Social post · read 1 August 2026

Glenn Luk

Did Western Countries Use Industrial Policy Before China?

A historical look at how Western economies used tariffs, subsidies, procurement, and state direction to build industries of their own.

How this note was made

This grew out of a conversation with ChatGPT after I worked through the source above. I asked the questions and reviewed the result; the source remains the authority where the note is incomplete or wrong.

Why I asked for this

A lot of people complain that China is using industrial subsidies and other forms of industrial policy to promote its own industries, create national champions, and so on. A lot of people accuse China of this. But is it fair to say that, throughout history, Western countries have done the same? Is this documented?

Here is ChatGPT’s answer

Yes. It is extremely well documented that most of today’s rich Western countries used tariffs, subsidies, state-directed finance, public procurement, infrastructure spending, technology policy, government-backed research, colonial preferences, and other forms of industrial policy while building their own industries.

The idea that Western countries became rich through immaculate free markets, while China alone has distorted an otherwise neutral global market through state support, is historically untenable.

But the most defensible answer needs two qualifications.

First, the fact that a country used protection or subsidies while industrialising does not by itself prove that those policies caused its success. Economic historians continue to debate which interventions worked, which were incidental, and which imposed costs.

Second, China is not necessarily doing exactly what Britain, the United States, France, Germany, Japan, or South Korea did. The broad instruments are familiar, but China’s economic size, administrative structure, state-owned banking system, local-government incentives, integration into global supply chains, and ability to affect world prices make its present-day industrial policy distinctive.

The fairest conclusion is therefore:

China did not invent state-supported industrialisation. Nearly every successful industrial power used the state to develop industries, acquire technology, build infrastructure, create markets, and protect or finance domestic firms. What may be unusual about China is not the existence of industrial policy, but its scale, institutional form, opacity, coordination, and international spillovers.

1. What counts as industrial policy?

Industrial policy is broader than giving a factory a cheque. It includes deliberate government action intended to alter the structure of production, accelerate technological development, build particular capabilities, or favour selected industries, activities, regions, or firms.

The instruments can include:

Import tariffs and quotas
Direct production or investment subsidies
Preferential loans and loan guarantees
State-owned or state-influenced banks
Public procurement
Export credit and export promotion
Research grants and public laboratories
Infrastructure built for particular industries
Tax concessions
Local-content rules
Technology-transfer requirements
State-owned enterprises
Government-backed training and technical education
Protection of infant industries
Military, energy, health, or climate programmes that indirectly create commercial technologies

This matters because Western industrial policy has frequently been hidden under other labels: defence policy, agricultural policy, regional development, science funding, infrastructure, energy security, or national security. China’s assistance is often described as “industrial policy,” while comparable Western measures may be described as “innovation,” “resilience,” “strategic investment,” or “research support.”

The World Bank’s Industrial Policy for Development now treats industrial policy as a toolbox containing many more instruments than tariffs and cash subsidies.

2. The historical evidence

Britain

Britain is often remembered as the birthplace of free trade. But Britain embraced broad trade liberalisation only after it had become the world’s leading industrial and naval power.

Before that, it used:

The Navigation Acts, which reserved important parts of British and colonial trade for British ships
Tariffs and prohibitions on manufactured imports
Colonial trading monopolies
Restrictions on colonial manufacturing
State procurement, especially through the Royal Navy
Government-supported infrastructure and imperial trading networks
Restrictions on the export of machinery and the emigration of skilled workers

Britain’s rise cannot be reduced to protectionism. Coal, wages, finance, institutions, empire, scientific culture, overseas markets, and technological innovation all mattered. But the image of early industrial Britain as a laissez-faire economy is misleading.

The nineteenth-century German economist Friedrich List famously argued that Britain had used protection and state power during its ascent and then promoted free trade once it had become dominant. Ha-Joon Chang later popularised this as “kicking away the ladder” in Kicking Away the Ladder: Development Strategy in Historical Perspective.

The United States

The American case is especially explicit.

Alexander Hamilton’s 1791 Report on Manufactures recommended tariffs, subsidies or “bounties,” support for inventions, infrastructure, and government assistance for industries considered important to national development.

Throughout much of the nineteenth century, the United States maintained high tariffs. It also used:

Public land grants and financing for railroads
Canal and port construction
Government procurement
Patent protection
Agricultural colleges and technical education
Military purchasing
Publicly supported scientific research

Douglas Irwin’s U.S. Trade Policy in Historical Perspective documents how tariffs served different purposes across American history: revenue, protection, and later reciprocity.

