For decades, the policy consensus in Western capitals was clear: governments should step back and let markets allocate resources. Industrial policy—the practice of governments actively shaping which industries grow and how—was dismissed as the discredited relic of a bygone era. Politicians who proposed picking winners were accused of economic illiteracy.

That consensus has shattered with remarkable speed. Today, the United States, European Union, Japan, and dozens of other nations are deploying unprecedented levels of government intervention in strategic sectors. The CHIPS Act, the Inflation Reduction Act, and similar initiatives represent a fundamental shift in how wealthy democracies think about the relationship between states and markets.

This isn't merely a policy adjustment—it represents a paradigm shift in international economic thinking. Understanding why industrial policy returned requires examining the forces that discredited the old consensus and the strategic calculations driving the new interventionism.

The intellectual case against industrial policy rested on a simple premise: governments lack the information and incentives to allocate resources better than markets. Political pressures lead to subsidizing failing industries rather than nurturing emerging ones. The theory seemed vindicated by spectacular failures—from Concorde to Solyndra—while market-driven Silicon Valley conquered the world.

Then China happened. Beijing's systematic deployment of industrial policy produced results that economists trained in market orthodoxy struggled to explain. China went from producing virtually no solar panels in 2000 to manufacturing over 80% of global supply by 2023. Similar trajectories unfolded in batteries, electric vehicles, high-speed rail, and telecommunications equipment. The scale and speed of these transformations had no precedent in market-driven development.

Western policymakers faced an uncomfortable reality: China's state-guided approach was generating technological capabilities faster than pure market competition. The theoretical superiority of markets wasn't translating into actual competitive outcomes in sectors that would define 21st-century economic power. Academic debates about market efficiency became secondary to concrete observations about who was building the industries of tomorrow.

This competitive challenge demanded a response. If industrial policy worked for China—creating national champions, securing supply chains, and generating millions of manufacturing jobs—then perhaps the Western rejection of such tools was a strategic vulnerability rather than an economic virtue. The question shifted from whether governments should intervene to how they could do so effectively.

Takeaway

When a competing nation achieves dramatic industrial success through methods your theory says shouldn't work, it's time to question the theory rather than deny the reality.

For three decades, the logic of global supply chains seemed unassailable. Comparative advantage dictated that production should flow to wherever costs were lowest. Efficiency meant eliminating redundancy. Just-in-time manufacturing minimized inventory costs. The result was a globally distributed production network of breathtaking complexity—and equally breathtaking fragility.

The pandemic exposed these vulnerabilities with brutal clarity. Advanced economies discovered they couldn't produce basic medical supplies. Chip shortages cascading from a single Taiwanese drought halted automobile production worldwide. A ship stuck in the Suez Canal disrupted global commerce. Each crisis revealed how optimization for efficiency had created systems with no margin for disruption and dangerous concentration in geopolitically sensitive locations.

Geopolitical tensions amplified these concerns. Russia's invasion of Ukraine demonstrated how economic interdependence could become a weapon—and how quickly established trade relationships could unravel. European dependence on Russian energy transformed from an economic arrangement into a strategic liability overnight. Policymakers began viewing supply chains through a security lens rather than purely an economic one.

The intellectual framework shifted accordingly. Resilience joined efficiency as a legitimate policy objective. Redundancy, once dismissed as waste, became recognized as insurance. And if markets wouldn't naturally build redundant capacity in strategic sectors—because redundancy hurts short-term profits—then government intervention became not just acceptable but necessary for national security.

Takeaway

Extreme efficiency and extreme resilience are often opposing forces. The strategic question isn't which to choose, but how to balance them for capabilities you cannot afford to lose.

The new industrial policy differs significantly from its predecessors. Rather than nationalizing industries or creating state-owned enterprises, today's interventionism works primarily through incentives, regulations, and strategic investment. The CHIPS Act offers massive subsidies—over $50 billion—to semiconductor manufacturers who build facilities on American soil. The Inflation Reduction Act uses tax credits to reshape energy investment decisions.

Local content requirements have emerged as a favored tool, conditioning subsidies on domestic production and sourcing. These provisions aim to rebuild industrial ecosystems, not just individual factories. The logic recognizes that modern manufacturing depends on dense networks of suppliers, skilled workers, and supporting services that take years to develop. Subsidizing one facility accomplishes little if all its inputs must be imported.

Export controls represent the coercive complement to subsidies. The United States has deployed unprecedented restrictions on semiconductor technology transfers to China, attempting to maintain technological advantage by limiting rivals' access to advanced tools. This weaponization of technology supply chains marks a sharp departure from the globalization-era assumption that economic integration benefits everyone.

Whether these tools will achieve their objectives remains uncertain. Industrial policy has a mixed historical record, with successes in East Asia balanced by failures elsewhere. The scale of current interventions creates enormous opportunities for waste, corruption, and political capture. Yet the alternative—allowing market forces alone to determine which nations control strategic industries—now seems equally risky to policymakers across the political spectrum.

Takeaway

Modern industrial policy operates through carrots and sticks—subsidies to attract investment home, and controls to prevent rivals from accessing critical capabilities. Understanding both tools reveals the full scope of economic statecraft.

The return of industrial policy reflects a fundamental reassessment of the relationship between markets, states, and strategic competition. The old consensus assumed that economic efficiency and national security generally aligned—that open markets would deliver both prosperity and capable industries. That assumption no longer holds in an era of great power competition.

Whether the new interventionism succeeds remains an open question. Governments are making enormous bets with taxpayer money, and history suggests many will fail. The risk of political capture, wasted subsidies, and trade conflicts is substantial.

But the debate has moved beyond whether governments should intervene to how they can do so wisely. Industrial policy is no longer a relic—it's the defining feature of 21st-century economic competition.