Dynamic Effects of Industrial Policies Amidst Geoeconomic Tensions

Ziran Ding, Adam Hal Spencer () and Zinan Wang ()
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Adam Hal Spencer: University of Bonn
Zinan Wang: Tianjin University

No 2504, Economics Discussion Papers from Department of Economics, The University of St Andrews Business School

Abstract: Amid ongoing geoeconomic tensions, industrial policy has emerged as a prominent tool for policymakers. What are the dynamic and welfare effects of these policies? How does the short-sightedness of policymakers influence their choice of instruments? What are the distributional consequences of these protectionist measures? We address these questions with a dynamic two-country general equilibrium framework that incorporates firm heterogeneity, trade, and the offshoring of tasks. By calibrating the model to the contexts of the US and China, we explore the effects of three popular industrial policies: import tariffs, domestic production subsidies, and entry subsidies. Our findings indicate that, from an initial state free of interventions, myopic policymakers are incentivized to subsidize production, while more forward-looking ones favor imposing import tariffs. Although all of these policies initially reduce wage inequality, some result in aggregate welfare losses, either in the short run or the long run.

Keywords: Macroeconomic dynamics; Firm heterogeneity; Trade; Trade-in-tasks; Industrial policies; Welfare; Global value chains (search for similar items in EconPapers)
JEL-codes: F23 F41 F51 F62 L51 (search for similar items in EconPapers)
Date: 2024-11-26, Revised 2025-12-07
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Related works:
Working Paper: Dynamic Effects of Industrial Policies Amidst Geoeconomic Tensions (2025)
Working Paper: Dynamic Effects of Industrial Policies Amidst Geoeconomic Tensions (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:san:econdp:2504

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