Industrial Policy and Trade Tensions in Strategic Sectors

This paper examines the global trade and welfare effects of industrial subsidies, employing a multi-country, multi-sector general equilibrium trade model with economies of scale. We first estimate the magnitude of industrial subsidies across countries relying on a novel approach that exploits information on subsidy counts during the period 2015-23. We then quantify the impact of the implied subsidy rates on trade flows and find that subsidies boost net exports in strategic sectors especially for China, while causing export declines in competing economies. Subsidies by the EU and the US produce qualitatively similar but smaller effects, as these economies target relatively more non-strategic sectors. A decomposition of the trade effects highlights the role of economies of scale and productivity changes in explaining sectoral specialization in response to subsidies. Tariff actions in 2018-19 and since 2025 partly offset these trade patterns. While targeting strategic sectors, recent subsidies and import tariffs lower global welfare by creating distortions and negative cross-border externalities.