Industrial Policy Competition Between Major Economies

Introduction

Industrial policy competition between major economies refers to the strategic rivalry among governments to strengthen domestic industries, secure critical technologies and supply chains, attract investment, create employment, develop national champions, and reduce dependence on foreign producers. It has become particularly significant in sectors such as semiconductors, electric vehicles, batteries, artificial intelligence, telecommunications, renewable energy, pharmaceuticals, defence technology, and critical minerals.

From a competition-law perspective, industrial-policy competition creates a difficult balance. Governments may legitimately support strategic industries, but subsidies, preferential procurement, regulatory advantages, state-owned enterprises, import restrictions, or exclusive arrangements can distort competitive conditions, protect inefficient firms, or disadvantage foreign competitors.

The central legal question is therefore not whether industrial policy is permissible, but when industrial-policy intervention becomes incompatible with competition law, State-aid disciplines, subsidy rules, or international trade obligations.

1. Meaning of Industrial Policy Competition

Industrial policy competition occurs when governments compete to create more favourable conditions for domestic industries.

Typical instruments include:

• Production subsidies;
• Tax credits;
• Investment grants;
• Cheap public financing;
• Government guarantees;
• Preferential procurement;
• Domestic-content requirements;
• Export incentives;
• Import tariffs;
• Foreign-investment restrictions;
• Research-and-development support;
• Public infrastructure;
• State-owned enterprises;
• Strategic stockpiling;
• Technology-transfer requirements;
• Supply-chain diversification programmes.

For example, if the United States provides major incentives for semiconductor manufacturing, the European Union responds with semiconductor-support measures, and China provides extensive state support to domestic semiconductor and technology companies, firms may compete not merely on the basis of productivity but also on the comparative strength of governmental support.

2. Why Industrial Policy Has Become a Competition-Law Issue

Historically, competition law primarily focused on private restraints of competition.

Modern industrial policy complicates this model because governments themselves can substantially affect market structure.

A government measure can:

1. Reduce the costs of domestic producers;
2. Increase competitors' costs;
3. Prevent foreign entry;
4. Create artificial barriers to expansion;
5. Strengthen a national champion;
6. Encourage consolidation;
7. Protect an incumbent from competitive pressure;
8. Influence access to essential infrastructure;
9. Redirect investment toward selected technologies.

Consequently, competition may be distorted even where there is no conventional cartel or abuse of dominance.

3. Major Forms of Industrial-Policy Competition

A. Subsidy Competition

Governments may offer financial incentives to attract strategically important production.

Examples include support for:

• Semiconductor fabrication;
• Battery plants;
• EV manufacturing;
• Green hydrogen;
• Solar panels;
• Critical minerals;
• AI infrastructure.

The competitive problem arises where subsidies permit a producer to operate at costs that competitors cannot commercially match.

B. Race to Attract Investment

Governments may compete for multinational manufacturing facilities by offering:

• Tax holidays;
• Land;
• Infrastructure;
• Electricity subsidies;
• Training support;
• Capital grants;
• Preferential financing.

This can produce a subsidy race, where the location of investment depends partly upon governmental incentives rather than underlying economic efficiency.

C. Protection of National Champions

A government may provide favourable treatment to a domestic enterprise considered strategically important.

Potential mechanisms include:

• Preferential government contracts;
• Regulatory exemptions;
• State financing;
• Exclusive licences;
• Preferential access to infrastructure;
• Debt guarantees.

The concern is particularly strong when the beneficiary is already dominant.

D. Domestic-Content Requirements

Governments sometimes require firms receiving benefits to purchase a specified percentage of inputs domestically.

Although such measures can support domestic suppliers, they may discriminate against foreign products and restrict international competition.

4. Industrial Policy and State-Owned Enterprises

State-owned enterprises can become major instruments of industrial policy.

Competition concerns arise where an SOE receives:

• Preferential financing;
• Government guarantees;
• Exclusive rights;
• Preferential access to land;
• Regulatory privileges;
• Monopoly concessions.

