4. Industrial Strategy
Risk level: High - June 2026
The War Economy Is Not a Metaphor
When we talk about a "war economy" in the UK context, we are not reaching for drama. We are describing a set of structural choices that have been made over decades, and the consequences of those choices are now fully visible.
The UK has systematically run down its domestic manufacturing base. Not through neglect alone, but through active policy: trade liberalisation without adequate defensive measures, procurement practices that rewarded the cheapest global supplier regardless of strategic risk, and an intellectual framework that treated "the economy" as a single abstract thing rather than a set of concrete capabilities. The result is a country that can design advanced military systems but cannot manufacture the steel plate they are built from. That can field a credible nuclear deterrent but depends on a single foreign supplier for the nitrogen fertiliser that underpins a significant portion of its food production. That can install offshore wind turbines but cannot produce the cables, switchgear, and transformers that connect them to the grid.
This is not a pre-crisis warning. This is a post-crisis observation. The supply chain disruptions of 2020 to 2025 exposed the shape of the problem. What we are now describing is what a government that understood those lessons would actually do about it.
The good news: the UK still has enough of the right foundations to rebuild. The bad news: it will take real money, real political will, and real time. No clever procurement trick will substitute for them.
Why Industrial Strategy and Not Just Trade Policy?
Industrial strategy is not protectionism. Protectionism is a stance toward trade. Industrial strategy is a stance toward capability. The distinction matters.
A government can run a genuinely open trading regime and still maintain strategic industrial capacity. The two are not opposites. Germany did it for decades through its legendary Mittelstand and its patient capital ecosystem. Japan did it through deliberate sector development. South Korea turned it into an art form via the Chaebol system. The United States does it through the massive carve-outs in its trade agreements for national security procurement, through DARPA, through the CHIPS Act, through agricultural subsidies that bear no relationship to comparative advantage.
The UK has been an outlier in its ideological commitment to the idea that the market, left alone, will produce the right industrial structure. It will not. Markets optimise for cost and efficiency on the timescale of quarters and years. Strategic resilience requires thinking across decades. That gap has to be filled by deliberate policy.
[RQ-08 - Historical precedent anchors: the suggestion that an active UK industrial strategy is unprecedented or markets-will-do-it-better does not survive basic historical comparison. The Manhattan Project (US, 1942–1945: state-directed R&D programme pulling multiple private sector actors into a single coordinated mission - it produced the atomic bomb and the prototype for post-war US science infrastructure within three years). South Korea (1960s–1990s: the government directed credit, protected infant industries, and built export markets for steel, shipbuilding, electronics, and automobiles through state-owned banks and targeted industrial policy - the outcome was one of the fastest sustained industrial transformations in recorded history, from one of the world's poorest countries to a technology exporter). Nixon's decision to end the dollar–gold convertibility (1971: a deliberate state act that restructured the global monetary architecture for thirty years - it shows that even governments committed to free-trade ideology will act strategically when national interest requires it). The objection that state-directed industrial strategy does not work is not a finding of economic science. It is a political preference dressed as a conclusion.]
What follows is not a comprehensive industrial strategy for every sector. It is a prioritised set of interventions that address the most consequential capability gaps, structured around what can realistically be done in the 2026 to 2028 window.
Sector Priorities: Where to Intervene and Why
Not all industrial sectors are equal from a national resilience perspective. The test for priority should be: if this supply chain broke, would it materially degrade the UK's ability to defend itself, feed itself, or maintain basic economic function?
Steel
Steel is the most immediate and obvious priority. It is the foundational material of industrial civilisation. Defence equipment, infrastructure, construction, energy platforms, and transport all depend on it. The UK still has some domestic capacity, but it is fragile, and the electric arc furnace route that would make it competitive in a decarbonised world requires significant capital investment that the private sector alone will not commit without a clear policy signal.
The strategic case is unambiguous. Every advanced military platform, from naval vessels to armoured vehicles to the substrates of semiconductor fabrication, flows through steel. The UK cannot outsource its national security metallurgy.
This connects directly to Part 3 (Energy) because offshore wind platforms, nuclear containment structures, and grid infrastructure all require heavy steel plate and specialized steel alloys. A UK that imports its steel from four countries is in a position where an escalation in any one of those relationships degrades multiple critical programmes simultaneously.
Chemicals and Fertilisers
This is the link to Part 2 (Food Security) that deserves explicit emphasis. Nitrogen fertiliser production is a chemicals industry product. The Haber-Bosch process that synthesises ammonia from natural gas and air is chemistry, not agriculture. The UK once had a domestic fertiliser industry of substance. It has been largely shuttered by high energy costs and competition from lower-cost producers.
