(Download the full report HERE)

Executive Summary

• Industrial Policy is an economic strategy often used by developing countries and, as the global diplomatic environment shifts, its use by developed nations has increased as well
• Tariffs are a tool that can be used to shape the overall structure of a nation’s economy, but are also a form of tax, most akin to a sales tax
• There is a trade-off between the efficiency of external supply chains with the stability of internal supply chains, which includes considerations of ally networks and defensible regions

Who Practices Industrial Policy? What is it? Why practice it? 

Industrial policy is the implementation of various government policies to incentivize and manage the development of select industries. Historically this was associated with mercantilism, contrasted with capitalist theory which attacked the various subsidies, protections, and privileges granted to favored industries. Industrial policy is inherently inefficient from the perspective of aggregate economic productivity; it is an intentional step to distort the organic state of economic affairs to achieve specific goals. Secondly, implementation of industrial policy typically has additional costs related to corruption and rent-seeking—increasing one’s own wealth without contributing to the wealth or benefit of society. 

The early United States, not without internal dissent, implemented tariffs and subsidies extensively, which were largely favored by the Federalist, then Whig, and later Republican parties. In addition, infrastructure projects, such as roads and railroads were subsidized in regions to favor developing northern industry. As in most cases of government economic intervention, issues of corruption abounded, and the benefits and costs of the policies fell upon the country unevenly. The South experienced higher goods prices, while the North benefited from a captive domestic market. The upside for the country was the development of a domestic industrial base, freeing the US from its dependency on a European-based manufacturing industry to consume American raw material exports and, in turn, deliver manufactured goods.

One of the major goals of industrial policy by the old European empires was to secure their supply chains, from the sourcing of raw materials through to the distribution of finished products. To this end, they established colonies, formed alliances and protectorates with local realms, built powerful armies and navies, and granted extraordinary powers to entities such as the British East India Company. To prevent disruptions to manufacturing and agriculture during wartime, these empires erected various trade barriers against hostile neighbors. In more modern times, we can see shades of this in China’s Belt and Road Initiative—building infrastructure and, in some cases, entire cities in key locations for their international supply chain. After the World Wars, most of these structures collapsed and the global security of international trade began to be underwritten by the United States, which ironically is among the less trade dependent countries globally. Here we should note that the cost of providing security is not directly borne by consumers or producers of a given product, and so an ordinary free market environment will generate a supply chain with what is effectively subsidized protection. In the past, taxation on trade tended to be linked to protecting it, with the British Royal Navy being formed for this purpose.

To read the Full Report, click HERE. 

Sources:

1. Civil War Research Engine at Dickinson College
2. World Bank, Trade (sorted by imports % of GDP)
3. Bill of Rights Institute: Commodore Perry and the Opening of Japan
4. WhiteHouse.gov 

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