DP18700 Modern industrial policy and the WTO
This paper surveys the economics of industrial policy as it relates to the World Trade Organization (WTO). Motivated by concern that the modern use of industrial policy is emerging in ways that threaten cooperation in the international trading system, the paper begins with the basic historical economic framework for tying industrial policy to underlying market failures. It then introduces the dominant economic understanding of the role played by the WTO, it examines the WTO’s rules on subsidies (and thus industrial policy), the unease with the evolution of the trading system’s subsidy rules, gaps in knowledge, and important data and measurement shortcomings. The main part of the paper examines four areas motivating why modern industrial policy is different and why it has become so important for the trading system: China, supply chain resilience, supply chain responsiveness, and climate change. The paper identifies the evidence to date, open questions, and potential paths forward for economic research to help inform policymaker efforts to restore international economic cooperation in trade and industrial policy.