What is less widely understood is that the chemicals sector is a general-purpose industrial capability. It produces the precursors for explosives and propellants (defence relevance), for pharmaceuticals (health security), for industrial coatings and adhesives (manufacturing), and for agricultural inputs (food security). A country without a meaningful chemicals sector is a country with a fundamentally constrained industrial ceiling.
The rebuilding task here is not simple. Chemicals plants are capital-intensive, energy-intensive, and require specialist engineering knowledge that takes a decade or more to develop in a workforce. But the alternative is permanent strategic dependency on imports for a sector that touches everything.
Defence Supply Chains
This is the area where the war economy framing is most literal. The UK's defence industrial base has its own supply chain vulnerabilities, and they are well-documented in the classified threat assessments that will never be published in a post like this but are well-known to practitioners in the sector.
The immediate pressures are: shipbuilding capacity (very limited globally, under severe demand), munitions production (running hot to supply Ukraine and simultaneously trying to replenish UK stockpiles), and specialist electronics and sensors (where the UK has genuine capability but is at risk of being outbid by US and Asian customers for limited production capacity).
The medium-term problem is more structural. Many defence supply chains are single-source by design: a subcontractor that is the only global supplier of a specific precision component. Those concentrations have been tolerated because global trade was assumed to be stable. That assumption has been retired.
Semiconductors
The UK has genuine capability in compound semiconductors, ARM chip design, and compound semiconductor fabrication (particularly at sites like Newport Wafer Fab). These are not leading-edge silicon foundries; that ship has sailed. But they are strategically significant and increasingly contested.
Semiconductors belong on this list not because the UK can compete at TSMC scale, but because specific niche capabilities in defence-grade chips, RF components, and specialized sensors are both commercially viable and operationally critical. A government that lets those capabilities migrate offshore because the market decided they were not profitable enough has made a category error about what strategic value means.
Artificial Intelligence: A Capability Multiplier, Not a Sector
AI belongs in this post as an industrial capability, not as a separate technology strategy. Its relevance is concrete: it improves performance in the sectors already prioritised here - grid balancing, industrial process control, logistics, defence systems, and health diagnostics. Treated as a standalone "tech economy" story, it becomes a distraction from the structural argument. Treated as infrastructure for the sectors above, it is directly useful.
The policy mechanism is state anchor demand with sovereignty conditions. Public contracts for AI in high-value domains - NHS, defence, tax, planning, infrastructure operations - should require UK data residency, model portability, open interfaces, and UK operational control of the deployment environment. That creates a domestic market for UK-based firms while reducing lock-in to foreign hyperscalers.
The compute question should be framed honestly. The UK is not going to outspend US frontier labs on general-purpose model training. The strategic play is sovereign capacity for public and defence workloads, plus targeted support for domain-specific models where the UK has data and institutional advantages: health, defence, and the specific industrial sectors described in this post. Interoperability standards across departments and explicit procurement preference for portable systems are the practical enablers.
For the NHS-specific data control-plane design, see Part 5 (Health and Social Care).
Grid Equipment
This connects directly to Part 3 (Energy) and deserves particular emphasis because it is the most unglamorous but most immediately consequential gap.
The UK is attempting the largest offshore wind buildout in its history. It is also attempting a major nuclear programme. Both of these require transformers, switchgear, cables, and protection systems. The global market for grid equipment is tight, lead times are measured in years, and a significant portion of critical equipment comes from a very small number of manufacturers, several of them in countries with whom the UK has complicated strategic relationships.
Grid equipment is not exciting. It does not appear in defence white papers. It will not generate a ministerial announcement. But a grid that cannot transmit the power it generates is not a functioning energy strategy.
Immediate Actions: Now Through End of 2026
The 2026 window is short and the interventions must be focused on removing immediate barriers rather than building new capacity, because new capacity takes years. What can be done in months is procurement reform and regulatory acceleration.
Emergency Procurement for Domestic Steel
The single most immediately actionable lever is government procurement. The UK public sector is a massive buyer of steel. Construction projects, defence contracts, and infrastructure programmes together represent demand that could anchor a significant portion of domestic steel production.
The current problem is that procurement rules and commercial practice do not systematically weight strategic supply chain resilience. "Most economically advantageous tender" is interpreted as lowest price in most cases. Changing that interpretation, even before any legislative change, is within the gift of the Cabinet Office and the Crown Commercial Service.
