## Industrial Policy and Trade Tensions in Strategic Sectors

_IMF Working Papers, July 24, 2026_

## Source details

**Canonical URL:** [Industrial Policy and Trade Tensions in Strategic Sectors](https://www.imf.org/en/publications/wp/issues/2026/07/24/industrial-policy-and-trade-tensions-in-strategic-sectors-578065)

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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

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### 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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## Content in this bundle

- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2026/07/24/industrial-policy-and-trade-tensions-in-strategic-sectors-578065_