Industrial Policy

The aim of this chapter is to give a brief overview of the historical arguments that have been used to argue for industrial policy in its widest sense, that is, that what a nation (or region) specializes in producing may be of key importance to the wealth and welfare of its inhabitants. Historically it has been generally agreed that symmetrical trade—trade in similar goods between nations at similar levels of technological development—has tended to be beneficial to both trading partners. In these cases, employing Ricardian trade theory has not been detrimental to the trading partners. This chapter explains the situations when Ricardian trade theory is not beneficial to one of the trading partners, and—at the same time—the economic mechanisms which have been identified as making industrial policy desirable. That manufacturing matters has, in various forms, been presented as a main reason for industrial policy, at least since England’s import-substitution policies during the 1400s: adding value to English wool by spinning it into woollen cloth and garments. This was mainly achieved by raising export duties on raw wool, making English wool cheaper for domestic manufacturers than for foreign ones. However, the reasons why manufacturing matters have varied. And that understanding has gone from intuitive inferences to scientific evidence. This chapter will historically present this process and the most common arguments for industrial policy over time.