The practical step: issue procurement guidance that instructs major public buyers to apply a supply chain resilience criterion alongside price and quality, with domestic content weighted where it exists. This does not require a WTO exception; it is already permitted under existing trade agreement provisions as a technical regulation applying equally to all bidders.
Chemicals and Fertilisers: Emergency Stockpiling and Supply Agreements
For fertilisers specifically, the immediate priority is not building new production capacity (that takes years) but ensuring that existing supply chains are de-risked and that domestic stockpiling provides a buffer against disruption.
The government should negotiate long-term supply agreements with existing producers, using the agricultural sector's purchasing power as the anchor. Where those agreements involve capital investment in UK production, co-investment structures should be put in place now (see below). In the interim, strategic stockpiling of a season's worth of nitrogen fertiliser supply is a cheap insurance premium against a disruption that could reduce UK food production by 20 to 30 percent in a single growing season.
This is a direct continuation of the analysis in Part 2 (Food Security), which should be read alongside this post.
Public Sector Buying British
Beyond steel, the public sector buys a vast range of manufactured goods. Construction materials, mechanical and electrical equipment, vehicles, uniforms, and hundreds of other categories represent demand that can be directed toward domestic suppliers with the right procurement guidance.
The practical constraint here is not legal: the UK has significant latitude in public procurement for environmental, social, and strategic criteria under existing trade agreement carve-outs. The constraint is institutional: the commercial civil service has been trained for decades to buy on price, and changing that culture requires leadership from the centre.
This requires a political decision that this matters, communicated clearly to the Treasury and the Cabinet Office, followed by procurement guidance with teeth.
Medium-Term: 2027 to 2028
The medium-term interventions are about building capacity that does not yet exist. This is where the real money and the real political commitment are required.
Accountability Structure: Named Body and Named Minister
The 50-year history of failed UK industrial strategy has a consistent institutional signature: no named body, no named person, no statutory basis for the accountability relationship. Every previous industrial strategy document has described an aspiration without specifying who is legally responsible for delivering it. The result has been the same every time: the aspiration dissolves into inter-departmental committees, vague responsibility, and no one to answer when it goes wrong.
The programme's industrial strategy must name the body and the accountable minister. The correct structure is a revamped Department for Business and Trade (DBT) with a statutory Industrial Strategy Unit (ISU) established on a clear legal footing - reporting directly to the Secretary of State for Business and Trade, with its own director-general-level head, a named director in post within six months of the programme's commencement, and a statutory obligation to report annually to Parliament on progress against the sectoral targets set out in this programme. The Secretary of State - not a junior minister, not an arm's length body - carries the parliamentary accountability. The ISU carries the operational delivery.
The alternative - distributing accountability across DBT, the Department for Energy Security and Net Zero, the Ministry of Defence, the Treasury, and the Cabinet Office - is the institutional design that has already failed. The industrial strategy requires a single institutional home with a single named accountable person. That is not a bureaucratic preference; it is the lesson of every previous UK industrial strategy failure.
The specific ministerial accountability: the Secretary of State for Business and Trade is answerable to Parliament for the industrial strategy's delivery against the sectoral milestones in this programme. That accountability is non-delegable to arm's length bodies. The ISU director-general attends the relevant select committee quarterly and publishes an annual delivery report against the milestones in this programme. This is the institutional spine that makes the rest of the industrial strategy executable rather than aspirational.
Capital Co-Investment Mechanisms
The fundamental problem with rebuilding industrial capacity in the UK is the capital gap. Private capital is risk-averse, short-termist, and oriented toward sectors with proven and rapid returns. Industrial capacity in steel, chemicals, and grid equipment is capital-intensive, has long payback periods, and carries technology and market risk that financial capital systematically avoids.
The solution is not to replace private capital but to de-risk it sufficiently that it becomes willing to participate. The mechanisms for this are well-established internationally and include:
Patient capital funds that take equity positions with long hold periods, targeting 15 to 20 year returns rather than the 5 to 7 year returns that define conventional private equity. The British Business Bank has some capability here, but it needs to be scaled and directed specifically toward strategic industrial sectors.
Co-investment structures where government and private capital enter together, with government taking the first-loss position to absorb the downside risk that makes private capital reluctant. This is how the German KfW system works, and it is why German Mittelstand companies have patient capital available in ways that UK firms rarely do.
