Do Industrial Policies Increase Trade Competitiveness?

Industrial policies (IPs) are on the rise. The most common motive for pursuing IPs is to boost strategic competitiveness of the targeted products. Leveraging a novel database of industrial policies and using the local projection difference-in-differences approach, this paper examines the dynamic relationship between IPs and trade competitiveness. Our results point to a nuanced picture. On average, products targeted by IPs experience a larger increase in competitiveness than non-targeted ones. However, there is substantial heterogeneity across different types of products and policy instruments. The average effect is driven by initially competitive products. Turning to policy instruments, domestic subsidies are associated with a temporary improvement in trade competitiveness in the short term, whereas export incentives are linked to medium-term improvements in competitiveness. Finally, we focus on three widely discussed value chains–solar photo-voltaic, wind turbines, and electric vehicles–and present suggestive evidence that IPs can have spillover effects on non-targeted products through value chain linkages. Our findings for these three value chains suggest that 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.