The issue becomes particularly difficult when the SOE competes directly with privately owned firms.

The competition-law principle of competitive neutrality seeks to prevent ownership by the State from becoming an unjustified competitive advantage.

5. Industrial Policy and Merger Control

Industrial policy can also affect merger enforcement.

A government may argue that consolidation is necessary to create:

• A globally competitive national champion;
• Strategic technological capacity;
• Supply-chain resilience;
• Defence capability;
• Economies of scale.

Competition authorities, however, may conclude that the transaction substantially reduces competition.

This produces tension between:

Industrial-policy objective → strategic scale

and

Competition-law objective → preservation of competitive rivalry.

The proper approach is generally to distinguish genuine strategic benefits from arguments that merely use national-interest language to justify anticompetitive consolidation.

6. Industrial Policy and National Champions

A national champion is a firm that receives explicit or implicit governmental support because it is regarded as strategically important.

Potential benefits include:

• Subsidised capital;
• Government contracts;
• Regulatory protection;
• Export assistance;
• Technology grants;
• Diplomatic support;
• Preferential infrastructure access.

National champions can sometimes generate legitimate economies of scale. However, their privileged status can also create entry barriers and long-term market concentration.

Competition law therefore asks whether governmental support produces benefits that ultimately reach consumers and the economy, or instead merely protects incumbent firms.

7. Industrial Policy and International Trade Law

Industrial-policy competition frequently overlaps with WTO law.

Important principles include:

• Non-discrimination;
• National treatment;
• Most-favoured-nation treatment;
• Subsidy disciplines;
• Prohibition of certain export subsidies;
• Prohibition of certain local-content subsidies.

Thus, a measure can potentially be:

industrially desirable → economically strategic → but legally discriminatory.

This is one reason modern industrial policy cannot be assessed exclusively through domestic competition law.

8. Six Important Case Laws

1. Canada — Certain Measures Affecting the Automotive Industry (WTO)

This dispute concerned Canadian measures providing benefits to automobile manufacturers subject to conditions concerning production and sourcing.

The WTO dispute-settlement process examined whether the governmental benefits were inconsistent with national-treatment and prohibited-subsidy disciplines.

Significance

The case demonstrates that governments cannot necessarily attach discriminatory conditions to industrial incentives simply because the objective is to develop domestic manufacturing.

Principle

Industrial-development objectives do not automatically justify discriminatory treatment of imported goods.

2. Canada — Renewable Energy / Feed-In Tariff Program (WTO)

This dispute concerned Ontario's renewable-energy programme and domestic-content requirements associated with electricity-generation projects.

The measures were challenged because participation in the programme was linked to the use of domestic goods.

Significance

The case is highly relevant to contemporary green industrial policy.

Governments increasingly want to develop:

• Solar manufacturing;
• Wind manufacturing;
• Battery production;
• Green hydrogen;
• EV supply chains.

The case illustrates the legal tension between green industrial policy and discriminatory sourcing requirements.

Principle

Environmental and industrial-development objectives do not necessarily immunise discriminatory procurement or local-content measures from international trade disciplines.

3. European Communities — Measures Affecting Trade in Large Civil Aircraft (Airbus)

The Airbus litigation involved extensive government support for the development and production of large civil aircraft.

The dispute examined various forms of governmental support and their competitive effects on Boeing and the wider aircraft market.

Significance

This is one of the clearest examples of industrial-policy competition between major economies.

The aircraft industry involves:

• Huge R&D expenditure;
• Long investment cycles;
• Strategic technological capabilities;
• Export competition;
• Government financing.

The dispute demonstrated how industrial subsidies can affect global market structure for decades.

Principle

Government support for strategic industries can become internationally actionable when it produces prohibited or adverse competitive effects.

4. United States — Final Countervailing Duty Determination with Respect to Certain Softwood Lumber from Canada

The dispute concerned countervailing duties imposed in response to alleged subsidisation of Canadian softwood lumber.

