Industrial policy and subsidies: the global race to pick winners

What it is

Industrial policy is the deliberate use of public resources to steer private economic activity toward sectors a government wants to build, protect, or control. The main tools are direct subsidies (cash grants, production bonuses), tax credits, cheap state loans, procurement preferences, local-content requirements, and import tariffs. The IMF finds that subsidies are the dominant instrument across both advanced and developing economies, rising to 71 percent of industrial policy measures in emerging markets between 2009 and 2023. The beat matters because subsidies distort prices, shift investment across borders, and invite retaliation: one government's industrial champion is another's unfair competitor.

History

For most of the postwar era, industrial policy was associated with East Asian developmental states and import-substitution programmes in Latin America and South Asia. The 1980s and 1990s brought a Washington Consensus backlash, with the IMF and World Bank conditioning loans on subsidy cuts and market opening. The WTO's Agreement on Subsidies and Countervailing Measures (SCM Agreement), in force since 1995, prohibited export subsidies for non-agricultural goods from developed countries and created a framework for challenging trade-distorting domestic subsidies.

The 2007-08 global financial crisis restarted the debate. Recovery packages in the US, China, and Europe included large green stimulus components. Covid-19 supply chain disruptions from 2020 onward revealed dangerous import dependence in pharmaceuticals, semiconductors, and electric-vehicle batteries. The US Congress passed the CHIPS and Science Act (August 2022, US$52.7bn for semiconductor manufacturing) and the Inflation Reduction Act (August 2022, up to US$369bn in clean energy tax credits over a decade). The EU responded with its Green Deal Industrial Plan (2023) and Net-Zero Industry Act; Japan, South Korea, and India followed with their own semiconductor and battery incentive packages. By 2024, the IEA's Government Energy Spending Tracker counted more than 1,600 national government measures across 68 countries in clean energy alone.

Current state

As of mid-2026, three dynamics define the beat. First, the US programme is in political flux: the House-passed One Big Beautiful Bill would phase out wind tax credits for projects starting after 2027 and restrict the 45X advanced manufacturing credit for materials sourced from foreign entities of concern, with the Senate outcome still uncertain (see One Big Beautiful Bill, 2027년까지 IRA 풍력 세액공제 단계적 폐지하고 FEOC 공급자의 45X 광물 공제 제한, 야금용 석탄 공제 신설). Second, the EU is institutionalising its approach through the Critical Raw Materials Act, which has approved 94 strategic projects as of March 2026 and sets 2030 targets of 10 percent domestic extraction and 40 percent EU processing (see EU 핵심원자재법 2차 전략 프로젝트 목록, 리튬·니켈·코발트·희토류 47건 추가. 첫 인허가는 24개월 내 처리). Third, China's 15th Five-Year Plan, approved by the National People's Congress on 25 June 2026, raises the renewable electricity share to 30 percent by 2030 and launches a two-year campaign to decarbonise energy-intensive industry (see 중국 15차 5개년 계획, 2030년까지 청정에너지 30% 목표와 산업 탈탄소화 추진).

Relationships

The four tracked nodes form one interlocking supply chain from mine to manufacturer to taxpayer. The 미국, 국방부식 하한 가격을 동맹국으로 확대, 프로젝트 볼트와 G7 비축 약속이 서방 광물 정책 수단을 재편 programme set a US Department of Defense price floor of US$110 per kilogram for neodymium-praseodymium oxide and negotiated similar floors with the EU, Japan, and Mexico by February 2026. That guaranteed price makes Western mining projects bankable, feeding the IRA's 45X manufacturing credits for battery cells, solar wafers, and advanced magnets. The CRMA strategic projects provide a parallel EU sourcing chain, reducing dependence on Chinese processing that still handles over 80 percent of rare-earth refining globally. China's 15th FYP responds by doubling down on domestic clean energy capacity, sustaining its cost advantage in solar panels and EV batteries.

What to watch

The US Senate will determine before the end of 2026 whether the 45X manufacturing credit survives, is narrowed to exclude FEOC-sourced materials, or is cut alongside wind incentives. At the WTO, the April 2026 Subsidies Committee meeting flagged persistent gaps in member notifications, particularly from China and the United States; a formal SCM Agreement dispute targeting IRA clean energy credits is plausible but had not been filed as of mid-2026. In the EU, the Commission is weighing whether to extend state-aid flexibilities, as the CRMA's 24-month permit window creates hard deadlines for project developers from 2026 onward. Developing economies remain the largest open question: the G7's Évian declaration committed US$64bn across 195 mineral projects, but most of that funding is debt rather than grants, leaving lower-income producing countries structurally reliant on external finance.