Industrial Policy

Industrial policy is back, but the economy it targets is not the one textbooks used to assume. Production is fragmented across borders, firms price above marginal cost, and carbon emissions spill over jurisdictions. Any serious analysis of industrial policy must start from these facts.

The open-economy constraint

A government that subsidizes a scale-intensive sector hopes to push firms down their average-cost curves. In a closed economy the logic is straightforward: larger output, lower unit costs, higher welfare. In an open economy the arithmetic changes. Expanding domestic production depresses world prices, shifts profits to foreign consumers, and invites retaliation. Lashkaripour and Lugovskyy (AER 2023) show that standalone trade policy is remarkably ineffective at correcting the misallocation created by markups and scale economies. Unilateral industrial policy fares little better: the international price effects can swamp the domestic efficiency gains, a mechanism the authors call immiserizing growth in the industrial-policy context.

Historical episodes and the coordination question

Korea's Heavy and Chemical Industry drive of the 1970s and China's manufacturing ascent are the canonical success stories. Lashkaripour and Wu (Oxford RE 2025) review these cases and ask what they imply for countries attempting similar strategies today. Their assessment is cautious: the global economy is more integrated, retaliation is faster, and the sectors that remain candidates for scale-driven policy are fewer. The paper argues that unilateral efforts are less likely to replicate past outcomes and develops a framework in which international coordination, through deep agreements that discipline subsidies and share efficiency gains, becomes the productive path forward.

Labor market distortions and technology adoption

Industrial policy sometimes targets the wrong margin. Farrokhi, Lashkaripour, and Pellegrina (JIE 2024) study how labor market distortions (barriers to occupational mobility, informality, spatial frictions) distort which technologies firms adopt. In low-income countries, these distortions erode roughly one-third of the productivity gains from trade liberalization. The implication for industrial policy is that subsidizing advanced sectors may accomplish little if workers cannot move to the firms that would use the subsidized technology. Fixing the labor market distortion can matter more than the sector-level intervention.

What coordination looks like

The recurring finding across these papers is that coordination is not a diplomatic nicety; it is a quantitative result. Deep trade agreements that combine tariff reductions with subsidy disciplines and carbon-border adjustments can unlock welfare gains that no country can access alone. The reason is structural: in an economy with markups and scale effects, unilateral policy moves surplus around but does not eliminate the underlying distortions. Only joint action can reduce the global wedge between price and marginal cost.