In a shift from decades of free-market orthodoxy, governments worldwide are embracing long-forgotten ideas about sovereign industrial policy. This resurgence reflects a growing recognition that strategic state intervention is crucial to maintaining industrial security, accelerating economic competitiveness, safeguarding national security, and addressing critical challenges such as climate change and technological disruption. China’s upending of Germany’s decades of dominance in the automotive sector highlights not only how quickly circumstances can change — but also how difficult and delicate decisions on industrial policy trade-offs can be.
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Read moreThe Covid-19 pandemic exposed vulnerabilities in global supply chains, while geopolitical tensions — particularly between the United States and China — have highlighted the potential risks of economic interdependence.
These factors, combined with the urgent need to decarbonize economies and establish leadership in new technologies, have pushed industrial policy — the concerted, focused effort on the part of government to encourage and promote a specific industry or sector with an array of policy tools — from the margins to the mainstream of economic thinking.
Critics warn about the risks of government overreach and market distortion, while supporters argue that well-designed industrial policies are essential to addressing market failures and capturing strategic opportunities.
The key challenge is to balance policies that increase state intervention with market forces that support growth while avoiding protectionist measures that could fracture the global economy.
No two countries are facing the same issues when it comes to establishing a new sovereign industrial policy. They all start with different capabilities, capacity, and vulnerabilities. And when establishing their policies, countries are balancing self-interest against other countries’ actions and potential responses. Governments must consider the impact on cross-country relationships and access to raw and intermediary components.
In 2025, governments will accelerate the use of economic security measures, creating an increasingly complex web of supplier relationships across countries and companies. Economic security policies will be motivated by three objectives: reducing reliance on geopolitical competitors, promoting domestic industrial competitiveness and supporting domestic sociopolitical stability.
Countries have established their own methods to identify critical products in specific industries, as a globally standardized cross-country and -sector methodology does not exist. The EU has put together critical-product lists in sectors such as pharmaceuticals and raw materials; however, each of these uses a different methodology.
EY-Parthenon has established a global framework and undertaken analysis to establish a list of critical products in key industries.
Three essential dimensions help organizations assess critical products, import reliance, supply risks and product importance. Determining criticality is subjective and each government will make its own determination, but a clear methodology of next steps is possible. Through the use of trade databases and the application of these three criteria, a government can build and then prioritize a short list of products by country and industry that are economically essential and at risk of supply disruption, depending on its view of industrial sovereignty, which translates into different dimensions of criticality.1
Critical products must be identified in strategic industries to effectively target industrial sovereignty initiatives and investment. According to the 2024 EY analysis of HS Importation codes, of more than 1,230 products in European strategic industries, half (47% to 56%) can be considered national governments by critical based on import dependence, supply risks and product importance.
Various initiatives around the world demonstrate the importance of public subsidies to foster private investments in industrial projects for critical products. State contributions typically account for 20% to 30% of total investment across sectors such as mobility, health care and energy.
While it is not possible or desirable to apply industrial sovereignty measures to all products, materials and components, industrial production security is increasingly important in the eyes of business leaders, who are now willing to make greater compromises to de-risk their supply chains and production capabilities. Clear objectives and effective prioritization will be critical to establishing that both government and private sector actions are focused on enhancing domestic manufacturing and protecting the supply of the most critical goods as a partnership between governments and companies.
The EY-Parthenon CEO Outlook Pulse survey for April 2024 found that 82% of CEOs globally report a willingness to participate in initiatives to enhance national resilience and autonomy, with 56% indicating they would accept reduced profit margins on domestically manufactured products targeting the domestic market.
There are regional differences, with more businesses already participating in industrial sovereignty initiatives in the Americas (55%) and Asia-Pacific (52%) than in Europe, where, while there is significant interest with 49% of CEOs planning to get involved, only 28% are involved now.
Among the industrial sovereignty actions suggested, CEOs are most willing to accept reduced profit margins in return for domestic production. This is true across the Americas, Asia-Pacific, and Europe. In second place for all regions, even if not as widespread in Asia-Pacific (38%), was persuading customers to accept slightly higher prices for domestic products. Meanwhile, requesting dedicated subsidies was selected by 50% of Americas CEOs but only 29% of European CEOs. This is reflective of a subsidy model in the EU that favors funding only innovative and sustainable industrial business models, whereas the US is more willing to risk subsidizing industry at a loss. EU CEOs therefore cannot request a subsidy in the same way.
Governments can accelerate this corporate desire to support industrial sovereignty through targeted policy initiatives. Clear regulatory frameworks help attract long-term corporate investment, and tax incentives encourage companies to invest in strategic sectors. Government funding can also support critical research and development projects. Strategic infrastructure investment can make “left behind” regions more attractive to businesses, supporting another widespread policy goal.
As governments navigate this new era of industrial policy, success will depend on their ability to foster innovation, maintain competitive markets, and coordinate effectively with the private sector while pursuing broader societal goals.
Globalization is undergoing a retrenchment. Governments globally need to understand that this will further accelerate vulnerabilities that the past five years have surfaced. They need to formulate their own unique industrial sovereignty plan by first understanding their critical needs and then implementing policies that are best suited to their circumstances.
Governments worldwide are shifting from free-market policies to sovereign industrial policies, recognizing the need for strategic state intervention to enhance industrial security, competitiveness, and address challenges like climate change. The COVID-19 pandemic and geopolitical tensions have exposed vulnerabilities in supply chains, prompting nations to prioritize critical products in key industries. While critics warn of government overreach, supporters argue that well-designed policies can address market failures. A collaborative approach between governments and businesses is essential for enhancing domestic manufacturing and ensuring supply security, as evidenced by a growing willingness among CEOs to accept reduced profit margins for domestic production.
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