Industrial strategy for Wales in a shifting global economy

Dr Lena Sheveleva, an expert on international trade from Cardiff Business School, shares her thoughts with the Wales Productivity Forum on appropriate industrial strategy for Wales in a shifting global economy.

With a second Trump administration underway, the United States has increasingly leveraged its market access to drive foreign policy goals and secure inward investment. What began as targeted tariffs on manufactured goods has expanded to include services, as seen in recent White House proposals to tax foreign film content. As a result, trade uncertainty with the US now spans all sectors of the global economy and threatens to disrupt existing trade patterns that Welsh firms rely on. This risks worsening Welsh productivity, which has grown slowly for over twenty years and remains below the UK average (Jones, 2025). This article argues that global volatility poses serious risks, but it may also present an opportunity to address long-standing productivity challenges in Wales.[1]

Developing new products and geographic markets in response to changing trade patterns can stimulate endogenous investments both in products and processes, creating a virtuous productivity cycle in Wales. A virtuous productivity cycle highlights that firms tend to invest in productivity improvements in response to profitable export opportunities, and more productive firms, in turn, can profitably exploit a wider variety of markets, as in Aw et al. (2022).[2]

Research on the role of institutional quality in supporting trade and investment in complex, high-value sectors such as finance and technology points to a strategic direction for Welsh firms and policymakers (see, for example, Levchenko 2007). As US governance credibility declines, the relative strength of UK institutions becomes a source of comparative advantage in these sectors. Welsh industrial policy should therefore signal a long-term commitment to reliability as a trade partner in both goods and services.

Beyond institutional quality, literature on economic complexity offers further guidance. Hidalgo and Hausmann (2007) conceptualise economic development as a function of the diversity and sophistication of products a region can produce and export competitively. Their work shows that income levels tend to converge toward what a region’s productive complexity permits. For example, regions capable of producing and exporting high-tech goods like medical imaging equipment or precision electronics tend to support higher income levels than those limited to basic commodities like textiles or raw materials.

This insight resonates with Henley’s (2024) analysis of the Welsh productivity gap, which highlights industrial structure and suboptimal labour utilisation as one of the constraints on productivity growth. For Wales, insights into economic complexity would imply moving from legacy sectors (e.g. aerospace, automotive, petrochemicals, metals) to more complex industries with stronger global demand. Consider compound semiconductors, life sciences, fintech, cybersecurity, and the creative industries as examples.[3] Importantly, Wales already has footholds in many of these areas.

Take the example of compound semiconductors. This sector demonstrates the effectiveness of targeted industrial strategy aligned with global trends and local capacities. As Munday et al. (2024) explain, in the 1980s and 1990s, Wales attracted large volumes of Foreign Direct Investment (FDI), lured by grants, cheap labour, and access to EU markets.  Much of this, however, was in low-skill, low-R&D activity, which became known as the “branch plant economy.” By the early 2000s, the UK semiconductor industry was declining in mainstream production as the UK firms lost their competitive edge to the US firms, but niche segments like compound semiconductors began to gain traction. Post-2010, a more coherent cluster emerged around firms like IQE (a leading global supplier of advanced semiconductor materials) and Cardiff University’s Institute for Compound Semiconductors. Business surveys from 2020-2021 revealed high productivity, strong R&D intensity, and export focus of the cluster. Munday (2024) argued that it was the deep integration of public support, skilled local talent, and firm-level innovation that helped the Compound Semiconductor cluster succeed.

A critical addition to the list of demands on industrial strategy in the current climate of global uncertainty is the agility of its response to the shifts in trade patterns and policy. For instance, creative industries such as TV and film have emerged as another Welsh success story. Cardiff is now the UK’s third-largest production hub after London and Manchester, with firms like Bad Wolf and Pinewood anchoring activity (Henley, 2024). But proposed U.S. tariffs on non-American cinema could undermine this growth. Temporary protections may be required as international trade policy begins to impact services. Likewise, sectors like fintech and cybersecurity may also need targeted support during downturns.

