Hinrich-IMD Sustainable Trade Index experts explain how decision–makers can benefit from looking at industrial policy. ...
Industrial policy – strategic government assistance aimed at both businesses and entire sectors to boost or reshape economic activities – is in vogue.
Its roll-out has vastly accelerated in the last 10 years. Between January 2023 and June 2024, approximately 4,000 trade-distorting industrial policy measures were implemented worldwide, according to figures from Global Trade Alert and the IMF. Advanced economies accounted for the lion’s share, a trend that’s been accelerating since 2010.
“The motives for these policy creations are often said to be climate-related priorities, the need for supply-chain resilience, and geopolitical and national security concerns. Mostly, however, it’s strategic competitiveness, as governments feel compelled to engage in industrial policy to be competitive,” said Chuin Wei Yap, Program Director of International Trade Research at the Hinrich Foundation.
In a webinar that took place during the launch of the Hinrich-IMD Sustainable Trade Index (STI), a panel of experts discussed whether the current approach to industrial policy was making economies more resilient (or not) and what might be done differently. A fresh medley of data and analysis on the topic was unveiled in the Index, in which New Zealand performed best.
Given that governments use industrial policies to address economic, societal, and environmental challenges, the STI is one of the most relevant resources for those who want to effect change in this area, as it allows for the comparing and contrasting of relevant data points and the identification of trade-offs in 30 different global economies.
Many of the STI’s indicators drill down into industrial policy-related spheres such as state policies, subsidies, and direct grants by measuring, say, tariff and non-tariff barriers, investment freedom, and country credit ratings.
“Industrial policy is becoming increasingly relevant at a time when governments and companies are worrying about how to make their supply chains more resilient,” said Yap. “So we are at a good juncture to consider if we are heading in the right direction.”
The STI’s 72 data points, called “indicators” in the report, are structured into three major “pillars” of sustainability – economic growth, societal advancement, and environmental stewardship – in a bid to measure how economies balance conducting open trade with prudent societal and environmental policies.
Many of the STI’s indicators drill down into industrial policy-related spheres such as state policies, subsidies, and direct grants by measuring, say, tariff and non-tariff barriers, investment freedom, and country credit ratings. Achieving balanced outcomes between the three pillars is essential for economic resilience, hence the title of the 2024 STI report: The race for resilience.
“Environmental resilience in terms of climate change – say, specifically, transitioning to green energy – requires foresight from the point of view of both public and business decision-makers. Take economic resilience: big trade players worldwide have established policies such as the EU’s Carbon Border Adjustment Mechanism (CBAM), the IRA (Inflation Reduction Act) in the US, the PLI (Production Linked Incentive) Scheme in India, and China’s Dual Circulation Strategy. These focus on domestic production and create more resilient supply chains. But one outcome is an increase in different trade restrictions,” said Christos Cabolis, Chief Economist at the IMD World Competitiveness Center. For those economies analyzed in the STI, tariff barriers have risen by 13% while non-tariff barriers have increased by 23% since 2023’s edition.
Both the recent and distant past suggest that governments still have lessons to learn about industrial policy. There are ways they can raise their game, says Simon Evenett, IMD Professor of Geopolitics and Strategy. However, he cautioned, “We are not seeing governments returning to creating and running firms themselves; they are hoping to attain industrial policy objectives through private sector markets. And so, industrial policy has to be designed with the private sector’s responses in mind.”
Governments, Evenett says, could move ahead in four ways:
It could also be very helpful to ask, “What are we not doing?” said Deborah Elms, Head of Trade Policy at the Hinrich Foundation.
“I’m not sure it’s even possible to identify in advance a critical health product for a resilient supply chain,” she said. “For example, would we ever have put an antibacterial handwash on a critical health product list before 2020?
“We might make ourselves so busy stockpiling these products that we neglect something else. There are trade-offs present, and you can see these playing out in the STI, encapsulated in different parts of the data. If you have more here, you have less somewhere else. How do those tensions play out? What happens when you prioritize the economy over society, or society over the environment? This is a key question for governments.”
The STI captures this reality: behavior in one STI pillar may disrupt or benefit another pillar. “The workforce, for instance, [which is measured in various ways in the societal pillar] may absorb disruptions and help adapt to new realities in other pillars,” said Cabolis.
You need to have the data before you can come up with policy solutions to a variety of problems. And those kinds of measurements are captured in the STI.
Does industrial policy encourage the kind of overcapacity that is damaging to markets in the long run? Is overcapacity true or are we witnessing a “herd stampede mentality in that general direction?” asked Elms.
“I am increasingly concerned about the use of the term ‘overcapacity’,” she said. “What’s the difference between this term and ‘exports’? Sometimes, when governments complain about overcapacity, I ask whether that isn’t the strategy of export-led growth that’s been successful for a long time now.”
“Because we are so vague about the definition of industrial policy success, it’s very easy to over label everything around the dumping of products as ‘overcapacity,’ or ‘exporting’ or ‘exporting at a value.’ We can’t have policies based on unclear definitions of what we are talking about, as that leads us to have policy discussions that are equally as vague and non-sensical and that fail to identify trade-offs: those things you are not doing but which are vital,” she added.
“You need to have the data before you can come up with policy solutions to a variety of problems. And those kinds of measurements are captured in the STI.”
Subsidies are not a panacea, and less so for the developing world. Developing countries don’t have enough money to subsidize their way out of problems anyway, and even for the richest ones “the subsidy war is ruinously expensive,” said Elms.
“Instead of picking winners in a specific sector – which may or may not work – how about focusing on broader-based issues like education? If we have a better-educated workforce (an STI objective) and a sustainable environment in which people are not succumbing to pollution, then we have a healthier population able to work. Those kinds of policies might be harder to pinpoint but can make a big difference.”
The Index can help identify more broad-based goals like this. “In the middle of the Index, there are some developing economies that are highly ranked and some richer economies that you might not expect to be so far down on the ranking. They can find out the right set of alignment for their own circumstances, wherever they are on the development scale,” Elms added.
China provides an interesting playground for discussing the subsidy merry-go-rounds. “There, you have to decide sector by sector on their viability,” said Evenett.
“I think of Chinese industrial policy as a tournament between the provinces and cities for who can build the best firms. Eventually, the Chinese allow a small amount of firms to go forward and the others get culled. It’s a tournament that anyone can show up to, but don’t think that just because you got in you are going to survive more than five or 10 years. There has to be a disciplined process for withdrawing subsidies and that’s the exit point that I mentioned earlier – the fourth of the big lessons.”
Ultimately, it’s not so much about choosing which industrial policy can work best for any given country as asking, “Why is the private sector underperforming?” Evenett stressed. Then a plan can be made about how the government can help facilitate a scaleup by the private sector.
Even with the right taxonomy, and clearly set objectives, the path ahead will be particularly challenging in cases of “more nebulous measures of strategic competition,” as Yap called them.
In such instances, coordination becomes more important than ever, Cabolis said, citing the work of countries who are joining forces to align industrial policies with respect to tariffs on different products with their objectives on environmental sustainability and agreeing to remove tariffs if the environmental criteria is met.
Too many different governments are trying to find solutions alone, meaning more collaboration in the form of smaller member groups could be very beneficial.
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