Industrial policies and subsidies are back with a bang.
From the United States and China to Germany and France, governments are increasingly setting industrial priorities and supporting strategic industries to promote innovation and technology diffusion. Industrial policy can take many forms and mobilize a variety of tools, from investment in R&D to tax incentives for corporations and households. But subsidies for local firms are by far the most popular tool: The annual implementation of subsidies has more than tripled over the past decade. In 2023 alone, governments implemented over 2,600 industrial policy measures, mainly in the form of subsidies favoring local firms.
In Europe, industrial policies have been advocated by Paris for a long time, but gained traction within the EU only after Emmanuel Macron became president of France in 2017, with Berlin reluctant at first, but more recently getting behind the idea with enthusiasm. Indeed, Germany ranks among the top five countries relying on industrial policy over the last decade, after the US, China, and India. High-profile examples of the return of industrial policy to the global stage include the European Union’s European Green Deal and Digital Europe program, the US’ Inflation Reduction Act (IRA) and CHIPS and Science Act, and China’s Made in China 2025 program.
This shift is being driven by both economic and non-economic motives, reflecting the new context of rising competition between economic blocs and geopolitical tensions, as well as the proliferation of ambitious national targets for climate neutrality. Indeed, countries tend to counter higher geopolitical risk with more export policy measures, subsidies, and sanctions, while higher economic policy uncertainty between 2020 and 2023 has also led to a 13.4 percent higher likelihood of governments implementing industrial policy measures.
But national interests differ: The US has put the largest emphasis on national security, with 43 percent of its measures falling under this category, compared to only 18 percent in the EU, where the lion’s share of spending is going toward promoting competitiveness or strategic sectors, followed by resilience and supply-chain security, and climate change mitigation.
Is Industrial Policy Good for Businesses?
Industrial policy is not a perfect solution and can even be counterproductive, leading to tit-for-tat reactions. A worrying trend for tenets of open markets is that governments have started to double down on tariffs by changing the industrial policy path from subsidies versus tariffs to subsidies followed by tariffs (i.e., the current introduction of electric vehicle tariffs after massively subsidizing them through the Inflation Reduction Act in the US) as the best tool to expand a favored firm or sector. But governments are notoriously bad at choosing and picking winners, due to a lack of accountability, as well as the risks of cronyism.
In fact, 1,659 of the protectionist policy interventions implemented in 2023 were firm-specific. Subsidies directed toward import-competing industries are expected to bolster domestic production and reduce imports, aligning with import-substitution strategies. Conversely, subsidies targeted at sectors with a comparative advantage and large, export-oriented firms are anticipated to increase production and potentially boost exports.
Moreover, subsidies may facilitate trade by addressing market failures and overcoming the fixed costs of exporting and importing, while also reshaping firm-level productivity and industry-level comparative advantage, thereby influencing trade patterns. And as the crowding-in effect from government spending into corporate investment continues, firms are starting to rely on this capital payout.
In 2023, firm-specific subsidies ranged between 23 percent of total subsidies in the EU and 51 percent in the US. This could lead to an advantage for those firms receiving capital payouts over those cautious of state intervention. Moreover, industrial policies in one country can often provoke a response from others that can neutralize the intended effects. China’s introduction of a new subsidy has a 92 percent probability of provoking a response from the EU27 and 71 percent from the US within a year. Conversely, when the EU27 or the US introduce a new subsidy, China shows an 87 percent and 8 percent response rate within a year, respectively.
Industrial policy also depends on fiscal capacity. In 2023, subsidies were equivalent to 0.3 percent of GDP on average in EU27 economies. But both France and Germany spend more than the EU average—0.9 percent and 3.7 percent, respectively—but they are also increasingly being constrained by large budget deficits and high levels of public debt.
Promising Short-Term Gains
For businesses, the return of industrial policy offers short-term profitability gains, especially for transition-related and tech sectors, primarily low-carbon technologies, metals (steel, aluminum and critical materials), advanced technologies, semiconductors, and defense-related sectors. The average renewable/green-tech manufacturer could see its gross profit margin double by 2025 compared to a baseline without tax credits.
At the same time, industrial policy also allows investors to play the commodities playbook at the expense of corporations 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 corporations 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. But industrial policy can also create long-term challenges as investment can eventually turn into over-investment and lose its efficiency.
Moreover, industrial policy could lead to a crowding-out effect as large corporations tend to capture most of these benefits, leveraging their substantial resources, lobbying power, and established market positions to maximize their profits. Large corporations have extensive resources and dedicated teams to overcome red tape in application processes for subsidies and grants. They also have the financial positions to meet the requirements and upfront costs often accompanying these policies.
Squaring the Circle in the EU
Germany and France face a particular conundrum as national industrial policies can distort competition in the EU. Indeed, the EU’s two largest economies need to navigate the delicate balance between achieving the green and digital transitions, maintaining the single market, and retaining national control over policies that are key to jobs and national economies.
