Geoeconomics through industrial policy: can competitive advantage be changed?
It depends, and there are costs
Specialisation versus power. The current state of world affairs has propelled energy security and national defense concerns to the forefront of policymaking. The costs of global market dominance by any single exporter, or import source concentration for any importer are rising in this context, relative to the benefits of specialised production and trade. Specialisation in production across countries supports economic efficiency and allows countries to benefit from economies of scale: these are good for growth. But, as it may also increase volatility in markets, prevent access to some markets, or allow the exercise of geoeconomic advantage by some to the detriment of others … it may also be bad for growth, as well as national security. The prevailing mood favours less specialization. But given the status quo, with production dispersed, how feasible is it to turn the clock back or dramatically alter direction? It depends.
The example (but there are others). Let’s take the energy market as an example, specifically solar PV panel manufacturing, with the intention of diversifying away from fossil-fuel use and imports or as an export good. To use solar energy, more than manufacturing is needed; panels must be installed and excess energy generation managed. But let us focus on manufacturing.
The incumbent. Today, Chinese manufacturing of solar energy products is far ahead of that of all other countries. China produces most of the world’s solar modules (85%) and inputs, such as high purity polysilicon (more than 90%), wafers (98%) and cells (92%). Another advantage is its ownership of huge shares of minerals and metals production/refining capacity for several of the critical minerals needed to manufacture these cells. For instance, it has around 70% of refined lithium produced globally and 98% of raw/low purity gallium. It has been exporting all along the value chain, from minerals and wafers to finished modules. China is also now a significant producer of the machines that make solar cells and panels.
The reason. China is the cheapest producer of these goods because it has economies of scale, cheap labour, allows fierce domestic competition amongst domestic producers to keep production costs down, has relatively cheap energy and experience (learning by doing). Over the past decades, it has also supported its manufacturing industry with immense amounts of subsidised funding and helped it expand vertically into critical areas.
The power. Needless to say, geoeconomic advantage conferred by such dominance is recognized. For example, China has had varying degrees of export controls on critical minerals for some years, demonstrating its ability to constrain production of any goods requiring these minerals. Trading partners are now seeking to diversify import sources and/or counter with their own industrial policies.
The advantage. But that is not all. China benefits from the many spillovers accompanying (high-tech) solar goods production. Solar energy requires storage facilities for when there is no sunlight. China moved into battery production - a dual purpose of which was to boost its domestic EV industry as well. It now accounts for over 80% of lithium iron phosphate battery packs. It also controls around 70% of lithium refining capacity. The battery storage market keeps growing. There are other spillovers too.
The challengers. Can new countries succeed in effectively competing with China where the latter has a head start? What are the factors affecting this estimation?
Their policies-entrant #1. Let’s take an example. India has aspirations to become a major solar products manufacturer, with an eye to both increasing exports and domestic energy security. According to the US Energy Information Administration, India imports between 80-90% of its petroleum and liquid fuels, and about half of the natural gas it consumes. To wean itself off energy imports, even as energy demand grows, India is looking to renewables. India has established large solar parks intended to facilitate installation of solar panels, working together with subnational governments and private investors. It also has a number of policies in place to encourage solar goods manufacturing, including trade and regulatory restrictions on solar panel imports.[1] These restrictions have taken different forms and have been in place since 2018, when India imposed a 25% duty on solar cells and modules imported from China and Malaysia. The Approved List of Models and Manufacturers issued in 2019, steers government subsidized projects away from imported solar modules.
A hiccup? However, India still imports a large percentage of solar cells, and it does not produce in upstream sectors, such as wafers and polysilicon, so has to import these too…from China. Polysilicon and wafer production are capital and energy intensive processes, and both of these inputs are relatively less cheap in India than in China. Construction of the requisite plants requires a long lead time. Neither does India have the same access to raw critical minerals that China has- nor refining capacity. This means that even if it produces cells, but depends on China for other upstream materials, its ability to produce solar energy depends on one major supplier who is also a competitor.
