Executive Summary
Industrial policies and subsidies are back with a bang, especially in major economies such as the US, China, India, Germany and Brazil. Governments are increasingly getting involved in setting industrial priorities and supporting strategic industries through subsidies to promote innovation and technology diffusion. The 2,642 industrial policy measures implemented in 2023 were driven by efforts to secure strategic competitiveness and mitigate climate change, as well as an increasing emphasis on national security. But industrial policy is not a perfect solution and can even be counterproductive, leading to tit-for-tat reactions. And fiscal capacity is the main constraint for financing industrial policy. Subsidies averaged 0.3% of GDP in EU27 economies in 2023. As more and more countries face constraints from budget deficits, public debt and fiscal pressures, this emphasizes the need for well-considered fiscal policies to promote innovation while being mindful of potential economic distortions.
For investors and businesses, the return of industrial policy offers short term gains for some but can also create longer-term challenges. Over the short run, transition-related and tech sectors will gain the most from industrial policies, especially low-carbon technologies, metals (steel, aluminum and critical materials), advanced technologies, semiconductors and defense-related sectors. Companies should benefit from a significant profitability boost: The average renewable/green tech manufacturer could see its gross profit margin double by 2025 compared to a baseline without tax credits. Industrial policy will also allow investors to play the commodities playbook at the expense of corporates and consumers. As the supply-demand gaps for some metals are becoming increasingly evident and inflationary risks loom, prices will increase in the future. Large corporates looking to finance projects eligible for industrial policy subsidies through green bonds could also benefit from significantly lower financing costs as industrial policies could lower risk. However, investment can eventually turn into over-investment and lose its efficiency. And industrial policy could lead to a crowding-out effect as large corporates are taking the lion’s share of receipts. For instance, only seven very large global firms will benefit from 75% of the CHIPS program grants that have already been allocated (USD29.3bn). This needs to be addressed by smarter, more efficient industrial policies.
The EU's industrial policy faces challenges as it aims to balance the green and digital transition, maintain the Single Market, foster innovation and retain national control over policies. The EU's industrial strategy focuses on key sectors such as semiconductor technologies, hydrogen, industrial data, space launchers and zero-emission aviation to achieve targets such as producing 10mn tons of green hydrogen by 2030 and securing a 20% share of the global microchips market. EU cross-border projects are supported with EUR80bn in approved investments across the chips, battery and hydrogen sectors, while allocating 32.6% of the total EU budget between 2021 to 2027 towards climate tech. But technological neutrality in EU industrial policy has led to less targeted support for innovative technologies compared to the US. Moving forward, EU policymakers should mainly target countries with high emissions and carbon prices just at or below the EU ETS price of USD61.3, such as Germany, France, Spain, Italy or Poland. To achieve strategic competitiveness, climate goals and resilient supply chains, the focus should be on industry, energy supply and agriculture.
In this context, we argue that the EU needs to design smart, horizontal, conditional and complementary policies that help the bloc leap forward instead of chasing the US and China. The bloc should (i) focus on horizontal policies, designing a mobility policy instead of a standalone EV policy for example; (ii) coordinate policies considering member states’ specializations and taking advantage of complementarities between countries and sectors; (iii) implement strong conditionality on sustainability and domestic content of projects before unlocking public support, without increasing red tape, (iv) ensure policymakers are made accountable for industrial policies through relevant KPIs and design policies with multiple stakeholders, including scientists and civil society, (v) place the innovation ecosystem at the core and think “two steps ahead” instead of chasing the US and China and (vi) share risks and profits with the private sector through blended industrial policy (PPS, mixed financing).