## htnea2024002 - Introduction ## Source details **Canonical URL:** [htnea2024002 - Introduction](https://www.imf.org/-/media/files/publications/howtonotes/2024/english/htnea2024002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/howtonotes/2024/english/htnea2024002.pdf.md) - [Structured JSON version](/-/media/files/publications/howtonotes/2024/english/htnea2024002.pdf.json) --- ### Introduction: scope and staff role - Industrial policy (IP) is defined as government efforts to shape the economy through targeted measures on specific domestic industries, firms, or economic sectors to achieve certain economic or strategic objectives. - IMF staff general view: - Discriminatory features are almost always unnecessarily costly, encourage retaliation, and should be discouraged. - Non-discriminatory industrial policies may still distort trade and FDI patterns; trade and investment spillovers should be considered along with domestic benefits and costs. - Design matters: - Some IPs address market failures or emergencies effectively; many do not or do so with high domestic costs or harmful global effects. - Policies aimed at giving competitive advantage to particular domestic sectors or firms often reflect political economy pressures and should be approached critically. - WTO considerations: - IMF staff should primarily assess policies on economic arguments but ensure recommended measures and program conditionality are consistent with a member’s WTO legal obligations. - The IMF does not judge WTO consistency; definitive rulings are the jurisdiction of WTO dispute settlement panels and the Appellate Body. - National or international security considerations: - Staff should examine and discuss economic impacts and cross-border spillovers in staff reports but would neither assess the appropriateness of measures invoked on national security grounds nor provide policy advice on those measures. - Limitations do not normally apply to policies motivated by “economic security” (policies taken to further economic objectives). ### Guidance on trade and trade-related policies: when and how to engage - When to address measures: - Country teams should apply standard surveillance criteria; measures should be addressed when they are macro-critical or generate spillovers (per the Integrated Surveillance Decision (ISD)). - Whether a measure falls under WTO rules does not affect the decision to address it, but IMF advice should not contradict a country’s WTO legal obligations. - Export restrictions: - Generally an unnecessarily costly and inefficient means to promote domestic industry and can have significant negative spillovers. - Domestic costs include lost export revenue, incentives for circumvention and corruption, and diversion of scarce resources. - If a country is a “large” producer, such restrictions can drive up prices and volatility on world or regional markets. - WTO: Article XI of GATT generally prohibits bans and other quantitative restrictions on importation or exportation of goods, though temporary exceptions exist to prevent or relieve critical shortages. Obligations on export duties vary by country; many WTO members have accepted binding maximum export duty rates on particular products—teams must check on a country- and product-specific basis. - Export subsidies: - Introduce domestic economic distortions, have fiscal costs, and directly distort international markets; with very few exceptions, they are prohibited by WTO rules. - Export subsidies involve benefits from a public entity to a firm or industry contingent on export performance and may arise from direct or indirect tax provisions, financing on non-commercial terms, and other forms. - WTO rules prohibit export subsidies, including corporate tax provisions that incentivize exports; a few remaining exceptions are being phased out, with special provisions for least developed countries. - Import restrictions and tariffs: - Import restrictions raise economic distortions; IMF staff advises moving toward tariffs that are relatively low and relatively even and to avoid policy reversals that create policy uncertainty. - Measures treating imports the same as domestically produced goods typically raise no concerns (e.g., border adjustments common to excise and value-added tax regimes). - Border carbon adjustments (BCAs) raise special issues (see Box 1). - Each WTO member has a binding, maximum tariff rate on most tariff lines; IMF staff does not advise exceeding the tariff binding but may advise reducing rates below the binding. - Subsidies not contingent on exporting: - Their use is growing rapidly; they can address market failures but may distort trade and investment, undermine trade commitments, carry fiscal costs, and prompt countermeasures. - Recent data for China, the European Union, and the United States shows on average there is a 73.8 percent probability a subsidy for a given product by one major economy is met with a subsidy for the same product by another within one year. - IMF staff should assess policy objectives, design effectiveness, fiscal and domestic costs, potential spillovers, and likely policy responses of other governments; consult with the WTO Secretariat when concerns of WTO inconsistency arise. - Domestic subsidies can be “actionable” (other governments can impose countervailing duties or pursue removal/modification via WTO dispute settlement), subject to demonstrating impact on their markets or firms. - Local content requirements (LCRs): - Require use of certain domestically produced goods or as a condition to receive a subsidy. - Tend to be specified in volume terms, are opaque, inhibit competition, reduce product diversity, raise prices, divert resources, promote rent-seeking, and encourage harmful policy responses. - LCRs will normally directly violate WTO non-discrimination principles and should be flagged in IMF reports if macro-critical. - Policies to attract or limit FDI: - IMF staff generally discourage direct interventions to favor or disfavor FDI in particular industries, while recognizing benefits from greater FDI overall. - Broad export promotion initiatives and initiatives targeted to underdeveloped regions can be positive. - Screening mechanisms for inward (and less often outward) FDI are increasingly common for national security; experience suggests including senior economic officials and relevant non-economic experts in screening to weigh economic costs and benefits. - Investment measures in services may be covered by GATS; GATT (trade in goods) does not generally cover investment measures. ### Box 1 — WTO Rules and Border Carbon Adjustments (BCA): key points - Domestic carbon taxes: - WTO rules allow charges on imports (and rebates on exports) equivalent to internal indirect taxes on the same (“like”) good when produced domestically. - Adjustments are allowed to an internal tax on a particular good or on an input used in a product; carbon emissions may be considered an “input,” permitting application of a domestic carbon tax to embodied carbon in imported products. - Methods of measuring embodied carbon must not be biased toward domestically produced goods. - Emissions trading systems (ETS): - An ETS could be considered an adjustable tax or alternatively a form of domestic regulation; imported products must be treated no less favorably than like domestic products, and border adjustments would likely need to take the form of an equivalent regulation. - Export rebates might be allowed so long as the rebate does not exceed costs incurred by domestic consumers as a result of the regulations (views vary). - Differentiating partners: - BCAs may vary based on objective emissions-related criteria, but not simply on country of origin. - Favorable treatment of some countries could be allowed where (a) participation in a treaty provides an objective test of emissions-related characteristics, or (b) discrimination in favor of developing economies is based on development considerations. - Exceptions (GATT Article XX): - A BCA that violates normal provisions might qualify for an exception if it relates to conservation of exhaustible natural resources and is made effective in conjunction with restrictions on domestic production or consumption. - To qualify, the measure must have an environmental goal, be proportionate in scope, clearly link to domestic policy, and not be a “disguised restriction” on trade or result in “arbitrary” or “unjustifiable” discrimination. - A BCA aiming primarily to preserve domestic competitiveness might not qualify; exemptions or favorable treatment unrelated to climate mitigation could cause failure under the Article XX chapeau. ### Assessing and engaging on subsidies, transparency, and coordination - Transparency and coordination priorities: - IMF and partners encourage improved transparency and analysis, and inter-governmental dialogue to build common perspectives on appropriate subsidy use and design; efforts should involve both finance and trade communities. - IMF staff should use Annex 1 suggested questions to authorities to assess subsidies; if a subsidy is assessed as not meeting objectives, costly, and posing high spillover risks, this assessment should be reflected in the staff report. - The IMF-WTO Cooperation Agreement requires informal consultation between IMF staff and the WTO Secretariat on matters that could raise issues of possible inconsistencies regarding a common member’s obligations. ### Resources available to staff - The Subsidy Platform: a joint effort by IMF, OECD, World Bank Group, and WTO to increase transparency on subsidies across economies and sectors; note that each organization uses its own definition, methodology, and coverage. - New Industrial Policy Observatory (NIPO): - Developed in collaboration with the Global Trade Alert (GTA); updated monthly. - Augments GTA collection to include technology-related measures, each policy’s stated motive, and targeted strategic sector. - Data cover industrial policy-related trade and subsidy measures implemented from January 2023 in a set of 70 jurisdictions, their motivation, and targeted products and sectors. - Caveat: real-time data are affected by a “revelation bias” as information becomes available at different speeds across jurisdictions. - Early Warning Tool: - Based on NIPO data; under development by SPR to alert teams to measures likely of significant relevance and includes indicators such as the share of global trade covered by a measure to help assess potential spillovers. - NIPO and the Early Warning Tool