Industrial Policy: A New Age of State-Guided Capitalism (Part II)

The Invisible Fist strikes back

The past few years have seen a dramatic pivot toward national industrial policy across the world as each major economy is pouring public funds into strategic sectors. On one hand, this reflects a fragmenting geopolitical and economic landscape marked by rising trade tensions, friendshoring, and the decoupling of supply chains.

On the other hand, there is a paradoxical unity of focus as all these industrial strategies concentrate on the same strategic sectors such as semiconductors, advanced computing and quantum, clean energy and net zero technologies, and biotech.

In short, the world’s leading powers may be diverging in their geoeconomic blocs, but they are converging on what they build.

This two-part report examines how North America, the European Union, and Asia are each drafting and implementing industrial policy. Part one focuses on developments in North America and Europe, with particular emphasis on the United States.

Part two turns to Asia, highlighting China’s expansive strategy alongside key initiatives in Japan and South Korea. Despite diverging national aims, these strategies reveal a shared focus on high-tech and clean-tech frontiers.

At a high level, the common threads include:

• Rampant subsidies and tax incentives to reshore semiconductor fabrication

• Major investment tax credits and grants to catalyze development of batteries, solar panels, wind turbines, hydrogen, and electric vehicles

• State-led research and development programs in quantum computing and artificial intelligence

• New restrictions to reduce foreign dependence, including export controls, domestic content requirements, and critical mineral strategies

These moves are overtly defensive in seeking to reduce reliance on geopolitical rivals and offensive in aiming to capture future industries. Yet the outcome is that every economy is trying to seize a larger share of the semiconductor market, the quantum computing race, and the renewable energy supply chain.

Asia

Asia’s policies are dominated by China’s state driven strategy, which has long treated industrial policy as a central tool of governance. Over the past decade, China’s plans, especially Made in China 2025, have been nothing short of a national mission to achieve self sufficiency in advanced technology.

Driven by national security concerns and viewed warily by the United States and the European Union, China has explicitly targeted semiconductors, renewable energy, electric vehicles, fifth generation networks and artificial intelligence, and quantum technologies as strategic emerging industries.

The Chinese Communist Party treats these sectors as areas where breakthroughs are needed for the country’s future growth and security. The result is massive subsidies, state investment funds, and preferential policies.

At the same time, China’s economic slowdown and its trade war with the United States have injected some caution, but overall Beijing continues to back its technology champions.

China’s push into semiconductors has been spearheaded by its Made in China 2025 initiative, launched in 2015, which set ambitious targets such as achieving 70 percent domestic chip self sufficiency by 2025.

The plan coordinated support across various levels of government to develop a robust homegrown semiconductor industry. Central to this effort is the China Integrated Circuit Industry Investment Fund, widely known as the Big Fund. Across its three phases, the Big Fund has amassed approximately one point one eight trillion yuan, or around one hundred seventy billion dollars, in capital.

The third phase alone, announced in May 2024, totals three hundred forty four billion yuan, about forty seven point five billion dollars, and is financed by the Ministry of Finance, state banks, and other entities. The fund makes equity investments in Chinese chipmakers and supports activities such as research and development, foundry construction, and equipment production.

Local governments and state owned enterprises also play an active role, providing subsidies and financial incentives to new semiconductor ventures. For example, the city of Chengdu has allocated significant resources to support the construction of multiple chip fabrication plants.

This entire strategy is framed by Chinese officials as a response to United States export controls and geopolitical constraints. Following the imposition of restrictions on advanced chipmaking tools, Beijing publicly emphasized the need for chip self reliance. Industry analysts report that Chinese firms now fulfill over 15 percent of their mature process semiconductor material and equipment requirements domestically.

However, significant gaps remain, particularly in advanced lithography, where China remains heavily reliant on imports. Only around 1 to 2 percent of the country’s lithography tools are domestically produced, and United States sanctions on extreme ultraviolet machines prevent China from manufacturing leading edge chips at the two nanometer scale.

To address these technological bottlenecks, Beijing has continued to…