This essay is part of a series of articles, edited by Stewart Patrick, emerging from the Carnegie Working Group on Reimagining Global Economic Governance.
From the Oblivion of Industrial Policy to Its Resurgence
In recent years, Western countries have seen dramatic shifts in favor of adopting industrial policies. Although there are various definitions of the concept, this piece uses the term industrial policies to indicate state policies or interventions that seek to promote the creation of productive capacities in specific sectors. The approval of the CHIPS and Science Act (for semiconductors) and the Inflation Reduction Act (for the green transition) in the United States, the Industrial Policy Strategy (for digital economy and energy transition) in the European Union (EU), and the Nova Indústria Brasil are good examples of this change in economic policy. Developed countries are the ones leading this change, in part because of the asymmetries with developing countries facing a trade order anchored to the neoliberal paradigm.
By their nature, these policies contradict the free-market institutions proclaimed under neoliberalism. Although technical economic arguments such as coordination problems, knowledge externalities, or incomplete markets in high-risk/high-return investments all favor state intervention, the neoliberal paradigm favored highlighting the risks of promoting industrial policies, such as rent seeking and the lack of information in centralized decisions. The minimization of state activity during neoliberalism led to recommendations for privatization and liberalization, as well as the avoidance of industrial policies and a state limited to monitoring effective competition. In international trade, the incorporation of this economic agenda guaranteed fair competition. For example, the North American Free Trade Agreement (NAFTA) imposed national treatment, prohibited the conditionality of foreign investments, and promoted competition surveillance, which led to the creation of the Federal Economic Competition Commission (Comisión Federal de Competencia Económica) in Mexico in 1993, among other measures.
There are two major exceptions to the lack of an active industrial policy during the neoliberal era. The first is sectorial and involves the military industry, which has received support from public spending under conditions of national preference. The second pertains to the unique East Asian experience. Industrial policies were central to the successful development strategy of countries like Japan, South Korea, and Taiwan, although these practices partially waned in the 1980s. The success story of China has been more contradictory. Although the Asian giant introduced many liberalization measures after 1978, it also continued to utilize industrial policy tools. These included demanding technology transfer, placing conditions on foreign partnerships with local businesses, and insisting on government control of major financial institutions. Any remaining doubts were dispelled by the publication in 2015 of the Made in China 2025 plan, which included explicit benchmarks for the local supply of strategic sectors and articulated the goal of becoming a global technological powerhouse by 2049.
The West’s evolution toward industrial policy has been gradual and has unfolded in response to several experiences. The financial and economic crisis of 2008 helped justify greater state intervention, though the U.S. bank bailouts and those of the EU were essentially crisis interventions rather than signals of a dramatic shift. Subsequently, the presidency of Donald Trump in the United States prompted an about-face in U.S. trade policy, notably the abandonment of the Trans-Pacific Partnership, the renegotiation of NAFTA (among other trade agreements), and the launching of a trade war with China. Although these measures were essentially protectionist by nature and did not form part of an integral industrial strategy, the appointment of Robert Lighthizer as U.S. trade representative reflected a growing concern with U.S. deindustrialization and rising mistrust regarding the effects of free trade.
The COVID-19 pandemic in early 2020 gave rise to several additional factors that favored a return to industrial policies. The lack of coordination among national containment strategies exposed the systemic risks of global value chains. These disruptions were particularly concerning when they involved strategic goods such as semiconductors, which affected major production chains, including the automotive industry. The pandemic also reinforced nationalist approaches to technological development—in this case pharmaceuticals, given the early availability of vaccines to those capable of producing them. The countries of the Global South, most of which lacked this capacity, experienced greater difficulties in relaxing measures of public health control and experienced rising deaths and reduced economic activity. Finally, worldwide, the need to reboot economies inspired major stimulus packages.
Since entering office in January 2021, Joe Biden’s administration has shown decisive support for the revival of manufacturing in the United States. The American Rescue Plan Act has directed $39 billion to almost 80,000 local projects. Through the Infrastructure Investment and Jobs Act, $1.2 trillion has been earmarked for the construction of energy infrastructure (particularly electric grids and renewable energy) and digitalization. The CHIPS and Science Act budgeted $253 billion to expand semiconductor production capacity, and the Inflation Reduction Act will channel $369 billion to support energy transition and social policies.
National preferences for government purchasing have also been reinforced in the United States. For example, by executive order, the Biden administration raised the domestic content threshold for goods or services to be considered preferential under the Buy American Act from 20 percent to 30 percent. Moreover, the administration has raised hurdles for waivers to these provisions by requiring a broader justification regarding whether subsidized consumable goods have affected the price differential.
Europe has experienced a parallel shift in favor of implementing more proactive industrial policies. Back in 2008, the EU’s relaxation of the competition rules was essentially a short-term, emergency response measure to the global financial crisis. However, the EU has made more decisive sectoral interventions in recent years. For example, the EU Industrial Policy Strategy lays the foundation for more significant intervention to advance the digital economy, energy transition, and industrial innovation aid programs. Some countries have gone even further. Germany, for instance, has taken steps that include government intervention in its National Industrial Strategy 2030, intended to safeguard German technological leadership in strategic sectors.
