According to the paper published in January 2026 by Ambrogio Cesa-Bianchi, Andrea Ferrero, Luca Fornaro, and Martin Wolf, titled Industrial Policies, Global Imbalances and Technological Hegemony, industrial policy is not just about helping domestic firms grow. It can also reshape trade balances, redirect global capital flows, and ultimately change which countries lead in technology.
The paper starts from a simple but powerful idea: not all sectors matter equally for long-run growth. In the authors’ framework, the tradable sector, especially high-tech manufacturing and high-tech services, is where innovation mainly happens. This matters because innovation raises productivity, and productivity is the main engine of sustained economic growth. So, when governments support these sectors, they are not merely increasing output today; they may also be strengthening the country’s future growth potential.
This is the first key point of the article. Industrial policy can expand the part of the economy that generates learning, research, and technological progress. If more labor, investment, and policy support move into tradable high-tech industries, firms have stronger incentives to innovate. In the model, this produces faster productivity growth over time.
But the paper’s main contribution is to show that this is only part of the story. The broader effects depend on the overall policy mix. If a government supports high-tech production while also keeping domestic consumption relatively weak, the result may be a persistent trade surplus. The country produces more tradable goods than it absorbs at home, so the rest is sold abroad. In macroeconomic terms, that surplus is matched by capital outflows and by trade deficits somewhere else in the world. The authors describe this as an “unbalanced” industrial policy mix: supply is boosted, but domestic demand does not rise by the same amount.
This mechanism is central to the paper. Industrial policy alone does not automatically create global imbalances. It does so when it is paired with policies that suppress domestic absorption, such as fiscal restraint, reserve accumulation, or other measures that keep consumption below what higher income would otherwise support. In that case, industrial policy becomes a driver not only of national development, but also of international imbalance.
The paper then asks what happens to the rest of the world. Here the argument becomes especially interesting. If one country runs a persistent surplus, another country must run a deficit. According to the authors, these deficits can have damaging long-run effects. In the short run, a deficit country may enjoy higher consumption and cheaper imports. But over time, the associated capital inflows can shift resources toward non-tradable sectors, such as local services or construction, and away from the tradable sectors where innovation is concentrated. As the tradable sector shrinks, incentives to innovate weaken, and productivity growth slows.
This is why the paper links industrial policy to what it calls “technological hegemony.” The issue is not only who exports more. It is who preserves and expands the sectors that generate technological leadership. In the authors’ framework, a country that combines industrial policy with subdued domestic demand can increase its share of innovative activity, while deficit countries risk deindustrialization and weaker long-run productivity growth.
The article also presents empirical evidence consistent with this view. Using cross-country data for 24 economies over the period 2002 to 2019, the authors find that more intensive industrial policy is associated with stronger manufacturing performance and faster total factor productivity growth. They also argue that, once relevant controls are introduced, industrial policy is positively associated with current account surpluses. In addition, they point to evidence showing that persistent trade deficits tend to coincide with weaker tradable-sector activity and slower productivity growth. The authors are careful not to overclaim: they present these patterns as suggestive and consistent with the model, not as definitive proof of causality.
One of the strengths of the paper is that it does not stop at diagnosis. It also considers policy responses for countries on the losing side of these spillovers. One possible response would be to imitate the surplus country and adopt similar industrial policies. Another would be to reduce trade deficits directly. However, the paper is skeptical that broad tariffs are an effective solution to overall trade imbalances. Instead, it suggests that the deeper issue is macroeconomic: trade deficits reflect a gap between national saving and investment, not just border policy.
At the same time, the authors warn that trying to eliminate imbalances too aggressively could depress global demand. If many countries simultaneously try to save more and consume less, the world economy could slide into weak demand and stagnation. This is why the paper argues that global rebalancing may require coordination, not just unilateral action. Policies that raise demand in surplus countries and strengthen saving in deficit countries may work better than blunt protectionism.
Perhaps the paper’s most constructive proposal concerns innovation policy. The authors argue that deficit countries do not necessarily need to reject trade deficits altogether. The real problem arises when foreign capital finances low-productivity booms rather than innovation. If governments channel resources into research and development, advanced manufacturing, and other innovation-intensive activities, they may be able to offset the negative productivity effects of external deficits. In that sense, innovation policy becomes a way to defend long-run growth without simply shutting the economy off.
The broader message of the article is clear. Industrial policy should not be seen as a purely domestic tool. In a world of open trade and capital flows, it can alter the global distribution of production, innovation, and power. A country that supports high-tech sectors while suppressing domestic demand may strengthen its own technological position, but it may do so partly by weakening the innovative capacity of others. That is why the debate over industrial policy is also a debate about global imbalances and the future geography of technological leadership.