Everything Is Industrial Policy: How China’s Second-Generation Industrial Strategy Is Rewriting the Global Dependency Structure

At the end of 2015, the U.S. Chamber of Commerce translated a Chinese planning document into English. The document is commonly known in China as the “Green Book,” and its content was the localization goals and strategic roadmap of “Made in China 2025.” The translation was widely distributed to companies, governments, and major research institutions in various countries, and became the common base text for a series of independent assessments that followed.

Within a year, three reports were released in succession: the Mercator Institute for China Studies (MERICS) in 2016, the European Union Chamber of Commerce in China in 2017, and the U.S. Chamber of Commerce in 2017. Their wording differed, but their judgments were highly consistent—if China succeeded, foreign companies and industrial nations would face a competitor armed with large-scale state support; markets could be distorted, foreign competitors could be squeezed out, and the principle of fair competition could be fundamentally weakened.

A decade later, an assessment completed by Rhodium Group for the U.S. Chamber of Commerce in May 2025 reached an uncomfortable conclusion: that trajectory had largely been borne out. The report’s preface was rather restrained—the warnings of that time “were not alarmist; if there was any deviation, it was on the conservative side.”

This constitutes the true starting point for understanding the current round of industrial policy. The problem is not whether the world lacked information. Information was ample, judgments were consistent, and warnings reached the governments and senior industry leaders of major economies. The real question is: when intelligence was not lacking, why was action still slow?

From “Selected Industries” to an All-Encompassing Industrial Policy

“Made in China 2025” focused on a clearly defined group of strategic emerging industries. The current policy framework is no longer satisfied with that kind of selectivity. It covers mature industries, foundational supply chain nodes, and frontier technologies at the same time, extending from upstream inputs and industrial equipment all the way to downstream applications, services, and future industries. In the report’s words, this is a shift from “sectoral intervention” to “everything is industrial policy.”

The driving force behind this shift is not a negation of the past decade, but a confirmation of its success. China’s decision-making circles tend to believe that earlier policies were generally effective in building domestic capabilities and global competitiveness, while clearly aware that technological dependence remains in high-end inputs. The strategy is therefore not to abandon mature industries, but to push them toward higher value-added segments; not to withdraw from upstream, but to replicate the dominant position already achieved upstream—critical minerals, silicon wafers, and magnetic materials—across a broader range of industrial products.

Worth noting is the approach to overcapacity. Even in mature industries facing overcapacity and severe price pressure, the policy orientation remains one of continued support and pushing enterprises to upgrade production technologies to compete for market share and lower production costs, rather than cutting capacity. The relevant authorities acknowledge the need to address imbalances, but the policy response to date has not touched the structural reforms needed to transform the growth model; efforts to boost consumption also remain limited, and underlying weak demand has not been truly addressed.

The State Begins to Create DemandThe service sector, relatively overlooked in previous rounds of industrial policy, has now gained more attention. Visible progress has emerged in fields such as software, data processing, and drug R&D. But the more emblematic change is occurring at the commercialization stage of technology.

Artificial intelligence, quantum technology, and future energy systems are seen as “time windows” that must be seized. These fields are no longer treated merely as R&D and innovation issues. Public procurement and state-owned enterprises are beginning to take on a more direct role: creating demand for new products and driving adoption at scale. Artificial intelligence is the core pillar of this shift, and broader demand creation means that policymakers are willing to pay for the commercialization of frontier technologies—a substantive step forward compared with the past.

In other words, the focus of industrial policy is extending from the supply side to the demand side. Subsidies address “whether it can be made,” while procurement addresses “to whom it can be sold once made.” In an economy with weak domestic demand and rising capacity pressure, the latter is often the bottleneck.

Recentralization Under Constraints

This round of expansion is taking place in a tighter macroeconomic environment. Slowing growth, weak domestic demand, rising fiscal pressure, and declining efficiency of capital allocation are all simultaneous constraints.

