Industrial Policy Arms Race: Risks to Global Trade Fragmentation
Industrial Policy Arms Race: Risks to Global Trade Fragmentation
Context : The global trade order is witnessing an intensifying industrial policy arms race, fueled by massive subsidy programs like the US Inflation Reduction Act (IRA) and the EU’s Green Industrial Plan. This shift—from rules-based multilateralism to geo-economic competition—risks deep trade fragmentation, lowering global welfare, and undermining the very institutions designed to ensure a level playing field.
I. Major Challenges Facing the Global Trade Order
The rise of protectionist industrial policies, particularly in advanced economies, poses a systemic threat to the post-Cold War global trade system:
A. Erosion of Multilateral Rules (WTO Paralysis)
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Weakened WTO: The World Trade Organisation (WTO), which provides the framework for disciplining subsidies and settling trade disputes, has been severely undermined.
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Appellate Body Paralysis: The non-appointment of judges to the WTO’s Appellate Body has paralyzed its dispute settlement function, effectively allowing major economies to pursue unilateral tariff actions and industrial policies without the fear of accountability. This has reduced trust in rules-based trade.
B. Subsidy-Driven Fragmentation
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Distortion Risk: Large-scale, locally-content-contingent subsidies (like those in the IRA, which favour domestic production) risk distorting global trade and triggering a cycle of retaliatory subsidy races among major economic blocs.
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Economic Warning: Institutions like the IMF and OECD warn that such subsidy races are counterproductive, leading to the misallocation of global capital and ultimately lowering global welfare.
C. Geopolitical Anxieties and Protectionism
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Economic Nationalism: Geopolitical anxieties, often centered on perceived industrial dominance (e.g., from China), are fueling economic nationalism. This leads to policies aimed at domestic resilience and supply chain reshoring, undercutting the economic principle of comparative advantage.
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Historical Precedent: These anxieties echo misplaced fears from past decades (e.g., concerns over Japan’s manufacturing dominance in the 1980s), suggesting the current protectionism may be an overreaction.
D. Climate-Policy Contradictions
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Fossil Fuel Subsidies: Despite strong global commitments to climate action, fossil fuel subsidies remain alarmingly high (estimated at $\text{US\$7 trillion}$ globally in 2022 by the IEA, including implicit subsidies). This contradiction undermines both trade liberalization goals and global climate targets simultaneously.
II. Addressing Challenges Amidst WTO Issues
Since comprehensive WTO reform is a long-term goal, a multi-pronged approach involving interim solutions and targeted policy is required:
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Plurilateral Cooperation (Interim Solution): With the WTO process stalled, plurilateral forums (involving groups of willing economies) can set new rules and guardrails on subsidies and technology transfer. Initiatives linking trade blocs (like CPTPP members and the EU) are seen as crucial for coordinating sector-specific rules, especially for clean technologies.
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Targeted Subsidy Discipline: Governments must differentiate between “good” subsidies (e.g., R&D, essential green transition support) and “harmful” subsidies (e.g., fossil fuel support, export-contingent subsidies). The Economic Survey of India emphasizes that industrial support must be targeted and time-bound to avoid fiscal drains and major trade distortions.
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Climate-Aligned Trade Action: International efforts should coordinate global support specifically for low- and zero-emission technologies. This must be coupled with the phased elimination of fossil fuel subsidies to align trade policy with the Paris Agreement and G20 commitments.
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Reviving a Modernised WTO (Long-Term): Long-term global stability hinges on restoring the WTO’s dispute settlement function (Appellate Body) and modernizing its subsidy rules to reflect the complexities of 21st-century industrial and digital policy.
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The Source’s Authority and Ownership of the Article is Claimed By THE STUDY IAS BY MANIKANT SINGH
