The new map of industrial power

US subsidies, Chinese overcapacity, and Europe's bet on regulation. Three strategies for the same future — and only one of them is untested.

By VastBlue Editorial · 2026-03-26 · 11 min read

Series: The Chessboard · Episode 1

The return of the factory

For three decades, the consensus was settled. Manufacturing was something rich countries did less of and poor countries did more of, and this was called progress. The comparative advantage doctrine — first articulated by David Ricardo in 1817, refined by Heckscher and Ohlin a century later, and enshrined as near-religious orthodoxy in the economics departments of every major Western university — held that nations should specialise in what they did best and import the rest. If Chinese labour could assemble electronics at a fraction of the cost of American or German labour, then Chinese factories should assemble electronics, and American and German workers should move into services, software, finance, design — the higher-value activities that justified higher wages. The factory floor was not lost. It was transcended.

This story was elegant, internally consistent, and broadly believed by the people who made policy. It also rested on assumptions that the last six years have systematically demolished. It assumed supply chains were resilient. They were not — a single container ship wedged in the Suez Canal in March 2021 cost the global economy an estimated $9.6 billion per day. It assumed geopolitical stability. It did not get it — Russia's invasion of Ukraine in February 2022 rewired European energy markets overnight, revealing that thirty years of gas dependency on a single authoritarian supplier was not interdependence but vulnerability with extra steps. It assumed that trade partners would remain trade partners. They did not — the US-China tariff escalation that began in 2018 and has only intensified since has turned the world's most important bilateral economic relationship into something closer to managed hostility.

The result is a phenomenon that would have been considered economically illiterate a decade ago: the world's three largest economic blocs are all, simultaneously, pursuing aggressive industrial policy. Not trade policy. Not regulatory adjustment. Industrial policy — the deliberate use of state power and state capital to determine what gets manufactured, where it gets manufactured, and by whom. The United States calls it the Inflation Reduction Act. China calls it Made in China 2025, and its various successor programmes. Europe calls it the Green Deal Industrial Plan. The language differs. The mechanisms differ. The underlying logic — that the market alone cannot be trusted to deliver strategic industrial outcomes — is identical.

What follows is a map of three industrial strategies, pursued by three blocs with different resources, different constraints, and different theories of how power works in the 21st century. Understanding these strategies is not optional for anyone building, investing in, or leading a company in Europe today. They are not background noise. They are the operating environment.

The American bet: spend to win

On August 16, 2022, President Biden signed the Inflation Reduction Act into law. The name was a masterpiece of legislative misdirection — like calling the Manhattan Project a "urban planning initiative." The IRA was not primarily about inflation. It was the largest industrial subsidy programme in American history, committing $369 billion in tax credits, grants, and loan guarantees to accelerate the domestic production of clean energy technologies, electric vehicles, batteries, critical minerals processing, and advanced manufacturing. The bill passed the Senate on a party-line vote, with Vice President Harris casting the tie-breaking ballot. It was, depending on your perspective, either the most consequential piece of climate legislation ever enacted by a democratic government, or the most consequential piece of protectionist legislation dressed in green clothing.

Both perspectives contain truth. The IRA's genius — and it is a genuine legislative achievement, whatever one thinks of its politics — is that it fused climate policy with industrial policy with national security policy into a single instrument. Previous attempts at climate legislation in the United States had failed because they imposed costs: carbon taxes, cap-and-trade systems, regulatory mandates. The IRA succeeded because it distributed benefits. It did not tell companies to stop emitting carbon. It told companies: if you build a battery factory in the United States, we will give you money. If you mine lithium in the United States, we will give you money. If you manufacture solar panels in the United States, we will give you money. The stick was replaced by a cheque.

