Old Rules, New Reality: How Industrial Policy Is Shaking the Foundations of Global Trade

Old Rules, New Realities: How Industrial Policy Is Shaking the Foundations of Global Trade

Once seen as a symbol of protectionism, industrial policy is now undergoing a profound revival around the world. From green-industry support to address climate change, to strategic deployments to secure critical supply chains and energy security, to economic development goals of creating jobs and nurturing new industries, government intervention in specific sectors has once again become the norm. This shift is no accident; it reflects the multiple challenges facing the global economy in the 21st century: intensified climate crisis, geopolitical fragmentation, supply chain risks, and the rise of the Global South. Yet, as these new industrial policies become increasingly intertwined with national strategies, a fundamental question emerges: Can the rules of the World Trade Organization (WTO), born out of the free-market consensus of the 1990s, still effectively accommodate and regulate today's reality?

The Legacy of 1990s Rules: The Limits of the Washington Consensus

The global trading system of the 1990s was shaped by the Washington Consensus, whose core belief was that markets, not governments, drive efficiency and growth. Subsidies, local content requirements, and state intervention were seen as market distortions rather than tools for structural transformation. The trade rules of that era emphasized tariff reduction and comparative advantage, paying little attention to climate, sustainable development, or economic resilience. The WTO's rule framework was built on this basis, assuming that free trade itself would bring universal prosperity and that governments merely needed to provide stable boundary conditions for markets.

However, the world of 2026 is completely different. Climate change has become a central issue in trade discussions, geopolitical tensions have returned, and countries' priorities have shifted toward supply chain security, strategic autonomy, and industrial resilience—often at the expense of comparative advantage. The United States, the European Union, and China are all established industrial powers, with other emerging economies following suit. Against this backdrop, countries have begun to re-examine their policy toolkits, only to find that WTO rules seem rooted in a bygone era.

Tensions Between Five Policy Tools and the Rules

The core tools of industrial policy include subsidies, local content requirements, export restrictions, import tariffs, and technology transfer. Each one creates friction with existing WTO rules to varying degrees.

Subsidies: Subsidies are an important tool for industrial development and green transition, but WTO rules prohibit export subsidies and local-content subsidies, and allow challenges against other members' measures that cause adverse effects. In a rapidly evolving global economy, some countries want to expand subsidies for the green digital transition while avoiding overcapacity and trade distortions; countries with limited fiscal space, however, face a different dilemma: how to support strategic industries under existing disciplines without a clear path. The expiration of Article 8 of the WTO Subsidies Agreement removed provisions on positive externalities of subsidies (such as climate mitigation and carbon reduction), prompting questions about whether the current framework can provide more policy space for green subsidies.Local content requirements: Such measures require enterprises to purchase a certain proportion of goods or services locally, and are often used to promote domestic manufacturing and employment. However, WTO rules on national treatment, investment, and subsidies restrict preferential treatment for local products, leaving such policies in a gray area under current rules. As supply chain risks rise, more and more countries want to use local content requirements to protect domestic industries, making the adaptability of existing rules a focal point of controversy.

Export restrictions: Countries use export restrictions to ensure domestic supply of key resources (such as agricultural products or critical minerals), prevent shortages, or stabilize prices. WTO rules in principle discourage export restrictions unless they are temporary and fully justified. However, when resource-rich countries rely on export restrictions to address supply chain risks, geopolitical pressures, and the green technology race, the question arises: should the rules be updated to take into account the needs of resilience, strategic autonomy, and fair access to essential inputs?

Import tariffs: Tariffs have long been a commonly used policy tool for countries, serving to increase fiscal revenue or protect domestic industries. The WTO allows members to impose tariffs within their commitments. However, global competition and geopolitical tensions today have driven increased use of tariffs, with some countries believing that the bound tariff rates negotiated thirty years ago cannot cope with current economic realities. Yet more countries cherish the predictability of bound tariffs, which is vital to the multilateral trading system.

