With the US President Joe Biden signing the CHIPS and Science Act in 2022, injecting over $52 billion into American semiconductor manufacturing, it's clear that governments worldwide are steering back towards industrial policy.
Industrial policy revolves around governmental strategies aimed at uplifting parts of the economy for strategic aims. Such strategies can incorporate tax incentives, protective trade laws, and direct public funding, with the prime focus on key industries such as heavy manufacturing, military production, energy, and advanced technology.
According to the recent Chief Economists Outlook by the World Economic Forum, industrial policies that place state power at the heart of national and global economic progress are increasingly gaining prevalence.
For instance, the European Union is also heading towards semiconductor legislation, intending to invest €43 billion in the industry to raise Europe's share in global chip production from less than 10% to 20%. China is also advancing with various industrial strategies under its "Made in China 2025" framework, aiming to amplify domestic high-tech manufacturing.
The objectives of such industrial policies vary from enhancing growth and innovation to job creation and supporting the green transition.
Take the US Inflation Reduction Act, signed into law in August 2022, as an example. This legislation incorporates more than 20 new or altered tax benefits and billions of dollars in grant and loan programs to aid the clean energy shift.
Christian Keller, the Head of Economic Research at Barclays, noted in an interview on Radio Davos that transitioning to a greener economy also demands increased state intervention.
Among the top economists surveyed in the Chief Economists Outlook, 58% predicted that active industrial policy would be a common economic strategy worldwide in the coming years; 16% found it extremely likely. The report indicated that chief economists unanimously agree that industrial policy will significantly affect the global economy in future years.
However, there was a divide among respondents on whether industrial policy would fuel innovation, with over 90% stating geoeconomic tensions deepening was a worry, and around 70% noted that industrial policy could inhibit competition and lead to an increase in problematic sovereign debt levels.
Despite bringing back semiconductor production, which has primarily been concentrated in Asian and US hubs, this move comes at a cost, as Keller explained.
A significant portion of the surveyed economists expressed doubt or were undecided about the capacity of industrial policy to fortify global economic stability. Equally, there was widespread uncertainty regarding the prospect of industrial policy instigating a comprehensive surge in global economic operations.
Economists uniformly expect further alterations in global supply chain structures, with a third expecting significant changes within the next three years.
The industries where chief economists foresee the greatest impact of industrial policy and the most pronounced supply chain changes overlap significantly. These include semiconductors, green energy, automotive, and broad technology, among others.
The report underscored a range of business tactics expected to shape the evolving architecture of worldwide supply chains. More than 90% of the principal economists anticipate these maneuvers to embrace adaptation to geopolitical rifts and favor resilience over efficiency. Concurrently, 84% predict the inclusion of supplier diversification in business plans, and 77% foresee an elevated emphasis on ecological sustainability.