Significance

The case illustrates the competitive consequences of government provision of economic benefits to domestic industries.

A government may argue that its programme serves:

• Resource development;
• Regional employment;
• Industrial stability.

But competing jurisdictions may regard those measures as giving domestic producers an unfair advantage.

Principle

Domestic industrial support can generate retaliatory trade measures when it materially affects competitive conditions.

5. PreussenElektra AG v Schleswag AG, C-379/98

The European Court of Justice considered Germany's system requiring electricity suppliers to purchase electricity generated from renewable sources at minimum prices.

The Court addressed the relationship between renewable-energy policy and EU State-aid rules.

Significance

The case is particularly important because it demonstrates that not every governmental economic intervention constitutes State aid.

This distinction is critical for modern industrial policy.

A government can pursue:

• Decarbonisation;
• Energy security;
• Renewable deployment;

without every resulting economic advantage automatically being classified as prohibited State aid.

Principle

The legal classification of an industrial-policy measure depends upon the source and structure of the financial advantage, not merely upon the fact that government policy benefits particular producers.

6. Altmark Trans GmbH v Regierungspräsidium Magdeburg, C-280/00

The Altmark judgment established important criteria for determining when compensation granted for public-service obligations does not constitute State aid.

The Court identified four cumulative conditions concerning:

1. Clearly defined public-service obligations;
2. Objective and transparent compensation parameters;
3. Compensation limited to the necessary amount;
4. Selection of the provider or determination of compensation through an appropriate benchmarking mechanism.

Significance

The decision is important for industrial policy because governments frequently justify financial support as compensation for:

• Public-service obligations;
• Strategic infrastructure;
• Connectivity;
• Energy security;
• Regional development.

Principle

A government cannot simply label a financial advantage as "public service" to remove it from State-aid scrutiny.

7. Commission v Italy (Case 35/96) — State Undertakings

The European Court of Justice examined the relationship between State ownership and EU competition principles.

Significance

The case illustrates the principle that EU competition law does not automatically prohibit State ownership, but State-owned enterprises remain subject to the relevant competition framework.

This is important where governments use state enterprises to pursue industrial-policy goals.

Principle

Public ownership is not itself unlawful; discriminatory or anticompetitive conduct associated with State intervention may nevertheless be subject to competition rules.

8. EDF v Commission, C-124/10 P

The case concerned whether a State's intervention in an undertaking should be assessed under the Market Economy Operator Principle.

Significance

The principle asks whether the State acted as a private market participant would have acted in comparable circumstances.

This is extremely important for industrial-policy competition.

For example, if a government provides financing to a semiconductor company, the question may be:

Would a private investor reasonably have provided equivalent financing on equivalent terms?

If yes, the measure may be less problematic under State-aid rules. If no, the intervention may represent an economic advantage.

Principle

The State cannot necessarily escape State-aid scrutiny merely by characterising a transaction as an ordinary investment.

9. Industrial Policy Competition Between the United States, EU and China

The contemporary industrial-policy environment is increasingly characterised by three major approaches.

United States

The United States increasingly uses:

• Strategic subsidies;
• Tax incentives;
• Technology controls;
• Domestic manufacturing incentives;
• National-security restrictions.

Major strategic sectors include:

• Semiconductors;
• AI;
• Batteries;
• EVs;
• Critical minerals;
• Defence technology.

European Union

The EU traditionally emphasised competition neutrality and State-aid control, but has increasingly incorporated:

• Strategic autonomy;
• Green industrial policy;
• Digital sovereignty;
• Semiconductor capacity;
• Supply-chain resilience.

This creates tension between State-aid control and European industrial competitiveness.

China

China has historically employed substantial:

• State financing;
• Industrial plans;
• SOE participation;
• Procurement support;
• Manufacturing subsidies;
• Technology-development programmes.

This has generated international concerns concerning competitive neutrality and subsidised overcapacity in certain sectors.