After the Second World War, American industrial policy became less tariff-centred but no less consequential. Defence procurement and federal research helped create or accelerate:

Semiconductors
Computers
Jet aviation
Satellites
Nuclear energy
The internet
GPS
Biotechnology
Pharmaceuticals
Advanced materials

Institutions such as the Department of Defense, NASA, the National Institutes of Health, the National Science Foundation, DARPA, and the national laboratories created technologies, markets, and demand that private firms later commercialised.

The United States therefore did not stop practising industrial policy. It often stopped calling it industrial policy.

France

Post-war France practised an explicit form of state-led development usually called dirigisme. The state used:

Indicative planning
Nationalised enterprises
State-influenced banks
Directed credit
Public procurement
Research programmes
Infrastructure investment
Deliberate creation of large firms in strategic sectors

This system helped develop nuclear power, high-speed rail, aerospace, telecommunications, and defence industries.

Projects such as the TGV, Ariane, Concorde, Airbus, and France’s nuclear power system were not products of laissez-faire competition alone.

Germany

Germany’s industrialisation involved tariffs, public infrastructure, technical education, research universities, military procurement, and close links among banks, firms, and government.

Friedrich List’s The National System of Political Economy offered one of the foundational arguments for protecting infant industries until they could compete with established foreign producers.

Later Germany built a dense institutional system including development banks, vocational training, applied-research institutes, export finance, and regional industrial support. The modern KfW development bank and Fraunhofer institutes are examples of institutions that support productive investment and technological diffusion without necessarily taking the form of crude protectionism.

The European Union

The European Union and its member states have supported agriculture, aerospace, energy, transport, semiconductors, research, and regional development.

Airbus is the obvious example of a deliberately constructed European champion. European governments provided launch aid, procurement, research support, and political coordination to create a competitor to established American aircraft manufacturers.

The Airbus–Boeing dispute is also a useful reminder that both sides subsidised their aerospace industries through different mechanisms. European support was often more visible as direct launch aid; American support frequently operated through defence contracts, tax treatment, and publicly funded research.

The Nordic countries

The Nordic economies are sometimes portrayed as free-market economies with generous welfare states but little industrial activism. In reality, governments played substantial roles in infrastructure, electrification, natural-resource development, export finance, telecommunications, research, and coordination between firms, banks, and labour institutions.

Their policies were generally less centred on permanent protection of inefficient firms and more centred on capability-building, social insurance, training, and exposure to export competition.

Canada and Australia

Canada and Australia also used tariffs and preferences to encourage domestic manufacturing. Both later liberalised substantially when protected industries became costly or uncompetitive.

These examples are useful because they illustrate the mixed record of industrial policy. Protection can help create productive capabilities, but it can also preserve small, inefficient industries that never become internationally competitive.

3. Industrial policy outside the West

The comparison should not stop with Western Europe and the United States.

Japan, South Korea, Taiwan, and Singapore used different combinations of:

Directed credit
Import protection
Export discipline
Technology acquisition
Public enterprises
Sectoral targeting
Subsidised investment
Government-business coordination
Education and infrastructure
Performance requirements

Chalmers Johnson’s MITI and the Japanese Miracle documented the role of Japan’s Ministry of International Trade and Industry.

Alice Amsden’s Asia’s Next Giant: South Korea and Late Industrialization emphasised that South Korea used subsidies and protection but often imposed performance standards on recipients.

Robert Wade’s Governing the Market argued that East Asian governments did not merely “get prices right”; they deliberately shaped markets and investment.

The East Asian record is central to the modern industrial-policy debate because these states often tied support to export performance, technological upgrading, investment, and productivity. Firms were not simply protected forever from competition. At least in the more successful cases, assistance was conditional, monitored, and accompanied by pressure to compete internationally.

4. The foundational economic arguments

4.1 The infant-industry argument

The infant-industry argument is associated with Alexander Hamilton and Friedrich List, and later formalised in economics.

Its logic is simple. A new domestic industry may initially have higher costs than established foreign competitors because it lacks experience, scale, suppliers, skills, and technology. Temporary protection or support can allow it to learn and become competitive.

The strongest version of the argument requires more than “young firms need help.” It requires a market failure. For example:

A firm’s learning benefits other firms, but the original firm cannot charge them for it.
Workers trained by one company may later move elsewhere.
Suppliers learn capabilities that spread across an industrial cluster.
Private investors may not finance a project whose broader social benefits exceed its private returns.
Several complementary investments may all be needed simultaneously.

