Recently, the leaders of France, Germany, and Italy met on the outskirts of Paris and committed to working together to counter the growing corporate protectionism from the U.S. and China. These three countries are actively promoting industrial policies, including subsidies, tax incentives, regulation, and trade protection. Last year, the number of global industrial policies tripled to over 2,500, which is three times the number from 2019. Notably, most of these policies were implemented by the wealthiest and most developed economies—some of which had previously criticized such practices. This move has raised international concerns, fearing it could hinder economic growth. The upcoming spring meetings of the International Monetary Fund (IMF) and the World Bank are expected to focus on this issue. The World Bank’s deputy chief economist warned that this could be a self-destructive move, while the IMF’s managing director cautioned that government intervention lacks legitimacy unless there are exceptional circumstances.
Since the Industrial Revolution, government intervention in the economy has been controversial. Current policies contradict the principles of open markets and limited intervention. Challenges such as the pandemic and supply chain crises have shaken confidence in the free market economy. Governments in many countries have placed security and resilience alongside economic growth as key policy priorities.
The U.S. and Europe have previously criticized China’s subsidies to both private and state-owned enterprises, yet they are now following China’s lead by introducing billions of dollars in industrial policies, focusing on key technologies and climate change. In 2022, the U.S. passed the Semiconductor and Renewable Energy Acts, Europe introduced the “Green Industry Initiative,” and South Korea enacted the “Chip Revitalization Act” to support its domestic semiconductor industry. The French finance minister remarked that it is difficult to propose an “European industrial policy” given the current social environment. In recent years, there has been an increasing positive evaluation of industrial policy. Research from Harvard is optimistic, and Nobel laureate Joseph Stiglitz advocates for the “decisive” implementation of industrial policy. However, economists such as the World Bank’s Cossé remain skeptical.
The IMF has developed a new analytical model to explain the timing and manner of implementing industrial policy. The model suggests that well-designed industrial policies can positively influence market failures, such as climate change, but they must define social welfare, avoid discrimination against foreign companies, and deal with challenges like misuse of funds, commercial interest interference, and trade disputes. The report indicates that the revival of industrial policy is often accompanied by large subsidies and discriminatory measures, and protectionism will harm the global economy. Governments intervene in markets for various reasons, including preventing unemployment, encouraging investment, or countering geopolitical rivals.
IMF research shows that last year, the most common interventions were aimed at protecting domestic industries, with climate change mitigation coming in second. Data also indicates that when one country provides subsidies, there is a 75% chance that other countries will follow suit. The EU has strengthened economic intervention cooperation to respond to U.S.-China competition, although member states have differing views. France has proposed aggressive industrial policies, while Germany remains cautious. There is broad support for increasing capital and reducing regulation. The European Parliament is working to increase the capacity of green industries and secure raw material supplies, with member states now proposing a joint United Nations defense industry strategy. The economic ministers of France, Germany, and Italy have already developed policies for green and digital technologies, and the French finance minister stated that “industrial policy” is no longer taboo.
Despite the IMF’s cautious stance on the revival of industrial policy, noting the risks of protectionism, EU member states have increased cooperation on economic intervention in response to U.S.-China competition. The economic ministers of France, Germany, and Italy are actively developing policies for green and digital technologies, signaling that industrial policy is becoming an important issue on national agendas. Its impact and outcomes will profoundly shape the future international economic order.