will be updated regularly and made available on the intranet. - Reference Note on Trade Policy and WTO Consistency: elaborates on WTO considerations and policy guidance. - WTO Trade Policy Review Mechanism: provides periodic reviews of member countries’ trade policies and practices. ### Annex 1. Possible Questions for Country Authorities — Purpose and Sample Questions - Purpose: - Support country teams with possible questions that teams could use in discussing trade-related industrial policies with country authorities. - Teams should reach out early to SPRXP for guidance if they plan to raise trade-related industrial policies for their AIV consultations. - Possible questions for authorities (select highlights): - What are the specific policy objective(s) of the measures (for example, employment, environmental, health, investment promotion, regional development, balance of payments, national or international security)? - What is the timeline of implementation? Is there a sunset clause that would trigger the end of the proposed policy? - What indicator is being used to assess the policy objective, and what would be considered a success? - Which specific firms, industries, or regions are targeted for benefits? - How is the policy implemented? For example: - Grants? From what level of government and/or public agency? - Tax provisions? - Financing? (for example, concessional lending; loan forgiveness; connected lending) - Public – private partnerships? - Regulatory provisions? - What are expected fiscal / quasi-fiscal a) expenditures? b) foregone revenues? How is the measure financed? - What is the authority for the program? What entity has approval authority? What entity has oversight? - What domestic industries, groups, or regions will be disadvantaged by the policy? - Which foreign investment and foreign trade partners will be impacted? Are there estimates of the impact on investment and trade in aggregate? With particular partners? - Have the authorities considered the policy’s consistency with their legal obligations in the WTO or other international trade and investment agreements? - What alternative approaches have been considered to address the objectives? What were the pros and cons of these alternatives, including with respect to their impact on trade and investment partners? ### Annex 2. Examples of IMF Policy Lines on Trade-Related Industrial Policies - Industrial Policy: Examples of IMF Policy Advice (country highlights) - China — 2023 Article IV: - Staff emphasized that the use of industrial policies and state interventions are contributing to trade distortions, generating spillovers to the trading system and called for scaling back such policies, accelerating SOE reform, and relying on market forces. - Staff also emphasized that export controls, including those on critical minerals, should be phased out and not be used to provide competitive advantage to domestic industries. - Euro Area — 2023 Article IV: - Staff emphasized that subsidies, investment screening, and export controls should be narrowly targeted to specific objectives, and the authorities should resist calls to use such tools to provide a competitive advantage to domestic industries. - Staff also stressed that the EU should continue to work toward globally cooperative green solutions that minimize distortions. - India — 2023 Article IV: - Staff emphasized that export restrictions on wheat and rice could have wide-ranging cross-border spillovers and could contribute to volatility of international food prices, domestic resource misallocation, rent-seeking behavior, and potential retaliation by trading partners. - Staff noted that the introduction of an Import Management System for IT equipment such as laptops, tablets, and personal computers carries an administrative cost and will create frictions that would hold back growth in important sectors of India’s economy. - Staff called for the expeditious phase-out of the recently-introduced restrictions and called on the authorities to work towards reducing India’s longstanding high tariff and non-tariff import barriers. - Indonesia — 2023 Article IV: - Noting that Indonesia accounts for roughly half of global nickel output, staff pointed out that the costs and other drawbacks of Indonesia’s restrictive policies could include foregone fiscal revenues, domestic resource misallocation, rent seeking, the disruption of international commodity markets, and the potential retaliation by trading partners. - United States — 2023 Article IV: - Staff characterized certain “Made in America” provisions as “bad for U.S. growth, productivity, and labor market outcomes” and called on the authorities to roll back the tariffs and other trade distortions introduced over the past five years. - Such policies “distort trade and investment decisions, disrupt global supply relationships, and risk creating a slippery slope that fragments global supply chains and triggers retaliatory responses by trading partners.” - Moreover, the U.S. “should avoid favoring domestic producers over imports or creating incentives that lead to a fragmentation of the global system for trade and investment.” *Source: IMF | How to Note NOTE/2024/002 — Industrial Policy: Trade Policy and World Trade Organization Considerations in IMF Surveillance (Introduction).