The global return of industrial policy is increasingly seen as a necessary response to the "China Shock 2.0". As global supply chains fragment and the green transition accelerates, policymakers in advanced and developing economies alike are resorting to state intervention to secure strategic industries.
Yet, in its efforts to either mimic or counter Beijing's approach to techno-economic state management, governments around the world risk formulating policies based on an imperfect understanding of how the Chinese model actually works.
Alicia Garcia-Herrero argues in this week's lead article that the most vital lesson to be drawn from Chinese industrial policy is a "cognitive" lesson. Policymakers' understanding of the Chinese model is often skewed, with "policy responses... often driven by what is most visible — subsidies directed at such sophisticated sectors as electric vehicles, semiconductors, and green hydrogen." But this is only the tip of the iceberg," writes Garcia Herrero. Behind these targeted successes lies a huge financial burden — state support for mature and inefficient sectors, which flows mainly through state-owned enterprises.
Understanding this dynamic requires looking beyond the simplistic view of so-called “state capitalism.”
China's economic trajectory is the product of decades of “catch-up” growth rooted in a culture of pragmatism, as well as the Chinese Communist Party's determination to legitimize its rule through economic performance, and the historical push to overcome the “century of humiliation” by achieving prosperity and security at all costs. The implementation of this strategy by the Communist Party involves a calculated balancing act between intervening with an iron fist and retreating to let the “invisible hand” of the market do its job.
Emphasizing the ideological roots of any bias toward SOEs is therefore largely misguided. In the Chinese context, structural advantage derives more from political ties and alignment with the overall strategic objectives of the state than from direct state ownership.
The second lesson from García Herrero's analysis is that China's real industrial advantage lies—at least so far—not in foundational innovation but in "commercialization." The country has created an effective framework—using preferential public procurement, pilot programs, and co-investment mechanisms—to bridge the gap between the lab and the factory floor.
And most importantly, the state-sponsored commercial marketing framework is enhanced by a unique local phenomenon—fierce and draining competition, or what is known as “neijuan.” The state sets directional targets and sets pathways for the private sector to compete aggressively for market share, rapidly cutting costs in the process. This powerful combination of state strategy and domestic trade competition enables China to transform technologies into globally dominant industries.
But this supply-side success story generates significant imbalances; China's curbing of household consumption in favor of industrial investment leaves deep structural and social weaknesses exposed. This may reflect a deliberate hierarchy of strategic policy, with Beijing continuing to prioritize industrial upgrading, national security, and technological self-reliance at the expense of a fair distribution of wealth or consumption-driven growth.
For the rest of the world, China’s strategy raises concerns about “overcapacity” — the flow of Chinese manufactured exports that local industries elsewhere cannot compete with.
The strong protectionist pressure against Chinese imports is largely driven by the need to protect producers—that is, the need to protect traditional industries and employment from global competition. This rhetoric, reflected in U.S. President Donald Trump’s tariff-laden trade policy, usually ignores the consumer perspective altogether. While Western economies suffer from high inflation and cost-of-living crises, China’s affordable exports can act as shock absorbers, effectively supporting global consumption and accelerating a otherwise costly green transition.
By treating China’s surplus only as an economic threat rather than a structural advantage to the global supply network, policymakers risk resorting to defensive policies that inevitably impose higher costs on domestic consumers—not just those shopping in stores, but also companies that benefit from access to China’s abundant digital and green energy technologies. From a macroeconomic perspective, public policy should be formulated around supporting labor markets in transition—including stronger social safety nets—without merely protecting “politically close” from global competition.
Perhaps the ultimate lesson of China's industrial policy for the rest of the world is “pragmatism.”
A full transcription of China's industrial policy is unwise, and a full subordination to the “disengagement” currents between the US and China is not a solution. Instead, governments should look inward to identify and develop their own competitive advantages. By definition, China does not have a competitive advantage in every sector. And countries can make pragmatic choices to strategically position their economies as indispensable nodes in the global supply chain.
This requires strategic clarity—identifying sectors where national capacity is non-negotiable, while maintaining openness to global trade and resisting trade policy being dependent on the interests of domestic producer groups. Economies that will thrive are those that are able to maintain strategic flexibility and political focus, and navigate geopolitical rivalry without compromising long-term economic resilience.
East Asia Forum (EAF) Editorial Board - Crawford School of Public Policy, Australian National University.
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