Industrial policy

An industrial policy is any government regulation or law that encourages the ongoing operation of, or investment in, a particular industry. It is often related to, or wholly determinant of, investment policy for that industry.

An active intervention in industrial development is the policy of most if not all countries in the world. Even the United States, which prides itself as a "free-trading" nation, has implemented strong tax, tariff, and trade laws to protect itself from "dumping", the flooding of a market by a competing nation with goods or services below market prices in order to gain an advantage over domestic firms.

In Japan, the powerful MITI has often taken an active hand in development of major industries, particularly electronics and software. The impact of this intervention is disputed, as Japan is still not a power in software, and has lost much of its advanced electronics industry to Asian Tigers, especially South Korea and Taiwan. However, authors such as Robert Hunter Wade in 'Governing the Market', provide arguments to support the link between government intervention and the successful industrial development of this whole region. Benefits from foreign investment such as the transfer of technology, skills and managerial techniques that could help infant industries become internationally competitive were captured using policies such as local content rules and joint-venture regulations.

As such, the development of infant industries does not simply involve protectionism as the infant industry argument suggests, but is dependent on a country's ability to learn directly from foreign direct investment. Such policies have traditionally been central to the industrial policies of countries that are attempting to catch up with technologically and economically more advanced states. A good example is the US and European attempt to catch up with Great Britain during the 18th and 19th century (see Ha-Joon Chang's 'Kicking Away the Ladder'). Many of these domestic policy choices are now prohibited by the WTO Agreement on Trade Related Investment Measures.

Today most industrial policy is subordinated to tax, tariff and trade rules of the General Agreement on Tariffs and Trade (GATT) and various trade pacts promising various degrees of "free trade", which in practice means limited subsidy and no protectionism of any one industry.

However, notable exceptions including agricultural subsidies in both Europe and the US, and cultural subsidies in Canada, prove that the principle of industrial policy is alive and well, and merely retreating into the shadows.