Entrant #2. What about Indonesia? Indonesia does have some of the metals and minerals needed for solar cell production. Yet, Indonesia does not currently have much solar cell production capacity; it mostly imports components needed for modules/panels and assembles them in the country, although, in the last couple of years, cell production has picked up. Foreign investors are also coming in. However, Indonesia does not produce upstream components either, including solar cell grade polysilicon, wafers and ingots. In fact, Indonesia has substantial silica resources to produce polysilicon, but the upstream phases use complicated technology and are capital and energy intensive. Indonesia has launched a roadmap that envisions integrated solar manufacturing capacity over the longer term. Domestic consumption of solar energy remains relatively low. The government aims to increase this substantially over time.
And #3 and #4. What about Malaysia and Vietnam? Malaysia is an important exporter of solar modules, increasingly so over the last several years as China has shifted more module assembly there. Malaysia also produces solar PV grade polysilicon and wafers, although, its global share of exports of solar products is minor, given that China dominates upstream ingot and wafer exports having around 98% of the market. For cells and modules, Malaysia accounts for 7% of exports. Vietnam exports cells and modules, but in the last few years, it has also begun wafer and ingot production, primarily because of Chinese FDI. As per IRENA, Vietnam is the lowest cost producer of solar cells and modules outside China.
Entrant #5 - with muscle. Other countries, richer and poorer, that produce and use solar panels are in a similar situation.[2] Even in the US where solar cells were first developed, there is little current capacity for wafer or polysilicon production for solar PV cells, and thus it cannot increase cell production without imports. Data centre energy demand has been increasing however, increasing the size of the solar energy market. With tariff restrictions and investment subsidies, domestic supply may increase. For households, prices may remain high relative to purchasing power and alternative energy sources, constraining demand. Importantly, with the rolling back of tax credits for solar energy investment and a hostile policy environment in the US, even Chinese companies with facilities in the US, such as Jinko Solar Co, are selling/cancelling their investments.[3] It is also important to note that Chinese solar producers competing strongly with each other in domestic markets has led to fast supply increases and price declines that have already engendered some bankruptcies and consolidation of these firms.
So…it depends and there are costs. In summary, solar panels can be, and are being, produced for domestic use or for exports in third countries. However, solar wafers, ingots, and other intermediate inputs are sourced in China for the most part. This includes raw materials. Moreover, given Chinese producers’ advantages, Chinese produced solar panels are cheaper than those in all other countries. Trade restrictions on Chinese imports and subsidies for solar energy ensure that higher cost panels produced in third countries are used. In countries like India, where the domestic market is large, producers can benefit from economies of scale and falling costs in various stages of the production process. Such a process can be stymied however, if access to a critical input, with few (or no) substitutes, is limited. It is hard to see how industrial policy can overcome such a hurdle in the short run. Constraints on input sources can be overcome through new investments that bear fruit over time, although such a path further raises the need for capital and short-term costs of production.
The market always changes. The structure of the final market and prices in it are anybody’s guess, although it is apparent from the experience of all countries to date, that successful industrial policy in this sector will require large amounts of funding- public and /or private and a long view. The interaction of fiscal and trade measures to support diversification of suppliers and sources, the prices of solar energy substitutes, technological innovation, energy efficiency, the consolidation of Chinese production, and global income growth will have substantial impacts on supply, demand and eventual prices. What is clear is that there may be more economic inefficiencies as markets segment in the search for security.
[1] See forthcoming paper: Innovation, industrial policy and geoeconomics: The case of solar energy. Islam, 2026 for details.
[2] https://www.csis.org/analysis/assessing-united-states-solar-power-play
[3] https://www.bloomberg.com/news/articles/2026-05-13/chinese-clean-technology-giants-wind-back-us-plans-as-trump-policies-bite?cmpid=BBD051326_GREENDAILY&utm_campaign=greendaily&utm_medium=email&utm_source=newsletter&utm_term=260513&utm_content=4446