For decades, as globalization reshaped the world economy where markets were once expected to self-regulate, industrial policy seemed like a thing of the past. But in recent years, it’s made a dramatic return.

Why?

Because the world is no longer looking at industrial policy through the lens of protectionism and state control, it’s looking at it as strategic intervention to solve the most pressing challenges of today and tomorrow.

So, why should we care? Because industrial policy today is not about saving industries in decline, it’s about future-proofing economies for a rapidly changing world. And it’s not only China or the US doing that; it’s countries all around the world changing their economic futures, from the EU’s green transition to India’s idea for a digital economy. In fact, government support for strategic sectors such as green energy and semiconductors has significantly increased since 2020.

But this shift isn’t about replacing free markets – it’s about adding a clear strategy for resilience and growth in the face of unpredictable global dynamics.

The Real Drivers Behind the Return of Industrial Policy

Forget the old debates of protectionism vs free markets. The conversation now is about how do we create a resilient, forward-looking economy in an era of climate crisis, supply-chain vulnerabilities, and geopolitical instability? Industrial policy is not about hunkering down and building walls, but building capacity in the areas that matter most.

1. A Revolution of the Green Economy: It’s not just about reduction of emissions, anymore, it’s about winning the green tech race. Governments aren’t merely rolling out tax credits; they’re wagering investors in technologies that will govern the world economy in the coming decades. By 2025, it is estimated that the investment in global green tech will amount to $1.5 trillion. Green Hydrogen, EV manufacturing, and carbon capture aren’t climate solutions – they’re the next industrial giants. If countries don’t invest now, they’ll be locked out of the future economy.
   Germany’s Energiewende has been one of the most ambitious green transitions in the world, aiming for 80% renewable energy by 2050. The government has heavily subsidised solar and wind technologies, supported grid integration, and provided long-term guarantees for energy companies. While the policy has accelerated Germany’s status as a leader in renewable energy technology, it also had to deal with challenges in balancing sustainability goals and industrial competitiveness. The price of green energy transition has resulted in higher energy prices, which has caused a debate on fiscal sustainability. In fact, Germany’s energy prices rose by 40% from 2021-2022, which is putting pressure on both consumers and businesses.
2. Sovereignty over Technology & Global Trade War : The world has witnessed the negative effects of supply chain fragility with the shortage of semiconductors and the US-China tech war. Industrial policy is back as a means of ensuring sovereignty over key technologies and alleviating the need for dependence on hostile powers. The global chip shortage wasn’t just a supply chain disruption. It highlighted the strategic importance of semiconductors, which are essential for a wide range of industries, from automobiles to electronics and defence systems. The new industrial policies are about ensuring critical infrastructure isn’t controlled by one nation or one company.
   The US CHIPS Act aims to restore semiconductor production capacity within the US, offering $52 billion in funding for domestic chip manufacturingThis move comes in response to the direct supply chain crisis of semiconductors that crippled the auto, tech, and electronics sectors during the pandemic. While the policy aims to lessen reliance on China and increase technology sovereignty, critics say US-based firms may become overly dependent on government hand-outs, which may crowd-out private innovation. The goal of the US government is to expand its share of semiconductor production from 12% to 30% in the world by 2026.
3. Reshaping Global Supply Chains : The cracks in the structure of our global trade system were exposed by the pandemic of Covid-19. The supply chains used for many years were highly dependent on China, and they were not sustainable – now the clamour is on as to rethinking where and how goods are produced.Supply chain resilience is now one of the highest priorities with US manufacturing reshoring growing by 20% since 2020, according to WTO data. Industrial policy is no longer about just encouraging investment; it’s about actively reshaping global trade routes to ensure economic stability.
   The Atmanirbhar Bharat (Self-Reliant India) initiative is aimed at turning India into a global manufacturing hub through subsidising critical industries, such as pharmaceuticals, defence and electronics. As the world experienced disruptions in supply chains during the pandemic, India has made an effort to get foreign investment and attract foreign investors through tax breaks and localisation mandates to lessen its dependency on Chinese imports.

What has to be done differently this time Around?

Yes, industrial policy is back but we need to be clear what’s different now. For this wave of industrial policy to actually work and not become a relic of a failed protectionism, it needs to evolve.

• Subsidies and tax incentives were the easy part. The harder challenge lies in building resilient, sustainable ecosystems. That means investing in infrastructure, upskilling workforces, and creating new markets. Take South Korea, for example. Its industrial policy has been instrumental in developing the country from a low income agricultural economy to the high tech industrial powerhouse. South Korea didn’t just provide subsidies, but rather was highly focused on developing a sustainable ecosystem through massive investments in R&D, education, and public-private partnerships. These efforts resulted in success in such technological sectors as electronics, automobiles, and shipbuilding. In fact, South Korea’s investment in R&D represented 4.93% of GDP in 2021, the highest recounted by the Organisation for Economic Cooperation and Development (OECD), so it represents an important factor of long-term, strategic investment. These investments didn’t just create technological innovation; they established a resilient economy capable of adapting to the challenges of the future.
• ​​Historically, industrial policy has been opaque – who gets the subsidy, why and at what cost was often hidden from public view. For modern industrial policy to succeed, accountability is key. Governments need to put clear benchmarks and exit strategies in place to make sure the subsidies are performance-based and don’t create zombie industries.
• Industrial policy shouldn’t be about protecting industries that are failing; it should be about fostering innovative industries which will lead to growth in the next economic wave. Governments need to incentivize R&D, private sector risk taking and technological advancement – and not merely safeguard incumbents.

Risks & Failures

While industrial policy can be a driver of growth, it holds great dangers if not properly carried out:

• Excessive dependence on subsidies may create inefficiency. Firms may become reliant on the government to stay afloat, a dead weight on innovation, creating zombie industries.
•  Long term subsidies can be fiscally stressful. Governments may not be able to scale back support once industries are reliant on it and get accustomed to it, thereby increasing costs and diverting resources from other important sectors, such as education and healthcare. This is evident in Germany’s Energiewende, where the heavy investment in renewable energy has resulted in higher energy prices, increasing fiscal pressure on the government and creating debates on sustainability.
• Protectionist measures, such as tariffs and subsidies, can lead to trade wars, disrupting supply chains around the world and increasing costs. These policies can bring about an increase in geopolitical tensions, which can ultimately harm global economic growth and stability.

This isn’t a retreat into protectionism – it’s a pivot towards resiliency. Industrial policy today is about positioning economies for the world in which technological leadership, security of supply chain and climate adaptation are the keys to winning. Governments aren’t replacing markets; they’re shaping the industries that will define the coming decades.