Industrial Policy and International Trade

Industrial Policy and International Trade

Updated February 14, 2024
Industrial Policy and International Trade
Supply-chain vulnerabilities revealed by the COVID-19
declining ones, as well as the channeling of resources into
pandemic have intensified debate in Congress about the
specific sectors and activities considered important for
proper role of the government in the U.S. economy. The
economic growth. A variety of instruments can be used to
debate also reflects growing concerns about how some
implement an industrial policy, including subsidies; tariffs
foreign governments use state support and guidance to
and other trade restrictions; rules; regulations; technical
boost their industries, thereby potentially causing the
standards; tax incentives; government procurement
United States and others to lose global market share and
regimes; and preferential access to credit. In addition to
competitiveness. China’s statist model of economic
aiming to accelerate economic growth, industrial policies
development, for example, relies on a comprehensive
can be designed to safeguard national security, create
industrial policy that nurtures a wide range of strategic and
employment opportunities in specific industries or regions,
emerging industries through government measures,
achieve environmental and social sustainability, or improve
including subsidies and protection against import
the competitiveness and export performance of domestic
competition. The scope and scale of these market-distorting
firms. The impact and effectiveness of such policies in
practices can create an uneven playing field for U.S. firms.
achieving these goals is subject to debate.
Concerns also exist about the extent to which the United
Some analysts maintain that industrial policy need not be
States lacks production capacity in certain industries and
executed through an explicit strategy. In the United States,
relies on imports considered essential to public health and
some experts consider various economic policies and
national security. Legislative activity in recent years has
programs that have the effect of favoring one industry or
focused on providing a greater government role and more
type of firm over another to constitute an ad hoc and de
coordinated approach to U.S. industrial development (see
facto industrial policy. As such, U.S. industrial policy has
text box). Some stakeholders criticize these measures as a
consisted primarily of interventions that are not made on
departure from the more market-led approach to the
the basis of any comprehensive or systematic set of
industrial sector that the U.S. government adopted in the
guidelines delineating the kind of production and trade that
1990s and generally applied over the past few decades.
should be fostered. Instead, they are implemented through
Such a departure, they argue, could trigger a spiral of
generalized or cross-industry policies (e.g., corporate tax
industrial subsidies and increased protectionist measures by
rate reductions) and industry or firm-specific policies (e.g.,
other countries, potentially adversely affecting global
tariffs and support/subsidies for electric-vehicle battery
economic growth and the rules-based trading system.
production).
Economic Debate Over Industrial Policy
Select Recent Efforts to Support U.S. Industries
Arguments for industrial policies come in several forms,
Creating Helpful Incentives to Produce Semiconductors
(CHIPS) for America Act (Title XCIX, P.L. 116-283). It establishes
but most are not compelling on economic grounds alone.
investment and incentive schemes to support U.S. semiconductor
With some exceptions, economists generally argue that
manufacturing, R&D, and supply chain security.
policies aimed at influencing the composition and level of
Infrastructure Investment and Jobs Act (P.L. 117-58). Among
output and trade can create market distortions and impose
other matters, it establishes requirements and incentives to support
costs on the economy as a whole that exceed any potential
R&D and energy infrastructure and cybersecurity, and ensure a
benefits. This is especially the case if policies are not
supply chain for critical minerals and battery materials.
carefully designed and the industrial program is captured to
CHIPS and Science Act of 2022 (P.L. 117-167). As part of a
further private rather than national interests. In addition to
wider set of China-focused measures, it provides funding to
direct government expenditures (e.g., through grants, loans,
support U.S. semiconductor manufacturing, R&D, and supply
industry specific tax credits), industrial policy may also
chain security.
impose costs related to inefficient resource allocation,
Inflation Reduction Act (IRA) of 2022 (P.L. 117-169).
implementation, higher prices, and foreign retaliation.
Among other matters, it aims to support investments in
In a market economy, there is a strong presumption that
domestic energy production, incentivize the procurement of
competitive forces channel resources into their most
domestically produced or assembled inputs and products, and
productive uses. However, markets sometimes fail to do so.
boost R&D of clean-energy technologies.
When this happens, government intervention to correct
market failures may be appropriate. A proper role for
What is Industrial Policy?
industrial policy, some experts argue, is to identify those
While there is no formal definition, industrial policy
failures and provide appropriate government support (e.g.,
commonly refers to a comprehensive, deliberate, and more
subsidies). Yet, beyond R&D and the diffusion of
or less consistent set of government policies designed to
information on results and innovations, there is skepticism
among economists about the government’s ability to
change or maintain a particular pattern of production and
trade within an economy. It generally involves policies
identify legitimate candidates for support. Experience with
designed to promote emerging industries or prop up
industrial policy in Japan, South Korea, Brazil, and other
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Industrial Policy and International Trade
countries has been mixed. Various case studies suggest that
policy. Supporters argue that imported goods or services
political objectives and heavy state interference in the
essential for national security could be “weaponized” or
management of industries have often undermined firms’
