**Introduction** The resurgence of industrial policy reflects efforts to strengthen competitiveness, secure supply chains, and accelerate technological upgrading. However, expanded state intervention also introduces material risks. These include persistent trade distortions, subsidy escalation, excess capacity, weakened multilateral disciplines, and reduced long-term productivity growth. As industrial policy becomes embedded in strategic competition, these risks increasingly affect both domestic economic performance and the stability of the global trading system[1][2][3]. **Contextual background** Since the late 2010s, governments have expanded the use of subsidies, tax incentives, state-backed finance, local content requirements, export controls, and investment screening in sectors such as semiconductors, clean energy, batteries, and advanced manufacturing. Intervention is no longer confined to correcting market failures; it is increasingly used to pursue strategic and security-linked objectives. WTO monitoring through 2025 shows a continued increase in trade-related measures, suggesting that expanded policy intervention is becoming a durable feature of the trade environment rather than a temporary response to recent shocks[4][5]. **Risks of the resurgence of industrial policy** **1.** **Persistent trade distortion and local content protectionism** A growing share of industrial programs includes domestic preference conditions, such as local content requirements and production-linked incentives. These provisions influence sourcing decisions and can shift investment toward jurisdictions offering fiscal support rather than those with underlying cost or productivity advantages. The use of local content measures has become widespread and sustained across sectors[6]. As they accumulate, they increase compliance requirements, constrain sourcing flexibility, and reduce gains from cross-border specialization in industries such as clean energy and advanced manufacturing[1][6]. **2.** **Subsidy escalation and competitive imbalance** Large-scale subsidy programs risk triggering competitive escalation as governments seek to attract or retain investment in priority sectors. When multiple economies target similar industries — such as semiconductors, batteries, or clean energy manufacturing — the location of new investment increasingly depends on the scale and conditions of public incentives rather than relative production costs or market conditions[2][7]. Escalation widens asymmetries between economies with strong fiscal capacity and those with limited resources. Smaller and developing economies may struggle to compete, leading to investment diversion and uneven industrial development[2][8]. **3.** **Excess capacity and weakened market discipline** Simultaneous industrial expansion across major economies increases the risk of global excess capacity. When output grows faster than demand, prices fall and margins narrow, placing pressure on firms and balance sheets. While lower prices may benefit downstream users in the short term, sustained excess capacity reduces returns on investment and discourages new private capital formation[3][9]. **4.** **Supply-chain fragmentation and reduced efficiency** Industrial policy increasingly intersects with export controls, investment screening, and strategic trade measures. These instruments shift production and sourcing decisions toward jurisdictions viewed as strategically reliable, even when this involves higher costs[10]. Fragmentation raises operating costs, limits economies of scale, and increases regulatory requirements for firms operating across multiple markets. More extensive geoeconomic fragmentation is associated with measurable medium-term output losses, especially if trade and investment shift toward politically aligned partners rather than existing commercial networks[11]. For highly trade-dependent economies, this reconfiguration can slow expansion, disrupt export earnings, and require costly adjustments in production and employment[10][11]. **5.** **Erosion of multilateral disciplines and governance coherence** Expanded use of industrial policy exposes weaknesses in subsidy transparency, notification, and enforcement under existing trade rules. Uneven reporting and prolonged disputes complicate monitoring and reduce predictability[4][7]. As governments rely more heavily on unilateral and plurilateral approaches, coherence within the multilateral trading system weakens. When confidence in binding dispute resolution declines, contested measures are more likely to remain in place, increasing policy unpredictability and raising compliance costs for firms operating across multiple jurisdictions[4][5][7]. **6.** **Policy entrenchment and productivity risks** Industrial policy programs are often politically difficult to unwind. Firms and regions that benefit from targeted support develop constituencies that favor extending or expanding those measures beyond their original scope[1][2]. Without clear sunset clauses and performance conditions, support can continue even when commercial viability has not improved. Over time, prolonged intervention may reduce pressure to lower costs, upgrade technology, or reallocate resources toward more competitive activities, especially if firms rely on continued state backing[12][13]. **Conclusion** The resurgence of industrial policy reflects efforts to strengthen resilience, secure technological capacity, and support decarbonization. At the same time, sustained and broad-based intervention carries clear risks. These include trade distortion, subsidy escalation, excess capacity, supply-chain fragmentation, weaker multilateral discipline, and slower resource reallocation across sectors. The scale of these risks depends on policy design. Measures that are transparent, time-bound, and tied to measurable performance criteria are less likely to generate persistent distortions or fiscal strain. By contrast, open-ended and nationally exclusive approaches increase fragmentation and competitive imbalance. As industrial policy becomes embedded in the global trade environment, managing the trade-offs between strategic objectives, economic efficiency, and systemic stability remains a central governance challenge.