Beijing’s choice is not to shrink intervention, but to change how intervention is organized: adapting to constraints through recentralization and tighter coordination of financial resources. Control over fiscal spending, bank credit, capital markets, and state investment funds is being strengthened to ensure that scarce resources are directed toward strategic priorities. Government guidance funds are being consolidated and aligned more closely with national goals; bank credit is increasingly directed through targeted relending tools and regulatory guidance; wasteful or duplicative tax and fee subsidies are being cleaned up, especially at the local level.

The long-term implications here deserve separate mention: after decades of marketization, non-market considerations are being written back into the operating logic of banks, state-owned enterprises, and investment markets. This arrangement may extend the effective duration of industrial policy, but it will leave long-term consequences for the vitality and efficiency of the Chinese economy as a whole.

Diluted Effectiveness: The Internal Tension Within Policy Itself

The broader the coverage, the more likely effectiveness is to be diluted. This is the most easily overlooked internal contradiction of second-generation industrial policy. When almost all industries are brought into the strategic vision, strategic prioritization itself loses its screening function.

At the same time, the state’s rising influence over financial markets may further reduce the efficiency of resource allocation. Signs of strain are already visible: declining corporate profitability, weakening private investment, and slowing R&D growth in key industries. In the short term, these variables may not necessarily weaken the momentum of industrial policy, but over time they may drag down productivity and long-term growth potential—even if they can still support progress at the industry level in the short run.

In other words, this round of policy is not without costs; it is just that the cost-accounting cycle is longer than the political cycle.

The Second China Shock: From Surplus to DependenceFor the outside world, what matters more is that the spillover pattern of this round of policy is changing. Over the past three years, the global impact generated by China’s industrial and economic policies has clearly accelerated, and it is likely to continue expanding rapidly.

The combination of sustained policy support and weak domestic demand has driven a rapid expansion of the manufacturing goods trade surplus, which many observers call the “second China shock.” According to the report, since 2019, the manufacturing goods trade surplus has roughly doubled to about $2 trillion, driven by both rising exports and successful import substitution. The report expects this trend to continue.

But the surplus is only the surface. The deeper change lies in the structure of dependence: foreign reliance on Chinese supply chains is deepening, and Chinese firms’ global expansion is accelerating. At the same time, Beijing is increasingly using policy tools to consolidate its dominant position in global value chains and to hedge against other countries’ diversification strategies. This has structural policy implications—other countries’ efforts to reduce their dependence have themselves become targets.

This mode of interaction differs from traditional trade friction. It does not mainly occur on tariff schedules, but in supply-chain node selection, the hedging of investment screening, and the availability of critical inputs.

Exposure Is Not the New Problem—the Window for Action Is

As early as 2016, MERICS’s “Made in China 2025” heat map had already visualized the exposure of major manufacturing powers—South Korea, Japan, Germany, and other European industrial economies. Ten years later, those anticipated competitive dynamics and supply-chain shifts have largely become inherent features of the global industrial landscape.

What also needs to be fully presented is the other half of the picture: in the most technologically challenging fields—high-end semiconductors, advanced aerospace, biomedicine, and others—Chinese firms have not yet closed the gap. This is not a story of total victory, but a state-led industrial campaign—one that achieved many core goals and also fell short in some of the most technically demanding areas.

And what may be most worth recording is the meta-assessment of this history. The report’s preface candidly acknowledges that the challenges today’s world faces did not stem from an intelligence gap. Translations existed, reports were published, warnings reached the upper levels of major economies’ governments and industries. But in too many cases, the response was inadequate—whether because of competing issues, political constraints, or a belief that market forces alone would suffice as a counterbalance. The cost of this delay is now reflected in lost competitiveness, weakened industrial capacity, and strategic vulnerabilities that require long-term investment to repair.

The lesson from ten years ago is really just one sentence: when credible analysis already exists and the trajectory is clearly visible, the window for effective action is limited.What is unique about second-generation industrial policy is precisely that it makes this window harder to exploit in any simple way. Faced with a subsidy project, tariffs and countervailing duties can respond; faced with an entire rewritten set of resource allocation mechanisms—from fiscal policy, credit, and capital markets to the procurement behavior of state-owned enterprises—the effectiveness of the traditional toolkit needs to be reassessed. This is where the true weight of “everything is industrial policy” lies.