Industrial policies, global imbalances and technological hegemony

We provide a framework that connects industrial policies to global imbalances and technological hegemony, and describe some empirical facts consistent with our model. We study the international spillovers triggered by industrial policies promoting high-tech sectors. Since high-tech goods and services are typically traded internationally, these policies boost the supply of tradable goods. Moreover, industrial policies lead to trade surpluses if the government pursues an unbalanced policy mix, such that domestic demand does not rise as much as supply. These surpluses are absorbed by the rest of the world, which in response runs trade deficits. Absent policy interventions, trade deficits reduce the competitiveness of the domestic tradable sector, stifling innovation and productivity growth. Innovation policies can help the rest of the world to mitigate these negative spillovers.