The subsidy architecture is worth examining in detail, because its design reveals a theory of industrial competition that Europe has so far chosen not to adopt. The IRA's production tax credits (PTCs) and investment tax credits (ITCs) are not one-time grants. They are ongoing per-unit subsidies that reduce the marginal cost of domestic production. A solar manufacturer in Georgia receives a tax credit for every panel produced. A battery cell manufacturer in Michigan receives a credit for every kilowatt-hour of capacity. An EV assembler in Tennessee receives a credit for every vehicle that meets domestic content requirements. The credits are stackable — a facility that meets additional criteria for domestic sourcing, prevailing wages, and location in an "energy community" (typically a former coal-dependent region) can accumulate credits that reduce effective production costs by 30 to 50 percent.

The immediate effect has been measurable and dramatic. According to the Clean Investment Monitor — a joint tracker maintained by MIT and the Rhodium Group — announced clean-energy manufacturing investments in the United States exceeded $110 billion in the eighteen months following the IRA's passage, compared to approximately $20 billion in the eighteen months prior. Battery manufacturing alone attracted over $70 billion in announced investments, with major facilities planned or under construction by CATL (through a licensing arrangement with Ford), LG Energy Solution, Samsung SDI, SK Innovation, Panasonic, and several domestic startups. Solar manufacturing investments surged after decades of near-total offshoring: First Solar expanded its Ohio operations and announced a new Alabama facility; Qcells (a Hanwha subsidiary) broke ground on the largest solar manufacturing complex in the Western Hemisphere in Dalton, Georgia.

The strategic logic is straightforward: the United States identified clean energy as the next industrial frontier and decided to buy pole position. The IRA does not attempt to make American manufacturing competitive through productivity gains, workforce development, or regulatory reform — all of which would take a decade or longer to yield results. It makes American manufacturing competitive through direct cost subsidy, effective immediately. It is industrial policy by chequebook, and it has the singular advantage of speed. Capital follows incentives, and the IRA's incentives are generous enough to redirect global capital flows toward American geography.

The Inflation Reduction Act did not ask American industry to become more competitive. It simply made competition less expensive. The distinction matters — it determines what happens when the subsidies end.

Editorial observation

But speed has its own risks. The IRA's uncapped tax credit structure means the actual fiscal cost is unknowable in advance. The Congressional Budget Office initially estimated $369 billion over ten years. Goldman Sachs revised that estimate to $1.2 trillion. The Brookings Institution settled on a range of $780 billion to $1.1 trillion. The uncertainty is structural: because the credits are available to any qualifying project with no aggregate cap, the total cost depends on how many projects are built, which depends on market conditions, permitting timelines, and supply chain constraints that no model can reliably predict. The United States has written what amounts to an open-ended cheque to its clean-energy manufacturing sector, and the final amount will not be known until the cheque clears — sometime around 2032.

There is a deeper question embedded in the American approach, one that its architects have been reluctant to confront publicly: what happens when the subsidies end? A subsidy-driven manufacturing base is competitive only so long as the subsidies flow. If the political winds shift — and in American politics, they shift every two to four years — the economic logic that brought a battery factory to Georgia disappears with the tax credit that funded it. The IRA's supporters argue that by the time the credits expire, the domestic supply chains will have achieved sufficient scale to be self-sustaining. This is plausible. It is also an assumption, not a fact, and the history of industrial subsidies is littered with industries that thrived on government support and collapsed without it.

The Chinese strategy: scale as weapon

China's industrial strategy did not begin with a single piece of legislation. It began with a diagnosis. In the early 2000s, Chinese policymakers — informed by the experiences of Japan's MITI-guided industrial ascent and South Korea's chaebol-driven export model — concluded that China's role as the world's low-cost assembler was a transitional phase, not a permanent identity. Assembly captures thin margins. Design, manufacturing process control, and IP ownership capture thick ones. The strategic objective was to move from the former to the latter across every industry that would define the 21st-century economy: semiconductors, electric vehicles, renewable energy, advanced materials, biotechnology, artificial intelligence, aerospace, and quantum computing.

