Summary.
It used to be that legislative agendas and macro policy issues like trade policies or environmental initiatives were long-cycle issues about which executives could say, “Oh, let's see what happens in the next G7 meeting.” They no longer...
The ongoing trade war has dominated conversations in boardrooms and newsrooms. On-again, off-again tariffs and economically bellicose statements have led to uncertainty, confusion, and even fear. Amid the market turmoil and operational confusion of the last few months, it's possible to lose sight of a profound underlying change of which these are a manifestation. Even after things calm down (as they will, sooner or later), businesses will have to face a new structural reality: Global commerce has entered an era where competition is directly—and profoundly— shaped by government industrial policy.
It used to be that legislative agendas and macro policy issues like trade policies or environmental initiatives were long-cycle issues about which executives could say, “Oh, let's see what happens in the next G7 meeting.” They no longer have that luxury. We've come a long way, in what seems a very short time, from the days when U.S. officials could be counted on to proclaim that it was not the job of government to “pick winners and losers” or when leaders of advanced economies routinely and sincerely said government policy should simply work to ensure a “level playing field.”
Focused or fuzzy, brilliant or bone-headed, industrial policies are here. Business leaders thus need to know how government affects their organizations—that is, how industrial policy might endanger value creation, strengthen it, or create opportunities to expand it.
The Industrial Policy Landscape
As the OECD defines it, industrial policy is “government assistance to businesses to boost or reshape specific economic activities, especially to firms or types of firms based on their activity, technology, location, size, or age.” Its tools include tariffs, incentives, subsidies, investment in public goods like infrastructure, and more. By that definition, industrial policy has become a strategic program in every major economic bloc.
Consider that in the U.S., while the Trump and Biden administrations have followed very different paths, both parties' stated goals share similarities: to support semiconductor and microchip research and manufacturing, energy production, artificial intelligence, and so on; reduce dependence on Chinese parts and materials; and promote economic self-reliance in key areas.
And countries in the European Union have increased their spending to support industry three-fold in the last decade, according to the International Monetary Fund, while the EU itself has developed a “competitiveness compass” designed to support a designated set of industries and reduce the bloc's dependence on outsiders.
Finally, in China, the hand of the state has long been on the wheel of the economy. In 2022 a panel of experts from the Asia Society and Stanford agreed that “under Xi Jinping, the leadership became even more aggressive in strengthening China's self-reliance and self-sufficiency in critical technology domains.”
Industrial policy is a mixed blessing. At its worst, it can syphon private capital from productive to unproductive uses, boost bad ideas, shore up doomed industries, or become a sink of outright graft and corruption. The best industrial policies identify areas of market failure and leverage an economy's inherent and unique strengths. (In the U.S., those should include its unique venture capital and business-formation ecosystem, enormous defense budget, large public research universities, and ability to attract, deploy, and reward both financial and human capital quickly.) Good policies also prize consistency, since erratic policy can paralyze the very investments it aims to promote. Danger comes when public purpose is used to cloak a private agenda.
How to Strategize Around Industrial Policy
Some companies might try (and some might be able) to shape industrial policy to their own benefit, but all companies need to know how it will affect them, monitor both trends and details, and be able to act on what they see. Here are six ways to go about that:
1. Look at your business through the eyes of policymakers.
It's easy for defense and semiconductor companies to see how policy affects them, but what about organizations in other sectors? A broad view of your value chain may highlight more opportunities and impacts coming down the pipe than appear on the surface. For example, some policies may seem pointed at AI; but AI needs data centers, and data centers need lots of real estate, electricity, and construction work. A broad policy goal of encouraging manufacturing can benefit bakers as well as automakers, not to mention logistics companies, makers of smart-factory equipment, and more.
2. Pay attention to the long-term implications of industrial policy.
There's a lot of noise in the trading system right now as the U.S. and others throw tariffs at each other, but there are always signals within the noise, and longer-lived trends despite the choppiness. Ideas and goals that have broad political and economic support, like defending key industries, jumpstarting industries of the future, or supporting energy independence, will likely survive the fray. A company can make long-term plans and investments with those in mind; at the least, it doesn't make sense to bet against them. In some cases, trade restrictions can buy time for domestic producers to make investments that will close competitive gaps with overseas rivals.
3. Audit short-term, specific risks and opportunities both at home and abroad.
Whether governments are using carrots or sticks, industrial policy creates risks for companies that depend on overseas suppliers. As my colleague Sudeep Suman and I pointed out in HBR, companies need to identify risks quickly and be prepared even for low-probability events—in detail, down to the SKU. Conduct the same kind of analysis to identify markets at risk. For example, restrictions slapped on American products by Mexico or Canada (or vice versa) or incentives given to domestic producers by Germany or France can all affect overseas markets.
In parallel, identify opportunities to win or win back home-market customers currently served by foreign competitors if industrial policies raise barriers for them. Consider how to leverage industrial policies to open markets, too; for example, by investing (directly or through alliances) in overseas production, a company can become an insider rather than an exporter. There are more and more incentives in more and more markets—look for them.
4. Build rapid-response capabilities.
Because threat and opportunity maps can change quickly—especially given the current American administration's approach to trade—an alert eye must be accompanied by a quick hand. A combination of tariff engineering, price-sensitivity analysis, and operational efficiency can mitigate many of the negative effects of trade barriers. Companies also need the financial resilience to absorb government-driven shocks as well as the operational resilience to adapt quickly to changes—for example, by having multiple suppliers for key ingredients, flexible manufacturing lines, and so on.
5. Tell your story. Widely.
Take an ecosystem view of your company, its impact, and its influence, and share that with people who can influence policy. How many legislators understand that the future of the auto industry is in software more than it is in steel? State, provincial, and metropolitan business-development organizations can amplify the voice of middle market businesses and help multinationals find allies in local government.
6. Don't let the tail wag the dog.
A core business is a core business, and most of the time industrial policy works on the margins. It doesn't make sense to pour discretionary funds into a non-core activity just to get government help that might be transitory and almost certainly will come with strings attached.
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The responsibility of leaders is to take advantage of the patterns they see, correct mistakes fast, look for opportunities, and ensure that their teams have the ability and resources to manage short-term issues. When something is new, it's easy to become distracted by every zig and zag, and industrial policy is new for many executives and boards. But in the long run, government policy manifests itself through the familiar competitive forces of suppliers, customers, entry barriers, substitutes, and competitors. We know how to deal with that.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