10. The "Subsidy Race" Problem

A major contemporary concern is a subsidy race.

Suppose:

• Country A provides $10 billion to attract battery manufacturing;
• Country B responds with $15 billion;
• Country C offers tax exemptions and cheap electricity.

The factory may ultimately be located where the government provides the largest package rather than where production is economically most efficient.

This can lead to:

Short-term benefit

• Investment;
• Jobs;
• Technology transfer;
• Infrastructure.

Long-term risks

• Fiscal waste;
• Overcapacity;
• Protectionism;
• Market concentration;
• Retaliatory subsidies;
• Trade disputes.

11. Industrial Policy and Competition Between Firms

Industrial policy may affect competition at three levels.

Level 1 — Firm vs Firm

A subsidised domestic firm competes against an unsubsidised foreign firm.

Level 2 — Industry vs Industry

Governments compete to establish entire industrial ecosystems.

For example:

Semiconductor fabrication + equipment + packaging + software + research institutions.

Level 3 — Economic Bloc vs Economic Bloc

The United States, EU, China and other major economies compete for technological and supply-chain leadership.

At this level, competition law intersects with:

• Trade law;
• Investment law;
• National-security law;
• State-aid law;
• Subsidy regulation;
• Economic-security policy.

12. Strategic Autonomy Versus Competition

Strategic autonomy has become an important justification for industrial policy.

Governments may argue that dependence upon foreign suppliers creates unacceptable risks in:

• Semiconductors;
• Energy;
• Medicines;
• Telecommunications;
• Critical minerals;
• Defence;
• AI infrastructure.

The competition-law challenge is that resilience and self-sufficiency are not necessarily synonymous.

A policy designed to eliminate all foreign competition may increase domestic market power rather than resilience.

A better approach may involve:

• Multiple suppliers;
• Interoperability;
• Stockpiling;
• Diversified sourcing;
• Open standards;
• Emergency procurement mechanisms.

13. Industrial Policy and Digital/AI Markets

Industrial-policy competition is particularly significant in AI.

Governments may support:

• GPU manufacturing;
• Data centres;
• AI compute;
• Foundation-model development;
• National AI laboratories;
• Cloud infrastructure;
• Semiconductor design;
• Advanced packaging.

This can produce a new form of industrial concentration.

For example:

Government subsidy → compute infrastructure → AI developers → data → applications → ecosystem dominance.

Therefore, an industrial subsidy initially intended to develop national AI capacity can indirectly strengthen already powerful digital ecosystems.

14. Competition Concerns Created by Industrial Policy

The major competition risks include:

1. Artificial entry barriers

Subsidised incumbents can make entry commercially unattractive.

2. Predatory expansion

Government-backed firms may tolerate losses for longer periods.

3. Overcapacity

Multiple countries may subsidise the same industry simultaneously.

4. Market foreclosure

Domestic-content rules can exclude foreign suppliers.

5. National-champion protection

Politically favoured firms may escape normal competitive pressure.

6. Reduced innovation

Protected firms may have weaker incentives to innovate.

7. Regulatory capture

Successful national champions may influence future industrial-policy decisions.

8. Cross-border retaliation

One country's subsidy can trigger countervailing measures elsewhere.

15. Industrial Policy and Merger Control: The National-Champion Problem

Suppose two domestic semiconductor manufacturers propose a merger.

The government argues:

"We need a large national champion capable of competing with foreign firms."

The competition authority may respond:

"The merger eliminates the only significant domestic competitor."

The correct competition-law analysis should therefore separate:

Strategic capability

from

competitive harm.

Industrial policy should not automatically override merger control.

Possible solutions include:

• Behavioural commitments;
• R&D commitments;
• Supply obligations;
• Interoperability;
• Licensing;
• Divestitures;
• Investment commitments.

16. Industrial Policy and Competitive Neutrality

Competitive neutrality means that government ownership or support should not give an enterprise an unjustified advantage merely because it is State-controlled.

