Strategic Industry

A strategic industry is a sector that a government considers so important to national security, economic independence or the functioning of society that it is unwilling to leave the sector's fate entirely to market forces. Common examples are defence, energy, telecommunications, semiconductors, critical minerals, pharmaceuticals, food supply, transport and core financial infrastructure. Governments protect or promote such sectors through ownership rules, investment screening, export controls, stockpiles and support under industrial policy.

There is no fixed list: which industries count as strategic changes with technology and geopolitics. In the 20th century, steel, shipbuilding and oil dominated; since the late 2010s, chips, batteries, rare earths, artificial intelligence and data networks have moved to the top. The concept overlaps with economic security and with "strategic trade theory", but it is mainly a political and legal designation rather than a precise economic term.

Think of a household that buys most things from whichever shop is cheapest, but insists on keeping its own front-door key, a store of food and a working phone line. Even if a neighbour offered to hold the key more cheaply, the family would not want to depend on someone else for something that essential.

Countries reason the same way. For ordinary goods they accept that trade makes everyone richer. For things they could not do without in a crisis or a conflict, such as weapons, power, medicines or the chips inside every device, they are willing to pay more, or restrict who can own and buy them, to avoid dangerous dependence.

• National security. Defence production, encryption, satellites and critical infrastructure can be used against a country if controlled by a rival.
• Supply-chain resilience. The COVID-19 pandemic and the 2021–2022 chip shortage showed how a supply shock in a concentrated supply chain can halt whole economies, exposing the fragility of just-in-time manufacturing.
• Economic coercion. Dependence on one supplier can be exploited, as with energy supplies to Europe in 2022 or restrictions on exports of rare earths and other minerals.
• Technological leadership. Strategic trade theory, developed by James Brander and Barbara Spencer in the 1980s, argued that in industries with huge fixed costs and few firms, such as aircraft, government support can shift profits toward national champions. The long Airbus–Boeing subsidy dispute is the classic case.

• Investment screening. The US Committee on Foreign Investment in the United States (CFIUS), strengthened by the Foreign Investment Risk Review Modernization Act of 2018, can block foreign takeovers on security grounds. The UK's National Security and Investment Act 2021, in force since January 2022, requires mandatory notification of deals in 17 sensitive sectors, and the EU's 2019 screening regulation coordinates national reviews of foreign direct investment and mergers and acquisitions.
• Export controls and sanctions. Since October 2022 the United States has restricted exports of advanced chips and chipmaking tools to China, with allies such as the Netherlands and Japan adopting related controls. These sit alongside wider economic sanctions.
• Subsidies and public purchase. Grants and tax credits for domestic production, such as under the US CHIPS and Science Act and the EU Chips Act, plus defence procurement that favours local suppliers; see subsidy.
• Ownership and control. State ownership, nationalization in emergencies, "golden shares" kept after privatization, and limits on foreign ownership in sectors such as airlines, media and banking.
• Trade measures and stockpiles. Tariffs, local-content rules and strategic reserves of oil, grain or minerals. The EU's Critical Raw Materials Act (2024) sets 2030 benchmarks, including that no more than 65% of any strategic raw material should come from a single non-EU country.

Trade law gives governments wide room here. Article XXI of the General Agreement on Tariffs and Trade (GATT) allows members to take measures they consider necessary for their essential security interests. For decades it was rarely invoked, but it now underpins many export controls and tariffs. A 2019 panel of the World Trade Organization (WTO), in a dispute between Ukraine and Russia, ruled that the exception is not entirely self-judging, though members still disagree about how far panels can review security claims. Because the WTO's Appellate Body has not functioned since 2019, many such disputes remain unresolved.

Supporters argue that the cost of protecting a few key sectors is a form of insurance against war, coercion and pandemics, and that unrestricted globalization left critical supply concentrated in a few places, notably East Asia for chips and China for many minerals and battery components. Critics raise several concerns:

• Scope creep. When almost every sector can be described as strategic, the label can disguise ordinary protectionism and shield firms from competition.
• Cost and efficiency. Duplicating supply chains raises prices and gives up the gains from comparative advantage.
• Capture. Firms have strong incentives to lobby for strategic status, a form of rent-seeking.
• Fragmentation. The IMF and others warn that splitting the world economy into rival blocs could reduce global output, with developing countries often bearing the largest losses.

The approach is associated both with Western economic-security policy and with state capitalism, in which the state directs strategic firms. State investors such as a sovereign wealth fund are themselves sometimes subject to extra scrutiny when buying into strategic sectors abroad.

• U.S. Department of the Treasury: CFIUS
• GOV.UK: National Security and Investment Act