* ### Introduction ........................................................................................................... ### htnea2024002 - Introduction ### Introduction: scope and staff role - Industrial policy (IP) is defined as government efforts to shape the economy through targeted measures on specific domestic industries, firms, or economic sectors to achieve certain economic or strategic objectives. - IMF staff general view: - Discriminatory features are almost always unnecessarily costly, encourage retaliation, and should be discouraged. - Non-discriminatory industrial policies may still distort trade and FDI patterns; trade and investment spillovers should be considered along with domestic benefits and costs. - Design matters: - Some IPs address market failures or emergencies effectively; many do not or do so with high domestic costs or harmful global effects. - Policies aimed at giving competitive advantage to particular domestic sectors or firms often reflect political economy pressures and should be approached critically. - WTO considerations: - IMF staff should primarily assess policies on economic arguments but ensure recommended measures and program conditionality are consistent with a member’s WTO legal obligations. - The IMF does not judge WTO consistency; definitive rulings are the jurisdiction of WTO dispute settlement panels and the Appellate Body. - National or international security considerations: - Staff should examine and discuss economic impacts and cross-border spillovers in staff reports but would neither assess the appropriateness of measures invoked on national security grounds nor provide policy advice on those measures. - Limitations do not normally apply to policies motivated by “economic security” (policies taken to further economic objectives). ### Guidance on trade and trade-related policies: when and how to engage - Country teams should apply standard surveillance criteria; measures should be addressed when they are macro-critical or generate spillovers (per the Integrated Surveillance Decision (ISD)). - Whether a measure falls under WTO rules does not affect the decision to address it, but IMF advice should not contradict a country’s WTO legal obligations. - Export restrictions: - Generally an unnecessarily costly and inefficient means to promote domestic industry and can have significant negative spillovers. - Domestic costs include lost export revenue, incentives for circumvention and corruption, and diversion of scarce resources. - If a country is a “large” producer, such restrictions can drive up prices and volatility on world or regional markets. - WTO: Article XI of GATT generally prohibits bans and other quantitative restrictions on importation or exportation of goods, though temporary exceptions exist to prevent or relieve critical shortages. Obligations on export duties vary by country; many WTO members have accepted binding maximum export duty rates on particular products—teams must check on a country- and product-specific basis. - Export subsidies: - Introduce domestic economic distortions, have fiscal costs, and directly distort international markets; with very few exceptions, they are prohibited by WTO rules. - Export subsidies involve benefits from a public entity to a firm or industry contingent on export performance and may arise from direct or indirect tax provisions, financing on non-commercial terms, and other forms. - WTO rules prohibit export subsidies, including corporate tax provisions that incentivize exports; a few remaining exceptions are being phased out, with special provisions for least developed countries. - Import restrictions and tariffs: - Import restrictions raise economic distortions; IMF staff advises moving toward tariffs that are relatively low and relatively even and to avoid policy reversals that create policy uncertainty. - Measures treating imports the same as domestically produced goods typically raise no concerns (e.g., border adjustments common to excise and value-added tax regimes). - Border carbon adjustments (BCAs) raise special issues (see Box 1). - Each WTO member has a binding, maximum tariff rate on most tariff lines; IMF staff does not advise exceeding the tariff binding but may advise reducing rates below the binding. - Subsidies not contingent on exporting: - Their use is growing rapidly; they can address market failures but may distort trade and investment, undermine trade commitments, carry fiscal costs, and prompt countermeasures. - Recent data for China, the European Union, and the United States shows on average there is a 73.8 percent probability a subsidy for a given product by one major economy is met with a subsidy for the same product by another within one year. - IMF staff should assess policy objectives, design effectiveness, fiscal and domestic costs, potential spillovers, and likely policy responses of other governments; consult with the WTO Secretariat when concerns of WTO inconsistency arise. - Domestic subsidies can be “actionable” (other governments can impose countervailing duties or pursue removal/modification via WTO dispute settlement), subject to demonstrating impact on their markets or firms. - Local content requirements (LCRs): - Require