Industrial Policy and Trade Tensions in Strategic Sectors
IMF Working Papers, July 24, 2026
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- Industrial Policy and Trade Tensions in Strategic Sectors
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Bibliographic details
- Authors: Lorenzo Rotunno, Michele Ruta, Priyam Verma
- Published: July 24, 2026
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229053495.001
Summary
- Paper examines the global trade and welfare effects of industrial subsidies using a multi-country, multi-sector general equilibrium trade model with economies of scale.
- Subsidy magnitudes are estimated from a novel approach exploiting information on subsidy counts during the period 2015-23.
- Quantifies impact of implied subsidy rates on trade flows and global welfare.
Methodology
- Multi-country, multi-sector general equilibrium trade model with economies of scale.
- Estimation of subsidy magnitudes based on subsidy counts for 2015-23.
Key findings on trade flows
- Subsidies boost net exports in strategic sectors, especially for China.
- Subsidies cause export declines in competing economies.
- Subsidies by the EU and the US produce qualitatively similar but smaller effects because these economies target relatively more non-strategic sectors.
- Tariff actions in 2018-19 and since 2025 partly offset these trade patterns.
Mechanisms and decomposition
- Decomposition of trade effects highlights the role of:
- Economies of scale.
- Productivity changes.
- These factors explain sectoral specialization in response to subsidies.
Welfare and externalities
- Recent subsidies and import tariffs, while targeting strategic sectors, lower global welfare.
- Welfare losses arise from distortions and negative cross-border externalities.
Policy implications and considerations
- Industrial subsidies can shift sectoral specialization through economies of scale and productivity effects, altering global trade patterns.
- Tariff responses can partly offset subsidy-induced trade reallocation but coexist with welfare losses.
- Policymakers should weigh targeted industrial support against negative cross-border externalities and global welfare costs.
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