Technology transfer: For developing countries and least developed countries, technology transfer is key to promoting indigenous innovation, attracting long-term investment, and building local capacity. However, forcing foreign enterprises to share knowledge or intellectual property is seen as unfair, may conflict with WTO intellectual property and investment rules, and may inhibit innovation. On the other hand, simply purchasing technology is costly for many countries. As green technology and digital infrastructure evolve rapidly, how to use trade policy to both support innovation and ensure fair access has become a core issue for developing countries.

The mismatch between multilateral rules and emerging realities

The above five tools highlight the inherent contradictions in the current WTO system. The rules assume that government intervention is distortion, whereas today's reality is that government intervention is regarded as a necessary response to market failures, especially in addressing climate change and securing strategic industries. This mismatch leaves countries often facing legal uncertainty when adopting industrial policies, and also affects the predictability of global markets.

In this context, a series of informal dialogues and structured discussions is underway within the WTO, such as the Structured Discussions on Trade and Environmental Sustainability (TESSD), providing members with a space to share experiences, examine emerging challenges, and consider reforms. The 14th Ministerial Conference (MC14), to be held in 2026, is seen as a key opportunity that may pave the way for reconciling industrial policy and trade rules. However, the road to reform is not smooth, with clear divergence among parties over "more rules" or "fewer rules."

The European perspective: green transition and strategic autonomy For Europe, the return of industrial policy is not an abstract concept but a core pathway critical to the realization of the Green Deal and strategic autonomy. The EU is advancing a large-scale green transition, from renewable energy deployment to clean technology manufacturing, all of which require government support and guidance from industrial policy. However, the EU is also bound by WTO rules and needs to find a balance between climate ambition and trade discipline.

The EU has demonstrated its support for green industries through policies such as the Carbon Border Adjustment Mechanism (CBAM) and the Net-Zero Industry Act, but whether these policies are compatible with WTO rules has always been a sensitive point of international controversy. More broadly, European companies face an uneven competitive environment globally: some countries are able to heavily subsidize their industries, while Europe has relatively limited policy space due to fiscal constraints and state aid rules. This has prompted Europe, while embracing industrial policy, to also call for international cooperation to avoid subsidy races and trade fragmentation.

Europe's position is that industrial policy is not protectionism but a tool for achieving public objectives, and it must be built on the basis of international cooperation. This stance has driven the EU to play a constructive role in WTO reform, advocating for more space within international rules for green subsidies and supply chain resilience, while also guarding against market distortions caused by excessive abuse.

International Discussions and Prospects for Reform

Countries differ greatly in their choices regarding industrial policy, but the common challenge is that existing rules cannot effectively manage the cross-border effects of these policies. At forums such as MC14, members have begun to discuss the possibility of a middle path: allowing a certain degree of policy space while establishing guardrails to prevent harmful competition. For example, consideration could be given to setting clear rules for green subsidies, or establishing transparency and review mechanisms for export restrictions.

However, reform has progressed slowly. The political diversity of the multilateral system means that universal consensus is difficult to achieve. At the same time, regional trade agreements and bilateral agreements may become testing grounds for rule innovation. Europe is increasingly incorporating sustainable development provisions and industrial policy-related content into its trade agreements; although imperfect, this represents the way forward.

Conclusion: The Necessity of Rule Restructuring

The return of industrial policy is not a temporary trend but a demand for fundamental adaptation of the global trading system. WTO rules were designed in a different era, and their market fundamentalist tendency is no longer compatible with the complex realities of climate, security, and development today. Whether it is subsidies, local content, or technology transfer, more nuanced international coordination and rule updates are needed to ensure that countries have the policy space to achieve public objectives while avoiding beggar-thy-neighbor policy escalation.

Although Europe faces pressure, it has also demonstrated adaptability. By actively participating in WTO reform and promoting cooperation at the regional level, the EU has the opportunity to shape a set of global trade rules that are more resilient and sustainable. Old rules cannot cope with new realities, but new rules will not emerge automatically. The international community needs actors like Europe that value multilateral mechanisms to actively drive change, in order to prevent the trading system from falling apart and to provide a stable institutional foundation for green transition and inclusive development.