The policy instruments were various and interlocking. Made in China 2025, announced in 2015, set explicit market-share targets for domestic producers in ten strategic sectors. State-directed bank lending provided capital at below-market rates to favoured companies and sectors. Provincial and municipal governments competed to attract manufacturing investment with land grants, tax holidays, and infrastructure buildouts. State-owned enterprises served as anchor customers for domestic suppliers, guaranteeing demand during the scale-up phase. Technology transfer requirements — formal and informal — extracted know-how from foreign companies seeking access to the Chinese market. And a permitting and regulatory environment that moved at a speed Western democracies could not match allowed factories to go from groundbreaking to production in timeframes that European or American facilities would spend on environmental impact assessments alone.

The results are visible in the data. In 2024, China manufactured over 60 percent of the world's solar panels, over 75 percent of its lithium-ion battery cells, and over 60 percent of its electric vehicles. Chinese companies held seven of the top ten positions in global battery manufacturing by capacity. BYD surpassed Tesla as the world's largest seller of electric vehicles by volume. LONGi, JA Solar, Trina, and Jinko collectively controlled enough solar panel production capacity to supply the entire world's annual installation demand — and still have surplus.

That surplus is the critical word. Chinese industrial policy has produced not just dominance but overcapacity — manufacturing capacity that exceeds both domestic demand and the current absorptive capacity of global markets. The International Energy Agency estimated in 2024 that Chinese solar panel manufacturing capacity was roughly double global demand. Battery cell manufacturing capacity was on a similar trajectory. EV production capacity was expanding faster than even China's rapidly growing domestic market could consume. The surplus has to go somewhere. It goes abroad, at prices that non-Chinese producers cannot match.

The price dynamics are difficult to overstate. In 2023, the average selling price of a Chinese-manufactured solar module fell below $0.15 per watt — a level at which most non-Chinese manufacturers operate at a loss. Chinese EV manufacturers, led by BYD, began offering electric vehicles in Southeast Asian and Latin American markets at price points between $10,000 and $15,000 — roughly half the cost of the cheapest EVs available from European or American manufacturers. Chinese lithium iron phosphate (LFP) battery cells reached prices below $60 per kilowatt-hour, a threshold that the global battery industry had not expected to reach until 2030.

The European and American response has been to label this "dumping" — the sale of goods below cost to destroy foreign competition. The label is partially accurate and partially misleading. Some Chinese manufacturers are selling below their marginal cost, subsidised by state support and willing to accept short-term losses for long-term market share. But others have genuinely achieved production costs that Western manufacturers cannot reach, through a combination of scale, vertical integration, lower labour costs, and manufacturing process innovations that are real rather than subsidised. The distinction matters because the policy response to genuine cost advantage is different from the policy response to predatory pricing. You can tariff a subsidy. You cannot tariff competence.

Chinese overcapacity is not a market failure. It is a market strategy. The question is whether Europe understands the difference before it crafts its response.

Editorial observation

The geopolitical implications extend beyond trade balances. When a single country controls the majority of global manufacturing capacity for the technologies that the energy transition depends on, that country acquires a form of structural power that operates independently of military force or diplomatic leverage. If China decided tomorrow to restrict exports of solar panels, the European Green Deal would stall. If China restricted battery cell exports, every Western automaker's EV strategy would collapse. This is not a hypothetical concern — China demonstrated its willingness to use export controls as geopolitical instruments when it restricted exports of gallium and germanium in July 2023, and again when it tightened controls on graphite — a critical battery material — in December of the same year. Each restriction was targeted and limited. Each was also a reminder of where the leverage lies.

Europe's wager: regulate first, build later

Europe's response to the new industrial competition has been, in character, distinctly European. Where the United States spent and China built, Europe regulated. This is not inherently wrong — regulation is a legitimate instrument of industrial strategy, and the European Union has a demonstrated track record of using regulatory power to shape global markets. The General Data Protection Regulation (GDPR), enacted in 2018, became the de facto global standard for data privacy. The EU Emissions Trading System (ETS) created the world's largest carbon market. The Digital Markets Act (DMA) imposed structural obligations on large technology platforms that no other jurisdiction had attempted. Europe's regulatory capacity is real, sophisticated, and globally influential.

