The FDI angle:

• Industrial policies have proliferated globally since the pandemic.
• Domestic competitiveness was the most cited motivation for new measures in 2023, many of which were in retaliation to another country's industrial policy.
• Why does this matter? Tit-for-tat industrial policies are expected to continue in countries with upcoming elections in 2024.

“Geopolitical tensions are putting a massive stress on co-operation,” declared Bob Sternfels, the CEO of McKinsey, at the World Economic Forum (WEF) in Davos this week. The remark not only echoed the WEF 2024 theme of rebuilding trust. It also underlined the perception that geopolitics is a major reason for the rise of protectionist government actions.

When it comes to industrial policies, however, that is not the case. Geopolitics and national security paled in comparison with other motivations for government interventions in 2023, according to data from the New Industrial Policy Observatory (NIPO) which shines a light on the otherwise opaque rise of industrial policies.

“The visible hand of governments’ industrial policy is typically not that visible,” says Michele Ruta, an IMF economist who co-wrote a working paper analysing the NIPO data. This new data enables assumptions about the drivers of industrial policies to be tested. 

Almost 2500 new industrial policy interventions were implemented globally last year, of which about 70% were distortive to trade. This is over three times larger than the 794 new industrial policies implemented in 2019, before the Covid-19 pandemic.  

About a third of the 1691 trade distortive industrial policy interventions were motivated by strategic competitiveness, in other words to protect domestic industries, while almost a quarter were aimed at climate change mitigation.

By comparison, geopolitics and national security were each explicitly mentioned as main reasons behind just 6% of interventions. To be classified as geopolitical, a measure had to have an official stated reference to risk from a country or a class of countries, like autocracies. A new industrial policy intervention can be associated with more than one stated motive, meaning there is some overlap in the NIPO database.

More data trends to understand rising protectionism:

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• Protectionism: trade restrictions reach an all-time high
• The rise of the EU's formal FDI screening
• Sovereign investors splurge on emerging markets

Industrial policies are not new. Debate over the extent to which governments should intervene to steer markets go as far back as the first industrial revolution in the 18th century. Few economic topics are dogged by as many contradictions and strong opinions. Among many US presidents, free marketer Ronald Reagan protected US steel and auto companies from foreign competition in the 1980s. 

“Traditionally, industrial policy has been justified on market failure grounds and has often been associated with promoting certain firms or sectors,” explains Simon Evenett, professor of economics at the University of St Gallen, Switzerland. The NIPO data, which Mr Evenett helped compile, shows that 2023 industrial policies were still focused on “age-old competitiveness”, rather than geopolitics.

There is, however, a distinction in the types of measures used by different countries. Advanced economies accounted for 70% of all trade-distorting measures, with the majority of these going to domestic subsidies. A notable focus of these industrial policies was on climate change mitigation, reflecting the drive by major economies to support clean technologies. The US, China and the EU were responsible for almost half of all trade distorted measures recorded in 2023. 

Emerging markets and developing economies also give subsidies to their domestic producers, but they tended to implement more trade measures like import barriers. 

“This is likely related to the difference in fiscal firepower of advanced and emerging economies,” explains Mr Ruta. Many measures are also in retaliation to industrial policies in other countries, especially in major economic blocs.

Data from 2021 to 2023 for China, the EU, and US shows that, on average, there is a 73.8% probability that a subsidy for a given product by one major economy is met with a subsidy for the same product by another within one year. 

Given that about 2 billion people are expected to vote in an election in 2024, including in India, Indonesia, Mexico, South Africa, the UK, the EU and the US, these retaliatory measures may be ramped up.

“It’s much harder for policy-makers to resist tit-for-tat industrial policy during an election year,” says Mr Evenett. Geopolitics may not be a major direct motivation, but it has given proponents of industrial policies more wind in their sails. 

As stated at this week’s WEF, there is a pressing need for closer collaboration. “The spirit of co-operation in industrial policy has not been particularly strong,” says Mr Ruta. “It’s extremely important that policy-makers talk to each other with the facts in front of them.”

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