The classic warning is that “temporary” support can become permanent. Governments may protect firms that never become efficient, while politically connected companies learn to lobby rather than innovate.

4.2 Learning by doing

Kenneth Arrow’s foundational paper “The Economic Implications of Learning by Doing” argued that productive experience itself generates knowledge and efficiency.

This gives industrial policy a possible rationale. If firms or workers become more productive through production, and some of that knowledge spills over to the rest of the economy, markets may underinvest in activities with high learning potential.

Robert Lucas’s “On the Mechanics of Economic Development” similarly emphasised human-capital accumulation and external effects as possible engines of persistent growth.

4.3 Coordination failures and the “big push”

Paul Rosenstein-Rodan’s “Problems of Industrialisation of Eastern and South-Eastern Europe” developed the “big push” argument.

A factory may be unprofitable if it operates alone because there are no suppliers, trained workers, transport links, power systems, or consumers with sufficient income. But a collection of industries may be viable if they develop together.

Kevin Murphy, Andrei Shleifer, and Robert Vishny formalised this reasoning in “Industrialization and the Big Push”. Their model shows how coordinated investment can move an economy from a low-industrialisation equilibrium to a higher one.

Industrial parks, ports, power networks, supplier ecosystems, and training programmes can therefore matter as much as direct subsidies.

4.4 Economic development as self-discovery

Ricardo Hausmann and Dani Rodrik’s “Economic Development as Self-Discovery” offers one of the most influential modern rationales for industrial policy.

An entrepreneur who discovers that a country can profitably make a new product bears the cost of experimentation. But once the discovery is made, other firms can imitate it. The pioneering firm therefore captures only part of the social value of its experiment.

This can lead to too little experimentation and diversification.

The policy implication is not that the government can perfectly predict the next winning industry. It is that governments may need to share the cost of discovery, learn alongside firms, and withdraw support from failures.

4.5 What a country produces may matter

Hausmann, Jason Hwang, and Rodrik’s “What You Export Matters” argued that countries exporting goods associated with higher productivity tend to grow faster, even after accounting for income and other characteristics.

This challenged the idea that the composition of production is irrelevant as long as markets allocate resources efficiently.

The later “product space” literature, including Hidalgo, Klinger, Barabási, and Hausmann’s “The Product Space Conditions the Development of Nations”, argues that development is path-dependent. Countries more easily move into products that require capabilities similar to those they already possess.

Industrial policy may therefore be less about choosing a miraculous sector from scratch and more about helping firms move into adjacent, more complex activities.

5. The sceptical economic literature

The existence of historical industrial policy is not disputed. Its effectiveness is.

Douglas Irwin and the American tariff debate

Douglas Irwin examined whether high nineteenth-century American tariffs actually caused rapid industrial growth.

In “Did Late-Nineteenth-Century U.S. Tariffs Promote Infant Industries? Evidence from the Tinplate Industry”, Irwin finds that the McKinley tariff helped establish domestic tinplate production. But the welfare case is less straightforward: consumers paid higher prices, and the industry’s learning benefits had to be large enough to justify those costs.

In “Tariffs and Growth in Late Nineteenth Century America”, he questions the broad claim that high tariffs explain America’s rapid growth. The United States had abundant land and resources, high investment, population growth, technological change, and an enormous domestic market. Tariffs may have changed the composition of production without being the primary cause of overall growth.

This is an essential qualification to “kicking away the ladder.” Rich countries used protection, but the historical correlation between tariffs and industrialisation does not prove that protection produced prosperity.

Pack and Saggi’s critical survey

Howard Pack and Kamal Saggi’s “Is There a Case for Industrial Policy? A Critical Survey” reviews the theoretical justifications and empirical evidence.

They accept that market failures can create a theoretical case for intervention. Their scepticism concerns implementation and proof:

Governments may lack the information needed to identify high-spillover activities.
Firms may exaggerate the assistance they need.
Support can be captured by politically connected incumbents.
Successful sectors may have succeeded for reasons other than targeting.
Failed interventions are often forgotten while successful examples are celebrated.

Their paper is valuable precisely because it does not argue that market failures are imaginary. It asks whether actual states can correct them reliably enough to outperform imperfect markets.

Government failure and rent-seeking

Anne Krueger’s “The Political Economy of the Rent-Seeking Society” showed how trade restrictions and licences can generate valuable rents that firms spend resources trying to capture.

