Do Industrial Policies Increase Trade Competitiveness?

IMF Working Papers, May 23, 2025

Source details

Authors: Yueling Huang, Sandra Baquie, Florence Jaumotte, Jaden Kim, Yucheng Lu, Rafael Machado Parente, Samuel Pienknagura
Published: May 23, 2025
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798229012157.001

Industrial policies (IPs) are on the rise and are most commonly motivated by boosting strategic competitiveness of targeted products.
The paper leverages a novel database of industrial policies and uses the local projection difference-in-differences approach to examine the dynamic relationship between IPs and trade competitiveness.
Results point to a nuanced picture with heterogeneous effects across product types and policy instruments.

Data sources: novel database of industrial policies (as described in the paper).
Empirical approach: local projection difference-in-differences.

Average effect:
- On average, products targeted by IPs experience a larger increase in competitiveness than non-targeted products.
- The average effect is driven by initially competitive products.
Heterogeneity across policy instruments:
- Domestic subsidies are associated with a temporary improvement in trade competitiveness in the short term.
- Export incentives are linked to medium-term improvements in competitiveness.
Value chain spillovers:
- Evidence for three value chains—solar photo-voltaic, wind turbines, and electric vehicles—suggests IPs can have spillover effects on non-targeted products through value chain linkages.
- IPs targeting upstream products are associated with larger improvements in the RCA of products using these upstream products relative to IPs targeting products at the same value chain stage.

Policymakers should account for heterogeneity in outcomes by product initial competitiveness when designing IPs.
Choice of instrument matters:
- Domestic subsidies may yield short-term competitiveness gains but appear temporary.
- Export incentives may be more effective for medium-term competitiveness improvements.
Consideration of value chain positions:
- Targeting upstream products can generate larger spillovers to downstream products’ revealed comparative advantage (RCA) than targeting products at the same value chain stage.

Subjects: Comparative advantage, Competition, Export subsidies, Exports, Financial markets, International trade.
Keywords: Comparative advantage, Competition, domestic subsidies, effect of IP, export incentives, Export subsidies, Exports, Global, Green product, Industrial policies, local projection difference-in-differences, RCA measure, RCA of product, revealed comparative advantage, targeted product, trade, upstream product.

IMF Working Paper No. 2025/098, May 23, 2025.