Change is in the air. As we know in the aftermath of the financial crisis, the US has justified – like never before – a strong role for government in economic affairs. And, of the two presidential candidates, Obama has expressed concern over the direction of US trade policy and has pledged to rethink it. Perhaps these events will make strategic trade and industrial policy rise again.
That's not to say strategic trade policy ever completely disappeared, but rather that it may be gaining respectability and could become more widely used. (At least, that's how I take his point.)
There are some interesting bits in the article about the degree of policy space provided for in trade agreements (WTO vs. U.S. bilaterals vs. EU bilaterals) which I may come back to. But for now, I wanted to focus on the merits of strategic trade policy, mostly just raising a few basic questions that occur to me.
The first question is the following. Is the argument for strategic trade policy that the specific nations who use strategic trade policy will be better off? Or is that the world as a whole will be better off?
I can see that there is a chance that a specific nation could make itself better off through strategic trade policy. Even if one believes governments often get things wrong, they do sometimes get things right. So, a government might select an appropriate industry for development, use the right policy tools, and thereby create a company that becomes a global competitor. In that way, the nation in question could end up better off.
But I'm not sure I see how the world as a whole would be better off. If one country uses strategic trade policy, others are sure to follow, so it is likely to be used by all or most rather than just one. If everyone did so, governments would spend a lot of money and other resources on their industrial policy goals, but wouldn't the result be that all countries would end up in the same relative position? (Or possibly, some countries would be better off and some worse off, depending on how good their plans were).
Taking this point a step further, the example he gives in the article is Embraer:
... the textbook example of strategic trade theory is the choice by the Brazilian government to subsidise and develop the aircraft company Embraer.
The free-trade theories espoused by the Washington consensus would warn Brazil of the high cost of subsidisation. To free traders, Brazil should focus on its advantage in agricultural products and forget about climbing the manufacturing ladder. Strategic trade theory helps explain why Brazil was willing to gamble in the short term to become one of the finest aircraft manufactures over the long term. They squeezed foreign firms out of the market and carved out a global niche for themselves.
From what I know about Embraer, it is true that Embraer has received government subsidies and it is true that Embraer has become a succesful player in the aircraft industry. But here are some of the questions I would ask about these subsidies:
-- Could all that subsidy money have been better used for something else, such as education or public health?
-- Would it have been possible to encourage an existing foreign aircraft maker to produce in Brazil, at a lesser cost to the government? This argument may not work as well in the context of aircraft, where there are very few producers, as compared to other industries. But if you take an industry such as steel-making, in which there has also been a lot of state intervention, it seems to me that it might be more effective to let an established foreign producer who already knows how to make steel set up shop in your country.
-- Isn't competition among countries (e.g., five countries all use subsidies to create an aircraft industry), and therefore many failed industries, very likely? Again, steel may be a better example to illustrate this.