The question is whether regulatory leadership is sufficient as an industrial strategy — whether setting the rules of the game is the same as winning it. The evidence so far is ambiguous at best.

Consider the Carbon Border Adjustment Mechanism (CBAM), which began its transitional phase in October 2023 and will become fully operational by 2026. CBAM is, in principle, an elegant instrument: it imposes a carbon cost on imported goods equivalent to the carbon cost borne by European producers under the ETS, thereby eliminating the competitive disadvantage that European carbon pricing creates for domestic manufacturers. If a European steel producer pays €90 per tonne of CO₂ under the ETS, a Chinese or Indian steel importer must pay an equivalent levy at the border. The playing field, in theory, is levelled.

In practice, CBAM covers only six product categories: iron and steel, aluminium, cement, fertilisers, electricity, and hydrogen. It does not cover finished manufactured goods — the EVs, solar panels, batteries, and electronics where Chinese overcapacity is most acute. A Chinese-manufactured solar panel can enter the European market without any carbon border adjustment, even though its production may have been powered by coal-fired electricity with an emissions intensity several times higher than European grid power. The mechanism addresses carbon leakage in heavy industry but leaves the fastest-growing segments of the clean-energy manufacturing economy entirely unprotected. This is not an oversight — it is a deliberate choice reflecting the political difficulty of extending carbon border costs to consumer-facing products. It is also a gap large enough to drive a container ship through.

The Green Deal Industrial Plan, announced by European Commission President Ursula von der Leyen in February 2023, was explicitly framed as Europe's response to the IRA. It proposed a "sovereignty fund" to match American subsidy levels, relaxed state aid rules to allow member states to offer tax incentives competitive with US credits, and streamlined permitting for clean-energy projects. The proposals were directionally correct. They were also late, underfunded, and structurally disadvantaged by the EU's institutional architecture.

The structural disadvantage is worth understanding because it is not fixable by policy alone — it is constitutional. The United States can pass a single piece of legislation that distributes $369 billion in subsidies across all fifty states through a unified tax code administered by a single federal agency (the IRS). The European Union cannot. The EU budget is approximately 1 percent of GDP — compared to roughly 24 percent for the US federal government. The EU has no common fiscal capacity to fund large-scale industrial subsidies. What it has is 27 member states with different fiscal positions, different industrial bases, different political priorities, and different capacities to offer state aid.

When the Commission relaxed state aid rules to allow member states to match IRA-level subsidies, the practical beneficiaries were Germany and France — the only member states with the fiscal capacity to write large cheques. Germany announced a €3.5 billion subsidy to Intel for a semiconductor fabrication plant in Magdeburg (subsequently paused). France offered €1.3 billion to support battery manufacturing in its northern regions. Poland, Portugal, Greece, Romania — countries with competitive labour costs and genuine manufacturing potential — could not come close to these figures. The relaxation of state aid rules, intended to help "Europe" compete with the United States, in practice helped rich European countries compete with poor European countries. The internal market — the EU's singular economic achievement — was being distorted by the very policy meant to defend it.

The Draghi Report, published in September 2024 by former ECB President Mario Draghi, provided the most comprehensive diagnosis yet of Europe's competitive position. Its findings were stark. European productivity growth had lagged the United States for two decades. European companies paid two to three times more for electricity than American competitors and four to five times more than Chinese ones. European venture capital investment was a fraction of American levels. European companies that scaled successfully — Spotify, Klarna, ARM before its SoftBank acquisition — tended to list and expand in the United States rather than remain in Europe. Draghi's conclusion: Europe needed €750 to €800 billion per year in additional investment to close the competitiveness gap. The figure was so large that it functioned less as a policy recommendation and more as an indictment.

Three maps, one territory

Step back far enough and a pattern emerges. The three strategies — American subsidy, Chinese scale, European regulation — are not arbitrary. They reflect the structural advantages and constraints of the blocs that devised them.

