Governments are increasingly trying to outdo other countries by pursuing an active industrial policy. It appears that faith in the power of industrial policy is making a comeback. The doctrines of a pure, free market economy and free trade take a back seat as countries compete under the banners of green transition, digitalisation, energy and security to improve the world and their position and beat each other in competition. Investment markets may soon discover both opportunities and risks in the face of abrupt policy changes. Economic growth may receive a boost as governments and businesses invest in the future.
A stronger European industrial policy
The rise of the industrial policy to centre stage is the result of a range of factors. The Covid-19 crisis revealed the vulnerability of supply chains. Russia’s war of aggression accelerated the transformation of energy markets. Disputes between China and the US could trigger a crisis in the production and supply of microchips.
The programmes launched by the European Union are a maze. The EU talks about strategic autonomy, green transition and industrial policy. It appears typical of EU policy that each crisis spawns new programmes, with the old money being partly recycled. The EU Recovery Fund and NextGeneration EU were born out of Covid-19, whereas REPowerEU came as a result of the war and energy crisis. The EU Green Deal Industrial Plan represents a new industrial policy in continuation of the EU Green Deal. Other new programmes include the Net-Zero Industry Act, the Critical Raw Materials Act as well as the Chips Act currently under preparation. The latest of these initiatives are responses to the US Inflation Reduction Act, which is designed to speed up the green shift but is widely interpreted in Europe as a protectionist measure.
Finally, the EU will, by the summer, clarify what it means by the Sovereignty Fund and what it is needed for. All of this leaves a lot of uncertainties and unanswered questions, but past experience shows that the project will eventually be adapted to Europe’s needs, i.e., needs on which Europe will reach a consensus by the summer.
Strategic autonomy
What European projects have in common is the quest for strategic autonomy. Strategic autonomy is an umbrella concept embracing all the themes listed above. At present, it is related to energy, key raw materials, the green transition and chip production. Later, it may well be connected to other themes. The path to strategic autonomy will be a long one, as the EU's ideology has in the past been based on free trade, the market economy and non-interference by the government. The transition to strategic autonomy is about rebuilding Europe on a new basis.
There is a fierce battle being fought in Europe between the proponents of government subsidies and pure competition. Decision-makers are called upon to create a new system based on a turning point in sustainable development, fair competition between companies and the added value provided by government action.
Government presence is often decried, but it will not go away. Some want to strip down government and bureaucracy, while at the same time asking for government help in times of crisis. National debt should be reduced, but governments are borrowing more and more. And now a new value-adding industrial policy should be shaped amidst these conflicting forces.
A global problem
Global trade policies are pursued under several sets of rules. For a long time now, China and other so-called emerging markets have been allowed to strongly support governments’ industrial policies. At the same time, many western countries call for free competition and trade. The game is the same, but there are two sets of rules.
Now these rules will be harmonised. Concurrently, China is discarding its role as a developing nation to become one of the most advanced countries in the world. Presumably, the international rules of trade will be renegotiated once the adoption of protectionist industrial policies is completed in the West. As a result, the negotiations will reopen with new arguments.
Conclusions
What should an institutional investor think of these developments? The good news for investors is that governments are willing to create opportunities and improve the business environment while making major new investments in the green transition and digitalisation. Economic growth will receive a boost.
Before long, the leading powers will engage in extensive negotiations that will shape the direction of global trade and the world order in the 2020s and 2030s. Optimally, these developments could eventually lead to a new "deal" between the US and China, which could reinvigorate competition between countries and companies. At the same time, they could offer some sort of security guarantee for companies that operate globally relying on global supply chains.
Meanwhile, in anticipation of this “deal”, we will see a world in which protectionism gains ground and a new industrial policy takes centre stage. In the face of this new situation, many beliefs will make room for realism. In the best of cases, we will be able to create something new and sustainable. What is important, however, is finding adequate concepts and new arguments for old ‘new’ things.
The writer is VER's CEO Timo Löyttyniemi.
