Most governments pursue industrial policies to support specific industries or economic activities with such interventions rising in recent years. They may do so to address market failures, bolster relative competitiveness, reduce dependence on rivals for inputs or export markets or to achieve a range of non-economic objectives.

Industrial policies often discriminate against foreign suppliers at the border – through import tariffs, export or investment restrictions – or through subsidisation of domestic firms. Such policies alter competitive conditions across sectors within an economy and generate cross-border spillovers for industries and workers in foreign countries and may affect the organisation of international supply chains.

The impacts of industrial policies are determined in part by what foreign countries do, whether independently or in response to actions by others. Insofar as one contry’s actions have detrimental effects on firms in other economies, uncoordinated unilateral industrial policies risk a ‘race to the bottom’, increasing the cost of interventions, reducing their effectiveness and undermining the rules-based multilateral trading system.

East Asian and Pacific countries can pursue competitiveness without undermining free and open trade. By cooperating with like-minded economies, they can ensure that industrial policies only discriminate against foreign producers when this is necessary to achieve a national policy objective.

The scope for using the World Trade Organization (WTO) as a platform to agree on new multilateral disciplines on industrial policies is limited due to washington’s moves to defenestrate the dispute settlement system and unilaterally abrogate its negotiated tariff commitments. Initiatives to guide the use of industrial policies and responses to such policies are more likely to be feasible if pursued on a plurilateral basis among either like-minded states or nations that jointly impose serious negative spillovers on each other and have incentives to reduce them.

One way they can do so is through complete trade agreements.Another is to pursue issue- or policy-specific plurilateral agreements.Asia Pacific economies have been proactive on both fronts. This is reflec“`html

Industrial Policies Risk Race to the Bottom Without Cross-Border Cooperation

Published: 2025/12/14 05:17:15

The Rising Tide of Industrial Policy

Governments worldwide are increasingly turning to industrial policies – strategic government interventions to promote specific sectors – to bolster economic growth, national security, and technological leadership. Driven by concerns over supply chain vulnerabilities exposed during the COVID-19 pandemic and geopolitical tensions, especially with China, nations are enacting policies designed to incentivize domestic production and innovation. Though, without careful coordination, this surge in industrial policy risks devolving into a counterproductive “race to the bottom,” characterized by escalating subsidies and trade distortions.

The Risks of Uncoordinated Action

A fragmented approach to industrial policy presents several meaningful dangers:

• Subsidies Wars: When countries compete to attract investment through generous subsidies,it can lead to a wasteful expenditure of public funds with limited net gains. Companies may simply relocate to capture subsidies without creating substantial new economic activity.The Peterson Institute for International Economics highlights the potential for these subsidy wars to distort markets and harm global efficiency.
• Trade Disputes: Industrial policies that favor domestic producers can be perceived as unfair trade practices by other countries, leading to retaliatory measures and escalating trade disputes. This can disrupt global supply chains and increase costs for businesses and consumers.
• Inefficient Allocation of Resources: Without a clear understanding of comparative advantages and global demand, industrial policies can misallocate resources, directing investment towards sectors where a country lacks the necessary capabilities or where demand is limited.
• Reduced Innovation: While intended to spur innovation, uncoordinated policies can stifle it by creating barriers to entry for new firms and hindering the diffusion of technology.

The Case for Cross-Border Cooperation

To mitigate these risks and maximize the benefits of industrial policy, international cooperation is essential. This cooperation can take several forms:

Details Sharing and Coordination

Countries should engage in regular dialog to share information about their industrial policy objectives and strategies. This openness can help avoid unintended consequences and reduce the likelihood of conflicting policies. The OECD provides a forum for countries to discuss and coordinate industrial policy approaches.

Joint Research and Advancement

Collaborative research and development projects can pool resources and expertise, accelerating innovation and reducing duplication of effort. International partnerships can also facilitate the transfer of technology and best practices.

Harmonization of Standards and Regulations

Aligning standards and regulations across countries can reduce trade barriers and promote competition. This is particularly critically important in emerging technologies where differing standards can fragment markets and hinder adoption.

Rules-Based Framework for Subsidies

Establishing clear rules governing the use of industrial subsidies is crucial to prevent a race to the bottom. The World Trade Organization (WTO) provides a framework for regulating subsidies,but reforms may be needed to address the challenges posed by new forms of industrial policy