The United States has deep capital markets, a reserve currency that allows it to borrow at low cost, a unified fiscal authority, and a political system that can (occasionally) concentrate resources on a single strategic objective. Its comparative advantage is money. The IRA leverages that advantage directly: outspend the competition and let capital markets do the allocation.

China has state-directed capital, a controlled financial system that can absorb losses that would bankrupt private-sector actors, a labour force that is both large and increasingly skilled, and a political system that can sustain strategic patience over decades rather than electoral cycles. Its comparative advantage is coordination. The overcapacity strategy leverages that advantage directly: build at scale, absorb short-term losses, dominate the market, and let competitors exit.

Europe has regulatory sophistication, institutional credibility, a large and wealthy consumer market, and a normative influence that shapes global standards. Its comparative advantage is rules. CBAM, the Green Deal Industrial Plan, the EU AI Act, the DMA, the DSA — all leverage that advantage. Europe sets the standard, and the world adapts to meet it.

The problem is that in a contest between money, coordination, and rules, rules tend to finish third. Standards matter, but they matter most when you also manufacture the products that comply with them. A European carbon border adjustment has limited strategic value if the solar panels and batteries that Europe needs to meet its own climate targets are manufactured exclusively in China. A European AI regulation has limited strategic value if the AI models and the compute infrastructure that runs them are built exclusively in the United States. Rules shape markets. They do not, by themselves, create them.

In a contest between money, coordination, and rules, rules tend to finish third. Europe excels at setting standards for markets it does not control. The question is how long that remains a viable strategy.

Editorial observation

This is not a counsel of despair. Europe retains genuine industrial strengths — strengths that are often underweighted in analyses that focus exclusively on technology manufacturing. European aerospace (Airbus, Safran, Rolls-Royce) remains globally competitive. European automotive engineering — the design, precision manufacturing, and systems integration capabilities of German, Italian, and French carmakers — is world-class, even as the industry navigates the combustion-to-electric transition. European speciality chemicals (BASF, Evonik, Solvay), precision machinery (ASML, Trumpf, Zeiss), and advanced materials represent segments where European companies are not just competitive but dominant. ASML's extreme ultraviolet lithography machines — without which no advanced semiconductor can be manufactured anywhere on earth — are perhaps the single most strategically important industrial product in the world, and they are built in Veldhoven, the Netherlands, population 45,000.

But strengths in precision manufacturing and engineering are not the same as strengths in the mass-scale industries that will define the energy transition and the AI era. Europe's challenge is not that it lacks capability. It is that its capabilities are concentrated in segments that, while strategically important, are insufficient to sustain an industrial base across the full value chain. You can build the machine that makes the chip, but if you do not also build the chip, the server, the data centre, the AI model, and the application — if you are a critical supplier but not a systems integrator — then your industrial position is dependent on the strategic decisions of others. ASML is essential. It is also, in the end, a supplier to TSMC, Samsung, and Intel. The value it captures is real but bounded.

What this means for European companies

For founders, investors, and strategists operating in Europe, the implications of this industrial realignment are immediate and concrete. They are not abstract geopolitical trends to be monitored from a distance. They are operating conditions.

First, energy costs. European industrial electricity prices in 2025 average between €120 and €180 per megawatt-hour, compared to $50 to $80 in the United States and $40 to $60 in China. For energy-intensive manufacturing — steel, aluminium, chemicals, glass, cement, data centres — this differential is not a headwind. It is a wall. No amount of operational excellence can compensate for a two-to-threefold cost disadvantage on a primary input. European companies in energy-intensive sectors face a binary choice: either secure long-term energy supply at competitive rates (through corporate power purchase agreements, on-site generation, or relocation to regions with lower energy costs), or accept that they are structurally uncompetitive and manage the decline accordingly.

