Gathering outside Paris just last week, top officials from France, Germany, and Italy made an unwavering commitment to pursue a synchronized economic strategy in response to heightened efforts by both Washington and Beijing to shield their domestic industries.
These three European nations have now joined a growing cohort embracing industrial policies—a term encompassing various measures such as targeted subsidies, tax incentives, regulations, and trade limitations—aimed at guiding an economy’s trajectory.
A recent study revealed a staggering increase, with over 2,500 industrial policies introduced last year alone, tripling the figure from 2019. Surprisingly, the bulk of these policies were enacted by the wealthiest and most technologically advanced economies—many of whom were previously outspoken critics of such tactics.
While these measures often enjoy domestic popularity, they are sparking concern among certain international leaders and economists who caution that heavy-handed economic interventions could potentially impede global growth.
This intensifying debate is poised to take center stage at the upcoming economic gatherings in Washington, known colloquially as the annual spring meetings of the International Monetary Fund and the World Bank.
M. Ayhan Kose, the World Bank’s deputy chief economist, aptly remarked, “There are various ways to shoot yourself in the foot. This is one of them.”
In a recent address, Kristalina Georgieva, the managing director of the IMF, underscored that, barring exceptional circumstances, the rationale for government intervention remains weak.
The question of governmental control over economies has been hotly contested since the advent of the Industrial Revolution. However, the current surge in policies represents a marked departure from the laissez-faire ideology championed by capitalist strongholds in recent decades.
This faith in unfettered market mechanisms has been eroded in recent years by a series of global upheavals, including the pandemic, supply chain disruptions, inflationary pressures, geopolitical tensions, and environmental concerns.
Security, resilience, and self-sufficiency have now assumed priority alongside traditional economic objectives such as growth and efficiency.
In response to longstanding grievances regarding China’s industrial subsidies, both the United States and Europe have begun adopting strategies reminiscent of Beijing’s playbook, funneling substantial resources into critical technology and environmental initiatives.
France’s finance minister, Bruno Le Maire, remarked, “A few years ago, discussions of ‘European economic policy’ or ‘European industrial policy’ were unthinkable.” Yet, positive assessments of such approaches have gained traction in recent times.
While some economists, like Mr. Kose of the World Bank, remain skeptical, others, such as Nobel laureate Joseph E. Stiglitz, consider industrial policy a sound choice.
In light of this resurgence in interventions, the IMF has formulated new guidelines delineating the circumstances and methodologies under which industrial policies should be implemented.
When executed judiciously to address exceptional market failures, such as those posed by climate change, these policies can yield dividends. However, there is ample concern regarding potential misallocation of resources, undue influence of vested interests, and the risk of igniting trade conflicts.
Era Dabla-Norris, one of the authors of the analysis, highlighted the prevalence of costly subsidies, often coupled with discriminatory measures against foreign enterprises, which could distort global trade dynamics to the detriment of the global economy.
Governments intervene in markets for a myriad of reasons, ranging from preserving employment to catalyzing investment in specific sectors or countering geopolitical rivals.
Of the 2,500 interventions introduced last year, safeguarding domestic industries constituted the majority, followed by efforts to combat climate change and fortify supply chains. Measures framed under the guise of national security comprised the smallest proportion.
Furthermore, data indicates a high likelihood of mimetic behavior, with countries swiftly emulating each other’s subsidies on similar products, potentially exacerbating trade tensions.
Amid mounting concerns over Europe’s competitiveness vis-à-vis the United States and China, the European Union appears resolute in pursuing more coordinated economic interventions, albeit amid internal disagreements over preferred approaches.
France has advocated for aggressive measures, including proposals to allocate half of public spending from industrial policy to European goods and services, while Germany remains more cautious regarding “Buy Europe” initiatives.
Nonetheless, there is widespread consensus on augmenting funding, streamlining regulations, and fostering a unified investment and savings market.
Recent initiatives by the European Parliament to bolster green industrial capacity and secure essential raw materials underscore this concerted effort, as does the proposal for a joint defense industrial strategy.
As European economic ministers convene to devise strategies promoting green and digital technologies, the EU aims to present a united front with a new five-year strategic plan on the horizon.
In the words of France’s finance minister, Mr. Le Maire, “Now that ‘industrial policy’ is no longer a taboo term, Europe must demonstrate its resolve to defend its industry.”
