Navigating Global Trade: Should Developing Economies Emulate US and China's Industrial Policies?

 The global trade landscape is undergoing rapid changes, prompting policymakers to rethink their approach. In the past, developing economies embraced globalization and opened their markets, but now concerns about trade fragmentation and rule flouting have emerged. This raises the question: should developing economies follow the United States and China's path by implementing industrial policies and trade restrictions to protect key sectors?

Historically, there has been a debate on whether developing economies should turn inward to safeguard their industries. Import-substitution policies were once favored to reduce reliance on foreign markets, but this perspective has been challenged. The success of countries like the United States and Western Europe indicates that openness, competition, and resource reallocation played a significant role in their economic growth. High tariffs did not prevent the US from becoming a global economic power, and Western Europe's transition from agriculture to industry and services was driven by market dynamics.

While the debate on industrial policy continues, it is important to consider the experience of successful East Asian countries. South Korea's remarkable export growth, for example, was driven by factors such as a realistic exchange rate and accessible credit for exporters, rather than targeted industrial policies. Quantitative models suggest that the impact of industrial policies may be limited in terms of productivity growth and transformative effects.

What sets the current situation apart is that major players like the US and China have explicitly embraced industrial policies. China's "Made in China 2025" initiative and the US's protectionist measures in the steel and aluminum industries are examples of this shift. The European Union also has its industrial strategy. However, it is crucial to recognize that these countries can afford such subsidies, which may not be viable for developing economies. Developing economies should be cautious about following this trend. Expensive subsidies can strain fiscal resources, and the benefits may not materialize as expected. Trade restrictions can lead to protectionism, reducing export earnings and impeding economic growth. 

Developing economies often benefit more from engaging with the global economy, attracting foreign investment, and acquiring technology. Scarce public funds might be better allocated to improving health, education, and poverty alleviation. China's shipbuilding industry serves as an example of how massive subsidies can be inefficient, leading to excess capacity and distorting markets. Developing economies have achieved significant progress by participating in the global market, rather than closing their doors to spur domestic innovation. The openness of the reform period since 1990 has contributed to convergence between rich and poor countries worldwide.

In summary, developing economies should carefully consider the potential implications of adopting industrial policies and trade restrictions. They should weigh the costs and benefits, acknowledging that the experiences of richer nations may not be directly applicable. Instead, continued engagement with the global economy offers substantial opportunities for growth and development, leveraging foreign investment, technology transfer, and export-oriented strategies.

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Source: IMF(International Monetary Fund) https://www.imf.org/en/Publications/fandd/issues/2023/06/the-return-of-industrial-policy-douglas-irwin?utm_medium=email&utm_source=govdelivery