Trade and innovation policies: Coexistence and spillovers

The debate over trade’s role in growth and inequality in recent years seems to center on the question of whether the gains from trade are worth the disruption from necessary adjustments. In particular static gains from trade for advanced economies are generally estimated to be small, while empirical evidence around growing employment and inequality challenges suggest trade’s role may be larger than previously thought, though still only one of many contributing factors. The focus on static gains though likely understates substantially the dynamic gains, as trade’s role in spurring faster economic growth, in both developed and developing countries through competitive and innovative forces. The dynamic, competition and innovation angle suggests a need for industrial policies to be revisited and examine how spillovers play out in the global economy. At the same time significant technological disruption is occurring through digital technology, big data, and machine learning/AI techniques that often require advanced capabilities and have significant competition implications. In recent COVID-19 pandemic policy responses governments have dramatically increased spending and liquidity to support stressed firms and households and encouraged many countries to consider strategic efforts to build certain domestic capabilities with the aim of reducing dependence on trade for emergency related goods and services. This paper provides insights on the specific role of innovation policies, and they differ from and are similar to traditional industrial policies, and what that might mean for future trade rules.