Worker-owned alternatives. The industrial strategy should not assume that the only ownership model for strategic enterprises is the publicly listed or private equity-backed company. Co-operative and mutual ownership - where the workforce collectively owns and governs the enterprise - have a documented track record of delivering advanced manufacturing capability with longer time horizons and stronger investment in human capital than conventional firms. The Mondragon Cooperatives in the Basque Country, now comprising 97 worker-owned companies across advanced manufacturing, finance, and retail with over 81,000 employees and revenues exceeding €11bn, are the clearest proof-of-concept: worker ownership is compatible with global competitiveness, R&D investment, and industrial scale. The British Business Bank's patient capital facilities should explicitly include co-operative start-ups and employee-owned business conversions as eligible recipients - particularly for supply chain firms in steel, chemicals, and grid equipment where the continuity of ownership and workforce expertise matters more than the speed of shareholder exit. This is not a separate social policy. It is a tool for solving the short-termism problem the industrial strategy already identifies as central.
Contracts for difference adapted for industrial products. The mechanism used to support offshore wind (guaranteeing a price for a defined period to make investment viable) can be applied to other strategic products. A CFDIrons: guaranteeing a floor price for UK-produced steel plate over a 10 year period to make the capital investment in electric arc furnace capacity viable.
The UK Infrastructure Bank
The UK Infrastructure Bank was established with a mandate to invest in infrastructure that supports the transition to net zero and levelling up. It has capacity. What it needs is a clear strategic directive to treat industrial resilience as within its mandate, alongside its existing objectives.
The Bank's lending capacity, combined with its ability to take equity positions, makes it the right vehicle for the co-investment structures described above. The enabling condition is that the Treasury sets a clear expectation that industrial resilience is a qualifying investment criterion.
Skills and Apprenticeships for Industrial Capacity
This is the slowest-moving and most-underestimated problem in the entire industrial strategy framework.
Every sector identified above requires specialist engineering skills that take years to develop. Steelworkers, chemical process engineers, specialist welders for nuclear and offshore applications, switchgear technicians: these are not skills that can be trained in a weekend course or a 6-month bootcamp. They require years of structured apprenticeship and on-the-job experience.
The pipeline problem has two dimensions. The first is attracting young people into industrial careers when the cultural signal for two decades has been that manufacturing is a failure state and university is the only respectable path. That cultural signal was wrong, and reversing it requires a sustained counter-narrative backed by genuine opportunity: real wages, genuine career progression, and visible investment in facilities.
The second dimension is the loss of institutional knowledge. The UK has shed an entire generation of experienced industrial workers and managers. Rebuilding that knowledge base cannot be compressed. It starts now, with apprenticeship programmes that will not produce qualified workers for 3 to 5 years, and that will not produce experienced senior workers for 10 to 15 years.
This is why the frequently-asked question "why can't we just build this quickly?" has a genuine answer: because the human capital cannot be conjured. This is the honest constraint that politicians find most inconvenient to communicate.
The North Sea Industrial Link
Part 3 (Energy) covers the energy system directly, but the North Sea deserves a specific mention here because it is simultaneously an energy asset and an industrial ecosystem.
North Sea oil and gas production requires offshore platforms, subsea infrastructure, specialist vessels, and ongoing maintenance services. Every one of those requirements represents demand for steel plate, specialist steel alloys, chemical coatings, heavy engineering, and precision manufacturing. The supply chain that supports North Sea extraction is the same supply chain that would support offshore wind construction, naval shipbuilding, and major infrastructure projects.
When North Sea production declines without a replacement industrial ecosystem to absorb the same supply chains, those capabilities atrophy. Steel plate mills that serve offshore platforms lose their customer base. Specialist fabrication yards that service rigs lose their workload and close. The workers retire or retrain and the knowledge leaves with them.
The deliberate policy response is to use the North Sea transition as a planned industrial ecosystem shift: as offshore wind construction ramps up, it should actively absorb the same supply chains that North Sea oil is releasing. This requires coordination between energy policy and industrial policy that has historically been absent. It also requires that the government treat the supply chains as strategic assets to be preserved, not just market participants to be left alone.
Additionally, the chemicals link is direct and underappreciated. North Sea gas contains the methane that is the feedstock for the Haber-Bosch process. The closure of North Sea production without replacement feedstock supply arrangements is a direct threat to any future UK fertiliser production capability. This is food security through the chemistry of agriculture, and it connects back to Part 2 (Food Security).
The Trade and Procurement Lever
Government procurement is the largest single buyer in the UK economy. The NHS, the Ministry of Defence, local authorities, and the wider public sector collectively spend hundreds of billions of pounds annually. That purchasing power is largely unused as a strategic tool.
