Industrial policy has definitively returned in the 21st century. Yet its new manifestation is very different from the old because the global environment has fundamentally changed.

While never exclusive to the region, East Asian countries had showcased the efficacy of traditional industrial policy under the US security umbrella and an open international trade regime. In contrast, the major drivers of industrial policy in the 2020s are hyper-uncertainties, including intensifying US-China strategic competition, supply chain disruptions, and increased geopolitical risks. But industrial policies are not limited to East Asia. European countries also actively pursue industrial policies to promote twin transformation — digital and green transformation — to address global challenges such as climate change.

What we are witnessing is not merely the return of traditional industrial policy, but the emergence of a new industrial policy.

The locus of industrial policy has fundamentally shifted. Western advanced countries, led by the United States, focused on promoting the Washington Consensus from the mid-1980s to highlight the negative facets of industrial policy. They used the 1997 Asian financial crisis as an opportunity to expose the structural limitations of the East Asian developmental state model. Critics argued that industrial policy catalyzed rent-seeking behavior and unproductively close government-business ties, ultimately leading the model towards crony capitalism.

After the 2008 global financial crisis, Western advanced economies developed a newfound interest in industrial policy as a tool to shore up domestic industrial competitiveness. In the 2020s, the United States and the European Union (EU) took the initiative to promote the new industrial policy, but East Asian countries have been largely reactive.

The scope of industrial policy has also expanded. As a growing number of countries have begun to address environmental and social challenges, such as climate change and aging populations, new forms of industrial policy emerged, including mission-oriented and green industrial policies. At the same time, the scope of industrial policy has broadened beyond supporting the commercialization of technologies to enhance innovation capabilities at an earlier stage.

New industrial policy places a high priority on mitigating the vulnerability of domestic industrial ecosystems. The rise of geopolitical risks and severe supply chain disruptions caused by events like COVID-19 starkly exposed the vulnerabilities of global value chains that were optimized purely for efficiency. For the United States engaging in strategic competition with China, manufacturing capabilities in key high-tech industries were identified as a critical source of vulnerability.

The 2022 CHIPS and Science Act and Inflation Reduction Act clearly demonstrated the United States’ intent to use industrial policy to address its advanced manufacturing vulnerabilities while simultaneously attempting to delay the ascent of China’s high-tech industries.

In Europe, policymakers became acutely aware of the EU’s meager share — less than 10% — of global semiconductor production. In September 2023, citing the need to enhance industrial competitiveness and accelerate digital and green transformation, the EU enacted the €43 billion (US$49.98 billion) European CHIPS Act.

Finally, a defining feature of the new industrial policy is the provision of financial support to foreign companies as a means to address domestic vulnerabilities. This would have been difficult to conceive under traditional industrial policy. In an era of hyper-uncertainty, safeguarding value chains and maintaining a robust industrial ecosystem are considered as important as boosting the competitiveness of national firms.

Japan exemplifies this shift, providing large-scale direct subsidies to revive its semiconductor industry. The Japanese government is supporting Taiwan Semiconductor Manufacturing Company (TSMC), a Taiwanese company, in expanding its domestic chip production capacity. Tokyo has earmarked 476 billion yen (US$3.10 billion) for the construction of TSMC’s first plant, which produces 12–28 nanometer semiconductors in Kumamoto and 730 billion yen (US$4.76 billion) for the construction of its second plant, which will produce 6-nanometer semiconductors.

Tokyo’s decision to provide up to 1.7 trillion yen (US$11.09 billion) to the semiconductor manufacturer Rapidus for the autonomous production of cutting-edge 2-nanometer semiconductors is also a departure from tradition because the project involves joint development with IBM and IMEC.

The diversity of new industrial policies generates dual dynamics of competition and cooperation. While countries compete to boost key high-tech industries, they also use industrial policies to mitigate the structural vulnerabilities of these industries, paving the way for international cooperation. But international cooperation is not without limitations. It tends to involve international cooperation along geopolitical fault lines, largely among like-minded countries.

In South Korea, new industrial policy takes various forms, reflecting differences in social challenges, structural vulnerabilities, and institutional foundations. Unlike the United States, the EU, and Japan, Seoul concentrates its support on materials, parts, and equipment — the primary source of vulnerability of South Korea’s semiconductor value chain — rather than manufacturing capacity.