This changes the political economy of protection. Instead of learning to become competitive, firms may learn to lobby, bribe, or build coalitions that preserve support.

The relevant comparison is therefore not between a perfect government and an imperfect market. It is between two imperfect systems:

Markets can underinvest in learning, coordination, research, and new capabilities.
Governments can misallocate resources, protect incumbents, and be captured by organised interests.

6. The modern middle ground

Dani Rodrik’s “Industrial Policy for the Twenty-First Century” reframed the debate.

Rodrik argues that the central problem is not whether governments can perfectly pick winners. Governments already influence economic structure through infrastructure, regulation, procurement, education, trade policy, and research.

The practical question is how to organise a process of discovery between the public and private sectors.

His preferred approach includes:

Continuous dialogue with firms without allowing capture
Support aimed at activities and capabilities rather than permanent protection of particular companies
Clear objectives
Monitoring and measurable benchmarks
Sunset clauses
Willingness to terminate failures
Public accountability
Institutions that learn from mistakes

Réka Juhász, Nathan Lane, and Dani Rodrik’s The New Economics of Industrial Policy surveys the newer empirical literature. It argues that research has moved beyond the old “pick winners versus let markets work” caricature.

The newer literature examines concrete interventions, including:

Historical protection
Place-based policies
Public research
Export promotion
Defence procurement
Training
Infrastructure
Sector-specific support

Their survey finds credible evidence that some interventions have persistent effects on industrial location, employment, productivity, and technological development. But effects vary enormously with policy design and institutional capacity.

Nathan Lane’s “Manufacturing Revolutions: Industrial Policy and Industrialization in South Korea” uses modern empirical methods to study South Korea’s Heavy and Chemical Industry drive. It finds that targeted industries expanded substantially and that effects persisted after the policy ended, with evidence of productivity and supply-chain spillovers. This is among the stronger recent pieces of causal evidence that well-implemented industrial policy can transform production.

The modern middle ground is not “industrial policy always works.” It is:

Market failures are real, government failures are real, and the effectiveness of industrial policy depends on the specific instrument, institution, objective, discipline, and context.

7. National champions

Governments have repeatedly tried to create or support national champions.

Examples include:

Airbus in European aerospace
Boeing through defence and space procurement
France’s nuclear and rail industries
Japan’s automobile and electronics industries
South Korea’s chaebol in steel, shipbuilding, automobiles, and electronics
American semiconductor and aerospace firms
European telecommunications and energy firms

National champions can achieve scale, absorb large fixed costs, coordinate supply chains, and compete in industries where entry is difficult.

But they can also become politically protected monopolies. A national champion may be nationally important without being internationally competitive. The state may then face pressure to keep subsidising it because failure becomes politically embarrassing.

The central issue is not whether a champion received support. It is whether support built genuinely competitive capabilities and whether the firm was exposed to meaningful discipline.

8. Is Western criticism of China hypocritical?

Sometimes, clearly yes.

It is hypocritical when the argument is:

Western companies succeeded through markets, entrepreneurship, and innovation, whereas Chinese companies succeed only because of the state.

Western history does not support that distinction. Western governments shaped markets, financed technologies, protected producers, created infrastructure, and purchased enormous quantities of strategic goods.

It is also selective to call a Chinese concessional loan a subsidy while treating an American defence contract, European launch aid, agricultural support, a tax credit, a government loan guarantee, or publicly funded pharmaceutical research as categorically different.

The global return of industrial policy makes the asymmetry even harder to defend. The World Bank notes in “The Renaissance of Industrial Policy” that the use of industrial-policy measures rose sharply after 2017 and that advanced economies accounted for a large share of new measures.

The United States’ CHIPS and Science Act, clean-energy tax credits, defence production policies, and tariff measures are industrial policy. European semiconductor, battery, green-technology, and energy programmes are industrial policy.

The West is not standing outside industrial policy and objecting to China’s use of it. It is increasingly practising industrial policy while arguing over what forms should be permissible.

9. Why criticism of China can still be legitimate

Historical hypocrisy does not automatically invalidate every contemporary complaint.

Scale

China is large enough that support for domestic production can alter world prices, capacity, investment, and the survival of firms in other countries.

An intervention in a small economy may mainly affect its domestic market. A similar intervention in China can reshape a global industry.

