD) are key to limiting any competitive advantage SOEs may gain as a result of state intervention. Regulations regarding government procurement agreements may further restore balance, limiting China’s SOE-favoring. Investment screenings should be defined as economic or security related, whilst clarifying to what extent they constitute protectionism in the context of international law, establishing appeals and arbitration measures. The WTO Appellate Body’s restoration is especially key to disincentivize further nationalization of industrial polices through unilateral enforcements and to clarify the legality of such unilateral actions. Finally, transparency and cross-national coordination will become key to mitigate impacts of national industrial policy on international commercial channels.

To reconcile with this new industrial policy environment, the WTO needs to formally close the Doha Development Round and open negotiations for a framework in which national industrial polices can co-exist with continued global economic growth. Bilateral and even regional frameworks are insufficient in context of an increasingly globalized economy. China’s accession to the MPIA is a step in the right direction, with membership extending across the EU, Brazil and Canada. The United States’ non-membership remains a signal, however, of the continued struggles that will be the renegotiation of international rules on national industrial policy.

Read Part I

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Paul Meyer
Paul is a foreign policy and international trade professional, currently working as Director – U.S. Trade Policy for the German Chamber of Industry and Commerce in Berlin on issues of bilateral trade and national and European economic policy. Having lived in China for over eleven years, affairs in the region have always been of close professional interest. Paul graduated from the University of Toronto with a Hons. BA in Public Policy, International Relations and Economics in 2024.

Ian Wan
Ian, a Beijing native, will be joining J.P. Morgan’s Global Corporate Banking division later this year. He brings experience from Tencent (腾讯), Mackenzie Investments and academic institutions across China and Canada, holding a deep interest in the Chinese economy, markets, and society. Ian enjoys tutoring and teaching undergraduates at the University of Toronto’s Department of Economics. Ian loves auctions and barbecues.