The Trade Remedies framework and WTO GPA (Government Procurement Agreement) constraints are real but frequently overstated. The GPA permits procurement preferences for national security. It permits environmental and social criteria. It does not require governments to buy the cheapest global option regardless of strategic consequence.
The practical opportunities include:
Strategic reservations in trade agreements: carving out specific sectors or product categories where domestic suppliers are given meaningful preference. This is done routinely by the US, Japan, and the EU. The UK has been reluctant to exercise this option, largely because the Treasury and the Department for Business are institutionally oriented against it. Changing that orientation is a political decision.
Local content requirements in public procurement: requiring that major contracts contain meaningful UK content commitments, not as a box-ticking exercise but as a binding commercial condition. Where UK content is not available, requiring supply chain diversification plans.
Buy British but correctly: the phrase "Buy British" is politically popular and substantively meaningless without the institutional infrastructure to make it work. What is needed is a proper definition of "British" for procurement purposes, a certification system to validate it, and procurement guidance that commercial civil servants can actually apply without exposing themselves to legal challenge.
The Honest Constraints
Industrial strategy fails when it is presented as something that can be done quickly, cheaply, or without difficult trade-offs. This post would be incomplete without stating those constraints clearly.
Time: building a new steel melt shop takes 5 to 7 years. A chemicals production facility takes 7 to 10 years. Training a qualified chemical process engineer takes 4 to 6 years. A specialist welder for nuclear applications takes 3 to 5 years. The interventions described in this post will show meaningful results in 3 to 5 years for the most optimistic cases, and 10 to 15 years for the full capability build. There is no shortcut.
Capital: the capital required to rebuild meaningful industrial capacity in steel, chemicals, and grid equipment is substantial. Order of magnitude estimates: a competitive electric arc steel mill serving the UK market would require 1 to 2 billion pounds of investment. A mid-scale ammonia/fertiliser plant would require 0.5 to 1.5 billion pounds. Grid equipment manufacturing capability, properly established, would require several hundred million. These are not large by Treasury standards but they are large relative to how the current spending review cycle works.
Skills: the pipeline problem is real and cannot be solved by policy announcement alone. Apprenticeship programmes take years to scale. University engineering courses take 3 to 4 years to produce graduates. Experience takes a decade to accumulate. This is the constraint that makes the "start now" urgency most acute: the skills you need in 2035 have to be recruited and trained in 2026.
Political commitment: every intervention described here will face opposition from those who benefit from the current model (importers, foreign suppliers with established relationships, commercial interests that profit from low-cost global supply), and from those who believe ideologically that government should not intervene in industrial structure. Sustaining a 10 to 15 year industrial strategy across multiple electoral cycles requires a degree of political consensus that the UK has historically found very difficult to achieve.
Cost vs Inaction
The final question for any industrial strategy is: is this worth it?
The cost of inaction is the cost of a supply chain disruption without the domestic capacity to absorb it. The 2020 to 2025 period gave us multiple previews: semiconductor shortages that closed car factories, fertiliser shortages that spiked food prices, energy price spikes that demonstrated the cost of gas dependency, and defence supply chain pressures that revealed how thin UK stockpiles and production capacity actually are.
Those disruptions occurred in a period of relative geopolitical stability. The scenarios for a more acute disruption, in a genuine security crisis or a major conflict that disrupted global shipping, are more severe. A UK that cannot produce its own steel, fertilisers, basic chemicals, or grid equipment, and that depends on global supply chains running through contested waters, is a UK with fundamental strategic vulnerabilities that no amount of financial hedging can address.
The cost of building resilience is real, ongoing, and visible in budget line items. The cost of not building it is hidden until the moment it materialises as an emergency. This asymmetry is the core argument for industrial strategy: the cost of prevention appears high until you calculate the cost of the crisis it was designed to prevent.
What Comes Next
Industrial strategy connects to every other part of this series. The energy programme described in Part 3 (Energy) requires the grid equipment manufacturing capacity described here. The food security measures described in Part 2 (Food Security) require the chemicals sector capability described here. The defence programme that will be described in Part 6 (Defence) requires all of it.
The fiscal implications are substantial and will be addressed in Part 5 (Fiscal Framework). The capital investment required is real. So is the cost of going without it.
This is the framework. The specifics will be developed in the posts that follow.
Part 4: Industrial Strategy - part of The Country That Works For You series
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