Multiple, overlapping channels

Chinese support can operate through:

Central and local governments
State-owned banks
State-owned enterprises
Preferential land access
Energy pricing
Tax concessions
Procurement
Credit guarantees
Research support
Infrastructure
Equity investment
Regulatory preferences

The difficulty is not merely that support exists, but that its total value can be hard to measure.

The OECD’s work on government support in industrial sectors emphasises that industrial subsidies are notoriously difficult to quantify because assistance can be indirect and disclosure incomplete.

Global overcapacity

Support can be development-enhancing when it creates a viable industry, lowers technology costs, or corrects a genuine market failure.

But if firms continue expanding because losses are repeatedly socialised, production can exceed plausible demand. That can depress world prices, force unsubsidised competitors out, and shift the adjustment cost onto workers and firms elsewhere.

The difficult question is distinguishing:

Efficient scale and rapid productivity growth
Aggressive but legitimate competition
Temporary excess capacity in a cyclical industry
Structurally subsidised overproduction

These are empirical questions, not conclusions that follow merely from observing low Chinese prices.

International rules

Britain and the United States industrialised before the WTO existed. China developed within a trading system whose members accepted rules concerning subsidies, discrimination, and trade remedies.

Historical precedent explains why countries use industrial policy. It does not settle whether a specific present-day policy complies with agreed rules.

At the same time, existing trade rules were largely designed during an era when industrial policy was unfashionable. They do not always distinguish well between socially useful interventions—for climate change, resilience, or innovation—and beggar-thy-neighbour subsidies.

Political and institutional structure

China’s party-state, state-owned financial system, industrial planning, and local-government incentives allow coordination that differs from the more fragmented policy processes of many Western democracies.

That can increase China’s ability to mobilise resources and build infrastructure quickly. It can also produce duplication, soft budget constraints, politically driven investment, and difficulty withdrawing support.

10. What history does and does not prove

History establishes several points firmly:

Western industrialisation was not a laissez-faire process.
Rich countries used many of the same broad instruments now associated with China.
States have repeatedly created markets, firms, technologies, and productive capabilities.
Advanced economies continue to use industrial policy.
The language used to describe intervention is politically selective.

History does not establish that:

Every tariff or subsidy is beneficial.
Western industrialisation happened primarily because of protection.
China’s current policies are harmless.
Historical use creates an unlimited right to subsidise exports today.
Governments can reliably identify winning technologies or firms.
Industrial policy can substitute for good institutions, competition, education, infrastructure, or macroeconomic stability.

11. A useful way to judge industrial policy

Instead of asking only whether a subsidy exists, ask:

What market failure is being addressed?

Is the policy meant to create learning spillovers, coordinate complementary investments, support research, reduce emissions, improve resilience, or solve a financing constraint?

Why is this instrument appropriate?

Would infrastructure, research funding, training, carbon pricing, competition policy, or broad investment incentives work better than protecting one firm?

Is support conditional?

Are firms required to invest, export, innovate, train workers, reduce costs, or meet technical milestones?

Is there competition?

Supporting several competing firms is generally safer than creating an untouchable monopoly.

Can failures be terminated?

A government that cannot withdraw support does not have an industrial policy so much as a permanent liability.

Who captures the gains?

Does public assistance produce public benefits, or are profits privatised while losses are socialised?

What are the international spillovers?

Does the policy create useful technology and lower global costs, or shift unemployment and excess capacity onto trading partners?

Is the policy transparent?

Opaque finance makes it harder to distinguish genuine capability-building from political patronage or hidden dumping.

12. Bottom line

Yes, it is fair—and historically necessary—to say that Western countries used industrial policy, subsidies, protection, public finance, procurement, and state power to build industries and national champions.

This is documented across the economic history of Britain, the United States, France, Germany, and the wider European economy. It is even more visible in the development of Japan, South Korea, and Taiwan.

The strongest version of the argument, however, is not:

The West did it, so China can do whatever it wants.

It is:

Industrial development has almost never been a purely market-led process. Western countries used the state extensively and continue to do so. China’s industrial policy should therefore be assessed not against a fictional laissez-faire Western past, but against the actual historical record—and then evaluated on its design, scale, transparency, domestic benefits, global spillovers, and compliance with international rules.

Western criticism is justified when it identifies specific harmful practices and demonstrates their effects. It becomes misleading when it treats all state support as uniquely Chinese, ignores functionally equivalent Western policies, or pretends that Western industrial power emerged without protection, public investment, procurement, and technological direction.

Selected reading