use of certain domestically produced goods or as a condition to receive a subsidy. - Tend to be specified in volume terms, are opaque, inhibit competition, reduce product diversity, raise prices, divert resources, promote rent-seeking, and encourage harmful policy responses. - LCRs will normally directly violate WTO non-discrimination principles and should be flagged in IMF reports if macro-critical. - Policies to attract or limit FDI: - IMF staff generally discourage direct interventions to favor or disfavor FDI in particular industries, while recognizing benefits from greater FDI overall. - Broad export promotion initiatives and initiatives targeted to underdeveloped regions can be positive. - Screening mechanisms for inward (and less often outward) FDI are increasingly common for national security; experience suggests including senior economic officials and relevant non-economic experts in screening to weigh economic costs and benefits. - Investment measures in services may be covered by GATS; GATT (trade in goods) does not generally cover investment measures. ### Box 1 — WTO Rules and Border Carbon Adjustments (BCA): key points - Domestic carbon taxes: - WTO rules allow charges on imports (and rebates on exports) equivalent to internal indirect taxes on the same (“like”) good when produced domestically. - Adjustments are allowed to an internal tax on a particular good or on an input used in a product; carbon emissions may be considered an “input,” permitting application of a domestic carbon tax to embodied carbon in imported products. - Methods of measuring embodied carbon must not be biased toward domestically produced goods. - Emissions trading systems (ETS): - An ETS could be considered an adjustable tax or alternatively a form of domestic regulation; imported products must be treated no less favorably than like domestic products, and border adjustments would likely need to take the form of an equivalent regulation. - Export rebates might be allowed so long as the rebate does not exceed costs incurred by domestic consumers as a result of the regulations (views vary). - Differentiating partners: - BCAs may vary based on objective emissions-related criteria, but not simply on country of origin. - Favorable treatment of some countries could be allowed where (a) participation in a treaty provides an objective test of emissions-related characteristics, or (b) discrimination in favor of developing economies is based on development considerations. - Exceptions (GATT Article XX): - A BCA that violates normal provisions might qualify for an exception if it relates to conservation of exhaustible natural resources and is made effective in conjunction with restrictions on domestic production or consumption. - To qualify, the measure must have an environmental goal, be proportionate in scope, clearly link to domestic policy, and not be a “disguised restriction” on trade or result in “arbitrary” or “unjustifiable” discrimination. - A BCA aiming primarily to preserve domestic competitiveness might not qualify; exemptions or favorable treatment unrelated to climate mitigation could cause failure under the Article XX chapeau. ### Assessing and engaging on subsidies, transparency, and coordination - IMF and partners encourage improved transparency and analysis, and inter-governmental dialogue to build common perspectives on appropriate subsidy use and design; efforts should involve both finance and trade communities. - IMF staff should use Annex 1 suggested questions to authorities to assess subsidies; if a subsidy is assessed as not meeting objectives, costly, and posing high spillover risks, this assessment should be reflected in the staff report. - The IMF-WTO Cooperation Agreement requires informal consultation between IMF staff and the WTO Secretariat on matters that could raise issues of possible inconsistencies regarding a common member’s obligations. ### Resources available to staff - The Subsidy Platform: a joint effort by IMF, OECD, World Bank Group, and WTO to increase transparency on subsidies across economies and sectors; note that each organization uses its own definition, methodology, and coverage. - New Industrial Policy Observatory (NIPO): - Developed in collaboration with the Global Trade Alert (GTA); updated monthly. - Augments GTA collection to include technology-related measures, each policy’s stated motive, and targeted strategic sector. - Data cover industrial policy-related trade and subsidy measures implemented from January 2023 in a set of 70 jurisdictions, their motivation, and targeted products and sectors. - Caveat: real-time data are affected by a “revelation bias” as information becomes available at different speeds across jurisdictions. - Early Warning Tool: - Based on NIPO data; under development by SPR to alert teams to measures likely of significant relevance and includes indicators such as the share of global trade covered by a measure to help assess potential spillovers. - NIPO and the Early Warning Tool will be updated regularly and made available on the intranet. - Reference Note on Trade Policy and WTO Consistency: elaborates on WTO considerations and policy guidance. - WTO Trade Policy Review Mechanism: provides periodic reviews of member countries’ trade policies and practices. *Source: IMF | How to Note NOTE/2024/002 — Industrial Policy: Trade Policy and World Trade Organization Considerations in IMF Surveillance (Introduction).