Second, subsidy competition. The IRA has created a gravitational pull for clean-energy investment that European incentives cannot currently match. European companies evaluating where to build their next manufacturing facility are doing arithmetic that increasingly favours American geography. Northvolt, Sweden's flagship battery manufacturer, announced a US expansion in 2023 — not because American demand was stronger than European demand, but because American subsidies made the unit economics incomparably better. When European companies build factories in America to access American subsidies, Europe loses both the manufacturing capacity and the supply chain spillovers that come with it. The jobs, the supplier ecosystems, the process know-how — all of it accrues to the geography that offered the better deal.

Third, market access. China's overcapacity export strategy means that European companies competing in clean-energy manufacturing — solar, batteries, EVs, wind turbines — face competitors whose prices reflect not market costs but strategic intent. Competing on price against a state-subsidised competitor with structural cost advantages and surplus capacity is not a business strategy. It is a slow liquidation. European companies in these sectors need either trade protection (tariffs, anti-dumping duties, local content requirements) or differentiation strategies that create value the Chinese supply cannot replicate — customisation, integration, service, brand, regulatory compliance expertise.

Fourth, and perhaps most importantly, speed. The gap between Europe and its competitors is not primarily a gap of ideas, talent, or technology. It is a gap of execution speed. A factory that takes three years to permit and five years to build in Europe takes eighteen months in China and two to three years in the United States (with IRA subsidies accelerating timelines). A regulatory framework that takes five years to design, negotiate, and implement arrives after the market it was meant to shape has already been structured by others. Europe's institutional thoroughness — the consultation processes, the impact assessments, the multilingual legislative procedures, the subsidiarity checks — are genuine democratic achievements. They are also, in a competitive environment where speed determines market position, a structural handicap.

• Energy costs 2-3x higher than the US and 3-4x higher than China — an existential constraint for energy-intensive industries.
• Subsidy gap pulling clean-energy manufacturing investment toward American geography.
• Chinese overcapacity creating price floors that European manufacturers cannot reach without state support.
• Permitting and regulatory timelines that are 2-3x longer than competitors — democratic thoroughness at industrial cost.
• Fragmented fiscal capacity preventing EU-level responses at the speed and scale of the IRA or Chinese state investment.

None of these constraints are permanent. All of them are addressable. But addressing them requires a level of institutional reform and political will that Europe has historically struggled to mobilise outside of acute crises. The 2008 financial crisis produced the European Stability Mechanism and banking union. The COVID pandemic produced NextGenerationEU and joint debt issuance. The energy crisis produced joint gas purchasing and accelerated renewable deployment. Europe tends to act boldly, but only when the alternative is collapse. The risk in the current industrial competition is that the crisis is slow enough to be managed — quarter by quarter, factory closure by factory closure, market share point by market share point — without ever triggering the political urgency required for structural reform.

The map of industrial power is being redrawn. The United States has its pen in hand. China has already finished its first draft. Europe is still convening the committee that will decide which pen to use. The question is not whether Europe has the talent, the technology, or the capital to compete. It does. The question is whether it has the institutional capacity to deploy those resources at the speed the moment requires. That question remains unanswered. And the window for answering it is closing.

Sources

1. Inflation Reduction Act — Full text and analysis — https://www.congress.gov/bill/117th-congress/house-bill/5376
2. Clean Investment Monitor — MIT / Rhodium Group — https://www.cleaninvestmentmonitor.org/
3. Goldman Sachs — IRA cost estimate revision — https://www.goldmansachs.com/insights/pages/the-us-is-poised-for-an-energy-revolution.html
4. IEA — World Energy Investment 2024 — https://www.iea.org/reports/world-energy-investment-2024
5. European Commission — Carbon Border Adjustment Mechanism — https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en
6. Draghi Report — EU Competitiveness — https://commission.europa.eu/topics/strengthening-european-competitiveness/eu-competitiveness-looking-ahead_en
7. European Commission — Green Deal Industrial Plan — https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal/green-deal-industrial-plan_en
8. Suez Canal blockage — economic impact analysis — https://www.bbc.co.uk/news/business-56559073