So far, the EU's industrial strategy has focused on key sectors such as semiconductor technologies, hydrogen, industrial data, space launchers, and zero-emissions aviation to achieve targets such as producing 10 million tons of green hydrogen by 2030 and securing a 20 percent share of the global microchips market. EU cross-border projects are supported with €80 billion in approved investments across the semiconductor, battery, and hydrogen sectors, while allocating 32.6 percent of the total EU budget between 2021 and 2027 toward climate tech. But technological neutrality in EU industrial policy has led to less targeted support for innovative technologies than the US.
There are lessons to be found in the past, though. One notable example of successful industrial policy in Europe is the Airbus consortium. Formed in 1970 as a collaboration between France, Germany, Spain, and the United Kingdom, Airbus received significant government support to compete with the American giant Boeing. Through coordinated R&D efforts, subsidies, and political backing, Airbus transformed into Boeing’s only major competitor, capturing a significant share of the global commercial aircraft market.
The example of Airbus embodies some of the key factors that make an industrial policy successful: It fostered government-private sector collaboration, leveraged strategic investments in R&D, and encouraged innovation ecosystems. It was also adapted to meet a benchmark in global competitiveness. Moreover, in the European context, it was an industrial effort that mutualized and pulled together existing industrial capacities without creating competition among the bloc.
Principles to Maxime Benefits, Minimize Risks
To maximize the benefits of industrial policy and minimize the risks, Germany and France will need to push for the design of smart, horizontal, conditional, and complementary policies that help Europe leap forward instead of chasing the US and China. They should rely on the following principles:
- Horizontal policies: When implementing industrial policies in the past, many countries took an “industry” or “sector” approach. Nevertheless, it is important that policies should be horizontal and based on household and firms’ needs, aimed at improving overall framework conditions. Even though the EU defines its industrial policy as horizontal by nature, many policies implemented by EU member states in recent years were rather vertical or targeted ones that favored a specific sector or firm. Moving forward, Germany and France should remind themselves of the horizontal approach to spur growth and master the green transformation.
- Coordinated policies considering EU member states’ specializations and taking advantage of complementarities: For industrial policy to be efficient, it must be coordinated so that member states’ industries can complement each other. For example, France and Germany have strong automotive industries; if they were to both implement strong electrical vehicle (EV) policies for their respective industries, it could result in a net loss. Historically, both countries’ sectors thrived as they specialized in different segments (high-end for Germany versus entry/medium level for France). Policies need to be coordinated to ensure these specializations in products and target markets remain, and that the countries do not compete with one another on the same products and market segments. Responsibilities as well as profits needs to be shared. Furthermore, policies should build on countries’ existing technological and economic capabilities. Policymakers should target where it makes the most sense and where there is enough difference to strengthen competitiveness. For instance, fostering the production of lithium batteries requires several steps, from refining metals to cell component manufacturing to cell manufacturing to battery system manufacturing. These processes could be split and coordinated across Europe, in different countries, making the best use of each country’s strengths.
- Implement strong conditionality of public support without increasing red tape: Recent EU industrial policies lack clear conditions. Tying public support to specific conditions is not about creating more bureaucracy, but about moving away from a programmatic approach. Making these conditions explicit would unlock sustainable and fair economic growth. Therefore, incentives like subsidies or tax breaks should be linked with production outcomes, social criteria, and sustainability standards (EU employment, low carbon policies from corporates etc.). This is crucial for the efficient use of state funds and effective policy implementation in EU industries.
- Policymaker accountability and multiple stakeholders: As for any public policy, industrial policy should have a set of KPIs (production of goods and services, CO2 avoided, industrial capacity created etc.). Policymakers should be accountable for achieving targets and improving these KPIs. Furthermore, these KPIs and targets should be set through a dialogue with multiple stakeholders, including civil society and scientists to avoid opaque discussions with corporate experts.
- Place innovation ecosystem at the core and think “two steps ahead”: Germany and France should design smart industrial policies that do not run “behind” the two other major blocs (i.e., the United States and China). Instead of developing large manufacturing capacities for products in which European firms do not have a technological or competitive edge (e.g., computer chips or EV factories), governments could invest massively in autonomous car software development or next-generation batteries or fabless chip design. Such policies would have the advantage of betting on a leap forward instead of playing catch-up.
- Sharing risks and profits with the private sector through blended industrial policy: Industrial policy cannot only de-risk private investment but also not provide the taxpayers profits (beyond the positive externalities aimed by the policies). One way to achieve this is by having closer collaboration between the public and private sectors. There are several options for this, from increased public equity in private companies to more public-private partnerships (PPPs) to mixed funding mechanisms.
Building on these principles, there is no reason why France and Germany should not forge a common way forward to enhance industrial policy in Europe further. It would also provide the Franco-German partnership with a new focus that would benefit the whole EU.
Ludovic Subran is chief economist of Allianz SE.