denied by foreign countries, thus requiring support for
attempts to become globally competitive. Other studies
domestic production. Some critics dispute the need for
credit industrial policy with advancing the economic
support given the competitive and geographically diverse
development of countries like China.
nature of the global marketplace. Supporters counter that
The United States and Industrial Policy
certain products sometimes cannot be stockpiled at a
reasonable cost or imported in sufficient quantities or in a
U.S. policy generally aims to support U.S. industrial and
timely manner. This was the case at the outset of the
technological development through market-based measures
pandemic, for example, when the United States and other
that promote R&D and business development. Policies that
countries faced shortages of critical medical products. In
may seek to preserve certain defense capabilities exist, but
such cases, policymakers may decide to subsidize producers
these are largely focused on technologies intended for dual
and suppliers or protect them from foreign competition to
use or military applications. Growing concerns about
safeguard national security. Whether these concerns and
China’s extensive use of statist practices, which have
aims are legitimate, or whether a U.S. industrial policy
supported its growing global industrial and economic role,
would be effective in achieving them, is subject to debate.
as well as perceived vulnerabilities highlighted during the
Such policies are generally thought to introduce market
COVID-19 pandemic, have led some Members to support
distortions and undermine economic efficiency, and, hence,
broader and more coordinated countermeasures to advance
economic growth. As a result, policymakers may weigh
U.S. economic competitiveness and national security. These
these potential adverse effects against the potential benefits.
positions tend to reflect a view that market forces by
themselves are insufficient to protect U.S. interests and
Global Rules and Constraints
capabilities in light of China’s practices, as well as those of
International trade rules generally limit countries’ ability to
other actors of concern.
use policies or subsidy schemes that target specific
industries within their territories and result in increased
In addition, during the past decade, pressure for preserving
exports. Many of these rules are embedded in World Trade
existing jobs and industries through state intervention has
Organization (WTO) agreements and bilateral and regional
increased. Higher levels of unemployment among some
preferential trade arrangements. For example, the WTO
groups of the labor force and slower wage growth in certain
Agreement on Subsidies and Countervailing Measures
economic sectors have made it more difficult for some
(ASCM) provides rules governing the subsidization of
workers to adjust to changes in technology, demand, and
goods and recourse for countries whose interests are
international competition. Some analysts favor a
harmed by subsidization. However, some stakeholders point
comprehensive U.S. industrial policy. They argue that the
to perceived weaknesses in the ASCM and emerging issues
ad hoc, de facto nature of U.S. industrial policy tends to
that current rules may not cover adequately. Often, critics
keep resources in less efficient areas. For example, trade
point to China, arguing that, to date, trade rules have not
adjustment programs, they say, may have the unintended
fully constrained China in adopting its industrial policy.
effect of reducing incentives for some workers and capital
to relocate. In this case, without strong positive incentives
Outlook and Issues for Congress
to adjust, they argue that resources will not be employed
Recent developments present Congress with questions
elsewhere in a timely fashion. Such proponents maintain
about the manner and extent to which the U.S. government
that the government should supply incentives to facilitate
can and should alter existing production and supplier
the transfer of resources to growing industries and, in some
arrangements. While increased government intervention in
cases, prop up contracting or noncompetitive ones in the
the economy may not necessarily provide long-term net
interest of U.S. national security.
gains, as many economists contend, some Members view
trade concerns with certain partners as requiring a U.S.
Additionally, some supporters argue that, as a relatively
industrial policy to level the playing field or safeguard
open economy, the United States is adversely affected by
national security. Others see these efforts as an undesirable
other countries’ industrial policies. In their view, a robust
shift in economic policy given the historical U.S. approach
U.S. industrial policy could mitigate these effects by, for
and potential costs. Additionally, some countries may seek
example, countering China’s exploitative economic
to adopt similar policies, thereby increasing protectionism
practices. Opponents argue adopting such a policy would
that may undermine economic growth and the rules-based
result in a misallocation of resources in the economy, stifle
global trading system. To avoid potentially costly trade and
innovation, and harm U.S. productivity and economic
subsidy “wars,” Congress may wish to engage formally
growth. They warn that it would also involve the
with the Administration to pursue reforms and update trade
government in picking “winners and losers.” A more
rules in a way that matches the complexities and realities of
effective approach, they say, would be to negotiate new
today’s global economy and advances U.S. security and
trade rules that reduce or eliminate such practices. For
economic interests.
example, some Members have encouraged the
Administration to work closely with allies to address trade
See also CRS In Focus IF10964, “Made in China 2025”
concerns and initiate or participate in regional trade
Industrial Policies: Issues for Congress.
agreements, such as the revised Trans-Pacific Partnership.
National and Economic Security Drivers Andres B. Schwarzenberg, Analyst in International Trade
and Finance
National security, defined broadly to include economic
security, is frequently invoked as justification for industrial
IF12119
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Industrial Policy and International Trade

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https://crsreports.congress.gov | IF12119 · VERSION 6 · UPDATED