The Industrial Accelerator Act (IAA) presents a new architecture for European industrial policy. The proposal put forward by the European Commission pursues several interlinked aims: restoring productive capacity, accelerating decarbonization, and strengthening Europe’s strategic value chains. The regulation sets as a reference that industrial GDP reach at least 20% of the European Union’s total by 2035, after having fallen from 17.4% in 2000 to 14.3% in 2024. To this end, the IAA articulates instruments such as public procurement, state aid, foreign investment, or activity permits to create demand for industrial products following two criteria: low carbon and of European origin (the well-known Made in Europe).
Now, as the proposal is being debated, several questions are being raised: Will it be enough to recover productive capacity? Will it have an impact on aggregate demand? How will it apply to other trading partners? What will be China’s response? What other incentives and reforms are needed to facilitate productive conversion? How can the gap in European public financing be narrowed?
The challenges of the IAA
The material conditions for compliance are one of the main challenges being posed. The external dependence of many of the affected sectors and the static nature of the thresholds present varying degrees of difficulty for adaptation and for industry to comply. This difficulty varies depending on the maturity, size, and offshoring of the affected industrial sectors.
“The IAA articulates instruments such as public procurement, state aid, foreign investment, or operating permits to create demand for industrial products”
Regarding the scope (and limitations) of the regulation, the set of sectors covered by the proposal represents 15% of European industrial production. However, these sectors have a broad effect on the industrial fabric and on the economy by influencing infrastructure construction, mobility and transport, energy supply, or defense. Still, in several of these sectors, the scope of the regulation is not broad enough to drive a market incentive impact. In electric automotive, the rule could affect up to 80% of the market, while in other sectors (such as cement or steel) it would affect only about 5% of the total. Moreover, the exemptions provided for by overcosts can become an obstacle in sectors where the price difference between European production and Chinese production structurally exceeds these thresholds. In batteries, solar modules, and wind turbines, EU production costs are between 30% and 45% higher than those in China. The key to avoiding overcost avoidance through per-project calculation rather than per-product calculation.
The conditions of the IAA mainly affect the Chinese economy, which accounts for 60% of production and market share globally in most of the sectors covered by the regulation. China’s response has aimed to shield Chinese investors from obligations to share data on capital, technology, intellectual property, and strategic assets in other jurisdictions (Industrial and Supply Chain Security Regulations and Foreign Investment Regulation). The European Commission argues that the IAA measures are reciprocal and comparable to instruments that the Chinese government applies in its own market (subsidies, substantial public investment, local preference, control over technology transfer) and that the IAA aims to strengthen productive capacity and not to discriminate commercially.
“The European Commission argues that the IAA measures are reciprocal and comparable to instruments that the Chinese government applies in its own market”
Origin equivalence with EU trading partners is another of the most debated aspects and presents two risks: one is that trading partners are excluded from the Made in Europe, affecting relationships and commitments made, as well as the supply chains of the European industry. The other is that the IAA opens too much to allow content from third-country sources with trade agreements to be considered equivalent to the EU-origin criterion. This presents the risk of circumventing the scope of the regulation through relocation and friendshoring. This will undoubtedly be one of the major battles of the IAA’s passage. Therefore, the proposal should incorporate control and safeguard mechanisms that justify the equivalence.
It is also relevant to distinguish between critical technologies such as batteries and, on the other hand, conventional technologies whose reliance on foreign suppliers does not pose a risk to economic security, such as solar panels. The IAA does not make this distinction, which could be crucial when determining localization targets according to the risk to economic security.
The structural obstacle is surely the gap in public financing. According to the OECD, between 2005 and 2024, Chinese industrial sectors received between three and eight times more public financial support than in the case of OECD countries. China’s total investment, public and private, in decarbonization technologies and clean energies was $680 billion in 2024, while that total investment figure in the EU was $370 billion, 45% lower. The lack of public financing in the EU is a structural hurdle to accelerating the industrial transition.
“Between 2005 and 2024, the Chinese industrial sectors received between three and eight times more public financial support than in OECD countries”
Economic incentives are as essential as regulation to achieve the ultimate goals. Some financial instruments to bridge the funding gap would include an European Sovereign Industrial Investment Fund, European public participation in the equity of strategic projects, earmarking a share of EU revenue from VAT on products covered by the IAA to finance projects, or the issuance of a European bond (a safe asset) to promote industry.
- An European Sovereign Fund for Industrial Investment. By investing directly in industrial projects with strategic assets within the IAA framework, the European sovereign fund could achieve an average gross annual return of around 4%. This public capital return could be reinvested in new productive projects or used as a new resource intended to sustain other public instruments supporting projects that are the backbone of this transition (lithium-ion batteries, small modular reactors, grid infrastructure, industrial heat pumps, electrolyzers).
- Europe-wide public equity participation in strategic projects. Public equity involvement offers added advantages over direct subsidies: it mitigates the risk of projects that are not yet profitable on market terms, promotes capital-intensive projects where private support is insufficient to achieve scale, generates productive public investments with autonomous returns, and allows direct influence over the strategic direction of projects.
- Allocate 10% of EU VAT revenue from industrial products to fund projects covered by the IAA. This would be a way to redirect the portion of revenue derived from the consumption of industrial products covered by the IAA (beneficiaries of its criteria) to a European own resource that can be used more efficiently. The fiscal advantage is that it would not entail a new tax. The operational challenge is that it would require unanimity and would affect national tax revenues.
- The issuance of an IAA European bond. A safe asset for industrial promotion, according to the decarbonization and European-origin criteria, could be the most efficient way to finance projects that contribute to productive transformation and industrial conversion in the short term. The yields from the various public instruments would help design a financially sustainable framework to deploy the new industrial policy inaugurated by the Industrial Accelerator Act.
- An EU Inc. framework for the IAA industries. All sectors affected by the IAA could be the subject of a pilot application of the 28th regime or EU Inc. That is, enabling the establishment of strategic projects (gigafactories, recycling, critical components, electrolyzers, small reactors) under a single corporate framework. This option would reduce establishment costs, simplify cross-border operations, facilitate European joint ventures, attract capital, and accelerate industrial scaling in a value chain that today depends on coordination among several Member States.
- A long-term strategy: reform of the commercial order. The current juncture requires, in the short term, industrial promotion measures (regulatory and economic) aimed at reducing strategic dependencies and strengthening the productive base. However, this short-term response does not imply abandoning a long-term strategy. A roadmap to reform the international commercial order, aimed at rebuilding its rules on a more balanced, reciprocal basis that reflects the current distribution of trade flows, constitutes a necessary complement to a smart industrial policy.