* ### Annex 1. Possible Questions for Country Authorities ### Annex 1. Possible Questions for Country Authorities ### Purpose - This annex aims to support country teams with possible questions that teams could use in discussing trade-related industrial policies with country authorities. - Teams should reach out early to SPRXP for guidance if they plan to raise trade-related industrial policies for their AIV consultations. ### Possible questions for authorities - What are the specific policy objective(s) of the measures (for example, employment, environmental, health, investment promotion, regional development, balance of payments, national or international security)? - What is the timeline of implementation? Is there a sunset clause that would trigger the end of the proposed policy? - What indicator is being used to assess the policy objective, and what would be considered a success? - Which specific firms, industries, or regions are targeted for benefits? - How is the policy implemented? For example: - Grants? From what level of government and/or public agency? - Tax provisions? - Financing? (for example, concessional lending; loan forgiveness; connected lending) - Public – private partnerships? - Regulatory provisions? - What are expected fiscal / quasi-fiscal a) expenditures? b) foregone revenues? How is the measure financed? - What is the authority for the program? What entity has approval authority? What entity has oversight? - What domestic industries, groups, or regions will be disadvantaged by the policy? - Which foreign investment and foreign trade partners will be impacted? Are there estimates of the impact on investment and trade in aggregate? With particular partners? - Have the authorities considered the policy’s consistency with their legal obligations in the WTO or other international trade and investment agreements? - What alternative approaches have been considered to address the objectives? What were the pros and cons of these alternatives, including with respect to their impact on trade and investment partners? ### Annex 2. Examples of IMF Policy Lines on Trade-Related Industrial Policies - This annex presents examples of recent coverage of trade-related industrial policies in IMF Article IV staff reports. - Industrial Policy: Examples of IMF Policy Advice - China - 2023 Article IV: Staff emphasized that the use of industrial policies and state interventions are contributing to trade distortions, generating spillovers to the trading system and called for scaling back such policies, accelerating SOE reform, and relying on market forces. Staff also emphasized that export controls, including those on critical minerals, should be phased out and not be used to provide competitive advantage to domestic industries. - Euro Area - 2023 Article IV: Staff emphasized that subsidies, investment screening, and export controls should be narrowly targeted to specific objectives, and the authorities should resist calls to use such tools to provide a competitive advantage to domestic industries. Staff also stressed that the EU should continue to work toward globally cooperative green solutions that minimize distortions. - India - 2023 Article IV: Staff emphasized that export restrictions on wheat and rice could have wide-ranging cross-border spillovers and could contribute to volatility of international food prices, domestic resource misallocation, rent-seeking behavior, and potential retaliation by trading partners. Staff noted that the introduction of an Import Management System for IT equipment such as laptops, tablets, and personal computers carries an administrative cost and will create frictions that would hold back growth in important sectors of India’s economy. Staff called for the expeditious phase-out of the recently-introduced restrictions and called on the authorities to work towards reducing India’s longstanding high tariff and non-tariff import barriers. - Indonesia - 2023 Article IV: Noting that Indonesia accounts for roughly half of global nickel output, staff pointed out that the costs and other drawbacks of Indonesia’s restrictive policies could include foregone fiscal revenues, domestic resource misallocation, rent seeking, the disruption of international commodity markets, and the potential retaliation by trading partners. - United States - 2023 Article IV: Staff characterized certain “Made in America” provisions as “bad for U.S. growth, productivity, and labor market outcomes” and called on the authorities to roll back the tariffs and other trade distortions introduced over the past five years. Such policies “distort trade and investment decisions, disrupt global supply relationships, and risk creating a slippery slope that fragments global supply chains and triggers retaliatory responses by trading partners.” Moreover, the U.S. “should avoid favoring domestic producers over imports or creating incentives that lead to a fragmentation of the global system for trade and investment.” *IMF | How to Note 8* --- _Source: https://www.imf.org/-/media/files/publications/howtonotes/2024/english/htnea2024002.pdf_