Industrial Policy in Latin America: Similarities and Challenges
Latin American countries also are weighing the implementation of industrial policy strategies with growing determination. One of the most relevant cases was the recent announcement by Brazilian President Luiz Inácio Lula da Silva of the Nova Indústria Brasil plan, an ambitious strategy of neoindustrialization with six transformative missions in agroindustry, the healthcare sector, infrastructure, digitalization, energy transition, and defense, with a budget of over $60 billion.
Mexico, albeit more hesitantly and with no integrated plan, has approved measures to push foreign and domestic investments, such as a decree providing fiscal advantages to export enterprises in ten chosen sectors. Some analysts have raised doubts as to whether this decree is consistent with the U.S.-Mexico-Canada Agreement (USMCA)—because it establishes investment requirements in the area of exports—or with the World Trade Organization (WTO) Agreement on Subsidies and Countervailing Measures. The Mexican experience exposes the potential for conflict between today’s emerging industrial policy measures and international rules of commerce created in an earlier context where such measures were frowned upon.
The new industrial policies being applied in developing and developed countries have some aspects in common. First, the vast majority are prioritizing digitalization. These measures include advancing connectivity infrastructure, transforming existing enterprises to increase their digital presence, or even reconfiguring value chains of strategic inputs like semiconductors. Such measures are more typical of a selective industrial policy in that they promote sectors with greater potential productivity gains. In this regard, the digital economy may have more in common with the classic argument for state intervention in industry, namely improving productivity and enhancing technological spinoffs.
Second, the new industrial policies are lending prominence to the energy transition, emphasizing electricity and energy production through renewable sources. The primary rationale for state intervention is the need to create incentives not supplied by the market in order to promote a global public good, while at the same time avoiding human-made climate change. In addition, national economic incentives may be at play. Trade restrictions or the potential imposition of carbon footprint tariffs on goods whose manufacturing processes cause pollution may offer domestic companies producing less carbon-intensive products greater profit margins on a mid-to long-term basis. These policies may carry additional benefits by helping to adapt the supply to the increasing demand for green goods.
The third and final common element in the new industrial policies is their connection to social policies. As mentioned above, U.S. industrial policy contains social components. Likewise, the Korean New Deal and the Nova Indústria Brasil not only affect productive capabalities but also have effects on welfare. Contemporary industrial policy treats well-being and labor rights as an important goal, alongside manufacturing. Concerns regarding labor regulations have been at the core of the Biden administration’s vision of a “work-centered trade policy.” Even during the Trump administration, Democrats backed the new chapter on labor rights and the Facility-Specific Rapid-Response Labor Mechanism (FSRRLM) during USMCA negotiations.
Like others in the Global South, Latin American countries face more difficulties when promoting a comprehensive industrial policy. States have less fiscal capacity, often owing to the prominence of an informal sector that limits their tax collection. Similarly, they have deficiencies in their rule of law and face more expensive financing, which also harms private initiative. Furthermore, developing countries have lower industrial and technological development, leaving them with a larger productivity gap to be closed. Latin American countries face considerable needs for infrastructure development and improvements to their educational system.
Several goals in these new industrial plans may even enhance broad international agreements. The clearest case could be incentives for green industrial transformation. However, such incentives arise within an international commercial order that reflects an earlier economic paradigm that prohibits such measures and may regard them as technical violations of trade agreements. For example, Lydia Murray recently has noted that various U.S. Inflation Reduction Act provisions may conflict with the WTO’s Subsidies and Countervailing Measures Agreement.
Beyond this difficulty, there is a genuine danger that some countries will design and defend industrial policy in a simplistic and short-sighted manner to advance a protectionist, isolationist vision whose international effects would be highly pernicious were they to become widespread.
In this sense, Latin America, much like other regions with developing nations, faces a complex set of circumstances. It seems self-evident that developed nations have a greater capacity to influence international institutions through dispute resolution mechanisms: for example, the United States has blocked the designation of members to the Appellate Body of the WTO; and the application of the FSRRLM is asymmetrical between Mexico and the United States, making it far more difficult for Mexico to denounce a lack of collective salary negotiation bargaining in the United States. These asymmetries are particularly dangerous within the context of a commercial order that has not yet adapted to a growing consensus to implement more proactive industrial policies.
Conclusion
A reorganization of the global commercial order is urgently required, from WTO regulations to bilateral trade agreements. This regulatory overhaul must provide more leeway for industrial policies, legitimating specific tools such as preferential margins. Moreover, insofar as industrial policy is now recognized as legitimate, it automatically follows that countries with lesser manufacturing development or that need structural transformation must also enjoy greater leeway in pursuing it.
That said, this task cannot be considered merely a factor of production. Latin American countries, and the nations of the Global South in general, may attract investments by offering lower wages—something that characterizes them to this day. Yet both multilateral cooperation and regulation ought to be directed toward improving labor rights and income, if not toward advancing wage convergence in itself. At the same time, countries must avoid adopting measures inspired by narrower, purely nationalistic perspectives, and which are liable to damage the bonds of trust on which international institutions are built.
The recognition that the international community faces a new economic paradigm, complete with new visions and challenges, compels all parties to revise the principles that regulate international commerce. The multilateral system must become more flexible in its attitude toward and treatment of industrial policies, including those directed toward preventing and mitigating climate change, promoting legitimate aspirations for technological improvement, and improving labor conditions. Measures for industrial advancement can be subject to review, allowing all countries to learn along the way.
