Industrial policy refers to deliberate government intervention in the structure of the economy to favor particular sectors, firms, or technologies deemed strategically important. Tools include subsidies, tax credits, tariffs, public procurement, state-owned enterprises, export credits, research and development grants, local-content requirements, and concessional loans from development banks.
The concept traces back to Alexander Hamilton's 1791 Report on the Subject of Manufactures and Friedrich List's 19th-century writings on infant-industry protection. Post-1945 East Asian developmental states—Japan's Ministry of International Trade and Industry (MITI), South Korea under Park Chung-hee, and Taiwan—became canonical examples, channeling credit and protection toward targeted export sectors. China's industrial strategy, including the Made in China 2025 plan announced in 2015, extended this tradition to semiconductors, electric vehicles, and aerospace.
Mainstream economists long treated industrial policy skeptically, citing risks of rent-seeking, capture, and "picking losers." The Washington Consensus of the 1990s discouraged sector-specific intervention in favor of horizontal reforms. That consensus has eroded. Scholars such as Dani Rodrik, Mariana Mazzucato, and Ha-Joon Chang have argued for a revived role for the state in shaping markets, particularly around climate technology and supply-chain resilience.
Recent Western examples include the U.S. CHIPS and Science Act (signed August 2022), which authorized roughly $52 billion in semiconductor manufacturing incentives, and the Inflation Reduction Act (August 2022), which deployed clean-energy tax credits with domestic-content provisions. The European Union responded with the Green Deal Industrial Plan (2023) and the European Chips Act (entered into force September 2023). Japan and South Korea have similarly expanded subsidies for chip fabrication.
Key debates concern: whether industrial policy violates WTO subsidy rules under the Agreement on Subsidies and Countervailing Measures; whether subsidy races trigger fiscal waste; how to design conditionalities that discipline recipient firms; and whether industrial policy in advanced economies risks fragmenting global trade into competing blocs—a dynamic sometimes called geoeconomic fragmentation by the IMF.
Example
The U.S. CHIPS and Science Act, signed by President Biden in August 2022, authorized roughly $52 billion in subsidies to revive domestic semiconductor manufacturing.
Frequently asked questions
Trade policy governs cross-border flows through tariffs and trade agreements; industrial policy targets domestic productive structure. They overlap when tariffs or local-content rules are used to nurture specific industries.
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