A useful framework asks:

1. Is the firm State-owned?
2. Does it receive preferential financing?
3. Does it receive implicit government guarantees?
4. Does it receive exclusive procurement?
5. Does it receive regulatory advantages?
6. Does it compete against private firms?
7. Is the advantage necessary for a legitimate public objective?
8. Is the measure proportionate?

17. Appropriate Competition-Law Response

Competition authorities should avoid two extremes.

Extreme 1 — Industrial-policy blindness

Treating every government intervention as irrelevant to competition.

Extreme 2 — Industrial-policy hostility

Treating every subsidy or strategic investment as inherently anticompetitive.

A more appropriate approach is effects-based scrutiny.

Authorities should examine:

• Market structure;
• Duration of support;
• Size of subsidy;
• Recipient's market power;
• Entry conditions;
• Rival access;
• Innovation effects;
• Consumer effects;
• Cross-border effects;
• Whether the intervention is proportionate.

18. Six-Part Legal Test

A useful analytical framework is:

Step 1 — Identify the policy objective

Is the measure directed toward:

• National security?
• Energy security?
• Climate objectives?
• Employment?
• Technology?
• Supply-chain resilience?

Step 2 — Identify the beneficiary

Is the beneficiary:

• A start-up?
• An incumbent?
• A State-owned enterprise?
• A dominant platform?
• An entire industry?

Step 3 — Identify the competitive advantage

Does the measure provide:

• Lower costs?
• Exclusive access?
• Guaranteed demand?
• Cheap financing?
• Regulatory protection?

Step 4 — Examine foreclosure

Could rivals be:

• Excluded?
• Raised in costs?
• Denied inputs?
• Prevented from entering?

Step 5 — Apply proportionality

Could the same policy objective be achieved through a less distortive mechanism?

Step 6 — Examine international consequences

Could the measure trigger:

• WTO litigation;
• Countervailing duties;
• Retaliatory subsidies;
• Investment disputes;
• Cross-border regulatory conflict?

19. Relationship Between Industrial Policy and Competition Policy

The relationship can be represented as:

Industrial policy

↓

Strategic investment / subsidies / procurement / regulation

↓

Change in market conditions

↓

Entry barriers / cost advantages / concentration / innovation effects

↓

Competition-law assessment

↓

Legitimate support OR distortion requiring conditions/remedies

The key point is that industrial policy and competition policy should not be treated as mutually exclusive.

20. Emerging Legal Principle: Competitive Industrial Policy

A modern approach can be described as competitive industrial policy.

Its objective is not simply:

"Create a national champion."

Instead, it seeks to create:

competitive domestic capabilities without unnecessarily eliminating rivalry.

This may involve:

• Open-access infrastructure;
• Technology-neutral subsidies;
• Competitive allocation of grants;
• Transparent procurement;
• Sunset clauses;
• Periodic review;
• Interoperability requirements;
• Multiple suppliers;
• Open standards;
• Restrictions on exclusionary conduct by beneficiaries.

Conclusion

Industrial policy competition between major economies represents a fundamental transformation in the relationship between government policy and competition law. The traditional assumption that markets and governments operate in separate spheres is increasingly unrealistic.

The Airbus, Canada–Automotive, Canada–Renewable Energy, Altmark, PreussenElektra, and EDF lines of jurisprudence demonstrate different aspects of the problem: subsidies can distort international competition, local-content requirements can discriminate against foreign goods, State intervention must sometimes be distinguished from genuine market investment, and public-policy objectives do not automatically remove governmental measures from legal scrutiny.

The central principle should therefore be:

Strategic industrial policy is legitimate, but its design should preserve contestability, competitive neutrality, innovation and access wherever possible.

For modern competition law, the most important question is no longer simply "Did a private firm restrict competition?" It is increasingly:

"How does the interaction between State intervention, strategic subsidies and private market power reshape the competitive structure of the market?"