Short-Term Boosts or Long-Term Gains? IMF Unpacks the Trade Impact of IP Tools

Industrial policy is making a robust comeback across the globe, reshaping the landscape of economic policymaking in both advanced and emerging economies. A new IMF Working Paper authored by Yueling Huang, Sandra Baquie, Florence Jaumotte, Jaden Kim, Yucheng Lu, Rafael Machado Parente, and Samuel Pienknagura, and produced by the International Monetary Fund’s Research Department, seeks to assess whether these policies are living up to their stated goal: improving the strategic trade competitiveness of the sectors they target. Drawing on resources such as the Global Trade Alert (GTA) database, CEPII’s BACI trade data, and motive classifications by the New Industrial Policy Observatory (NIPO), the researchers combine empirical depth with novel methodology. By analyzing over 5,000 products across 156 countries from 2009 to 2022, the study provides a cross-country lens into how governments shape comparative advantage through policy intervention.

A Novel Method to Track Trade Impacts

To measure the real-world effects of industrial policies, the authors employ a cutting-edge econometric technique known as the local projection difference-in-differences (LP-DiD) model. This method outperforms traditional models by mitigating bias that occurs when policy treatments are staggered over time across different sectors and countries. The LP-DiD model allows the researchers to isolate the short- and medium-term effects of industrial policy on trade competitiveness, operationalized through the Balassa index of Revealed Comparative Advantage (RCA). Their clean-sample approach tracks the difference in RCA between products that are newly targeted by industrial policies and those that are not, while accounting for anticipatory effects and delayed responses.

Their findings reveal that industrial policy can indeed increase trade competitiveness. On average, targeted products see a 5.6 percent greater increase in RCA three years after policy implementation compared to non-targeted ones. This improvement unfolds in two phases: first, a short-term expansion in the export value of existing products (intensive margin), followed by the medium-term addition of new products to the export portfolio (extensive margin). However, this average masks considerable variation depending on the nature of the products and instruments used.

Winners and Losers: Who Benefits Most?

The study reveals a crucial dimension of heterogeneity: the initial competitiveness of products matters a great deal. Products that were already competitive before policy implementation, those with RCA values above 1, experienced significant short-term improvements, often peaking two years post-intervention. In contrast, products without prior competitiveness showed delayed or statistically insignificant improvements, sometimes even registering early declines. This suggests that policymakers may prefer to “back winners,” as such interventions deliver faster and more predictable results. However, this strategy also risks neglecting sectors with high future potential but lacking current competitiveness.

Another layer of differentiation comes from the type of policy instruments used. Among the most prevalent instruments globally are domestic subsidies and export incentives. Domestic subsidies are shown to generate immediate boosts in competitiveness, but their impact diminishes over time. In contrast, export incentives have a delayed but more persistent effect, with RCA gains becoming more pronounced in the medium term. This divergence echoes the export-oriented industrial strategies of East Asian economies, where long-term global competitiveness was cultivated through disciplined, outward-facing support.

Going Green: The Special Case of Low-Carbon Products

One of the most compelling aspects of the paper is its deep dive into green products, which have taken center stage in the current wave of industrial policy. Using a curated list of 869 environmentally significant products drawn from six international classification systems, the researchers find that industrial policies targeting green sectors are more effective over the long run. Green products show larger and more sustained increases in RCA than their non-green counterparts. More importantly, even green products that lack initial competitiveness exhibit strong medium-term gains when supported by IPs, underscoring the transformative potential of state support in emerging low-carbon industries.

Further, the paper explores how the effectiveness of policy instruments varies by sector. Export incentives are particularly impactful when used to promote green products, producing the strongest RCA gains. Domestic subsidies also have positive effects, but these tend to appear after a lag. These findings highlight the strategic importance of supporting green innovation, not just for environmental goals but also for securing a country's position in future global trade.

Beyond Direct Targets: Value Chain Spillovers

Another innovative aspect of the study is its exploration of cross-product spillovers within key green value chains: solar photovoltaics, wind turbines, and electric vehicles. Using detailed product-stage mappings, the authors show that policies targeting upstream segments, like raw or processed materials, generate more substantial downstream benefits than policies targeting end products. These upstream-focused IPs can reduce input costs, relieve capacity constraints, and strengthen the competitiveness of entire value chains. This insight suggests that policymakers should think systemically when designing industrial strategies, as interventions in one segment can ripple across the entire production ecosystem.

Despite the promising results, the authors are careful to emphasize the limits of their analysis. The study captures partial equilibrium effects and does not account for general equilibrium trade-offs, such as cross-sector distortions, fiscal burdens, or retaliation under WTO rules. As such, the paper does not argue for unchecked industrial activism but rather for strategic, data-informed, and internationally coherent interventions.

The paper provides robust empirical support for the idea that well-designed industrial policies can increase trade competitiveness, especially when targeted at already promising sectors or green technologies. However, success is not guaranteed, and the effects are far from uniform. By offering a rigorous and nuanced analysis, this research marks an important step forward in understanding how governments can shape trade outcomes in an increasingly complex global economy.