While global trade realignments present opportunities, they also endanger existing productivity gains, particularly in trade-exposed industries where losses are spatially concentrated. Tata Steel plant in Port Talbot, is an obvious example. The experience of U.S. regions affected by the “China Shock,” as documented by Autor et al. (2013) illustrates the long-term scarring that trade shocks can inflict on communities. In such contexts, effective policy is not necessarily to protect every job at all costs, but to facilitate transitions: retraining workers, supporting affected areas, and enabling reallocation to higher-productivity sectors. Without such measures, regions risk being trapped in cycles of low productivity, poverty and decline.

Global trade uncertainty presents a double-edged sword for Wales. On the one hand, it threatens fragile progress in productivity and exposes key sectors to new risks. On the other, it opens space for a more targeted and forward-looking industrial strategy that aligns with shifts in global investment, leverages institutional stability, and focuses on high-value, complex sectors. The examples of compound semiconductors and the creative industries show that Wales can successfully build competitive clusters when public support, skilled labour, and innovation align. But realising these gains at scale requires sustained strategic effort, particularly in ensuring adaptability to global trade policy.

References

1. Autor, David H., David Dorn, and Gordon H. Hanson. “The China Syndrome: Local Labor Market Effects of Import Competition in the United States.” American Economic Review, vol. 103, no. 6, Oct. 2013, pp. 2121–68. American Economic Association, https://doi.org/10.1257/aer.103.6.2121.
2. Aw, Bee Yan, Mark J. Roberts, and Daniel Yi Xu. “R&D Investment, Exporting, and Productivity Dynamics.” American Economic Review, vol. 101, no. 4, June 2011, pp. 1312–44. AEA, https://doi.org/10.1257/aer.101.4.1312
3. Jones, Melanie. Wales’ Productivity Challenge: A Focus on the Future. Productivity Insights Paper No. 051, The Productivity Institute, Jan. 2025. https://www.productivity.ac.uk/wp-content/uploads/2025/01/PIP051-Wales-Insights-Paper-January-2025.pdf.
4. Henley, Andrew. “Welsh Productivity Performance: Lost Cause or Still Waiting for a Miracle?” Welsh Economic Review, vol. 31, 2024, pp. 5–11. Cardiff Business School, Cardiff University. http://doi.org/10.18573/wer.267.
5. Hidalgo, César , Bailey Klinger, Albert‑László Barabási, and Ricardo Hausmann. The Product Space Conditions the Development of Nations. Science, vol. 317, no. 5837, 14 July 2007, pp. 482–487. Science, https://doi.org/10.1126/science.1144581.
6. Levchenko, Andrei A. “Institutional Quality and International Trade.” The Review of Economic Studies, vol. 74, no. 3, July 2007, pp. 791–819. http://doi.org/10.1111/j.1467-937X.2007.00435.x.
7. Munday, Max, Robert Huggins, Wanxiang Cai, Nikos Kapitsinis, and Annette Roberts. “The Transformative Potential of Inward Investment on Industrial Cluster Development: The Case of the Semiconductor Industry in Wales.” European Planning Studies, vol. 32, no. 7, 2024, pp. 1594–1612. Taylor & Francis, https://doi.org/10.1080/09654313.2024.2319704.

[1] While pinning down the exact cause of low productivity in Wales is a big challenge, studies identify low Research and development (R&D) spending, restricted access to finance, and a weak skill base as key contributing factors. See Jones (2025) and Henley (2024).

[2] Economic theory suggests that access to market opportunities incentivizes firms to invest in productivity-enhancing activities, including innovation. More productive firms are also better positioned to exploit such opportunities, both across products and geographies. This two-way relationship underpins a virtuous cycle, as documented in the literature on exporting, R&D, and productivity (e.g. Aw et al. 2022).

[3] As good quality data on detailed trade-flows is not available for Wales complexity analysis could not be performed. The implication is based on the authors’ understanding of the Welsh economy and insights from Henley (2024) and Munday et al. (2024).