Treasure the moment, it will not last;
Only the fool lives in future or past.
A series of “industrial revolutions” taking place from the eighteenth century onward has changed the production process tremendously. The first industrial revolution (about 1760–1840) mechanized manufacturing with water and steam power, marking a historic shift from a manual to machinery-based production. The second one (between the late nineteenth century and the early twentieth century) used electricity for mass production. The third or “digital” revolution (the 1960–1990s) automated production through the incorporation of electronics and information technology (IT). The current fourth industrial revolution builds on the digital revolution and creates a fusion of technologies – for example, artificial intelligence, the Internet of things, 3-D printing, nanotechnology, biotechnology, and so on – cutting across the physical, digital, and biological domains.Footnote 2
Thanks to these significant developments, manufacturing now is much faster and less labor-intensive than it was centuries ago. The spectrum of end-products is significantly broader as well. Information and communications technology (ICT) and the Internet are transforming the present-day production, delivery, and consumption of goods and services in such a way that the lines between the tangible and the intangible, real and virtual worlds are getting blurred.
Industrialization without any government’s involvement is hardly conceivable. In practice, many governments have played an undeniable role in establishing, stimulating, and protecting domestic industries even when it was contrary to market principles.Footnote 3 Such a government’s participation is captured by the concept of “industrial policy,” which itself has never been defined in a commonly acceptable manner. Under a narrow understanding, this concept is closely associated with subsidies, but this book follows a definition that comprises a wider scope of public interventions directed at influencing industries through horizontal and selective policy tools.Footnote 4
The global financial crisis and the Great Recession of 2008–2009 aroused a renewed interest in industrial policy. The crisis showed that market mechanisms were not necessarily efficient and that strong government interventions were even indispensable to save national economies from a devastating collapse. As a result, the importance of industrial policy is gaining wider recognition in academic and political circles.Footnote 5
Today, many governments are in the process of modernizing their industrial policies with a view to coping with the crisis consequences, ongoing and new challenges caused by various internal and external factors, as well as technological advancements. Localization or industrial nationalism, digitization, innovation, and green growth are some key words that characterize current industrial policy-making in different parts of the world. It addresses both traditional and “new generation” issues often going far beyond national boundaries.
In 2017, the European Union (EU), for instance, announced a new Industrial Policy Strategy that highlights cybersecurity, free flow of nonpersonal data, renewable biological resources, intellectual property rights (IPRs), public procurement, sustainable finance, critical raw materials, mobility, and transport. The EU horizontal policies are complemented by some sectoral measures affecting steel, space, defense, and automotive industries.Footnote 6
Under the slogan “America First,” the United States, in 2017, withdrew from the Trans-Pacific Partnership (TPP) and embarked on renegotiating some of its major trade agreements with the avowed objective to clinch deals that will “better” serve its industrial interests. Moreover, the US administration recently unveiled a plan to repeal the policy of curbing carbon emissions from power plants and to boost domestic production of fossil fuel energy in order to lessen the environmental burden on local manufacturers.Footnote 7
In 2015, China launched an ambitious initiative called “Made in China 2025” to significantly upgrade Chinese industries and make them innovation-driven. It prioritizes basically ten sectors, including, inter alia, advanced IT, robotics, aerospace equipment, maritime equipment, and biopharmaceuticals, with the domestic content of core components and materials to be increased to 40 percent by 2020 and 70 percent by 2025.Footnote 8
The “More Productive Brazil” project was introduced in 2016 to restructure the Brazilian industrial sector. It consists in the governmental cofinancing of consulting services that help local companies raise their productivity in compliance with the principles of lean manufacturing – methods of reducing waste, such as overproduction, waiting time, transportation, excess processing, inventory movements, and defects.Footnote 9
The Indian government’s new plans for a “future ready” industrial policy pursue the goal to strengthen global strategic linkages of domestic industries through brand-building and foreign direct investment (FDI), to enhance industrial competitiveness, and adapt the innovative ecosystem to cutting-edge technologies and artificial intelligence.Footnote 10
As for examples of some topic-specific practices, Australia, Canada, Russia, Turkey, Viet Nam, and some other countries restrict data outflows for the sake of information privacy and cybersecurity, which has serious implications for many IT companies and IT-reliant industries.Footnote 11 Global climate change and the deterioration of the environment have compelled most nations to adopt greening policies with actual or potential transboundary industrial impacts.Footnote 12 Creativity and innovation are what many politicians today consider as new engines for growth and make part of economic development strategies.Footnote 13
Because industrial policies are designed and implemented with the internationalized nature of business linkages in mind, the domestic market is not the only focal point for national authorities. The authorities also pay attention to how to assist their producers in utilizing commercial opportunities abroad and expanding their presence in global value chains. All of these factors necessarily connect industrial policies to international trade.
When the General Agreement on Tariffs and Trade (GATT) was signed in 1947, the parties proudly declared the completion of “the most comprehensive, the most significant and the most far reaching negotiations ever undertaken in the history of world trade.” At that time, twenty-three signatories shared approximately 70 percent of world trade.Footnote 14 The GATT’s successor – the World Trade Organization (WTO) – now has 164 members accounting for about 98 percent of global trade.Footnote 15 The GATT/WTO multilateral trading system has effectively resisted the temptation of countries to resort to beggar-thy-neighbor actions even during the periods of severe economic difficulties. This point is convincingly illustrated by WTO Director-General Roberto Azevêdo:
[W]e all saw the value of the trading system during the financial crisis. In the 1930s, protectionist measures wiped out two-thirds of trade flows – with devastating consequences. In the crisis of 2008 we did not see the same escalation – precisely because governments knew they were bound by common rules. They held each other to the agreed standards. And these agreed standards are quite clear. We know when red lines are crossed – which we did not see in the 1930s. Our monitoring shows that trade restrictions imposed by the G20 economies since the 2008 crisis cover just 4.25 percent of world trade. This shows that the system is doing what it was created to do.Footnote 16
Antiprotectionism is definitely an important but not the only part of the WTO domain that impacts on countries’ sovereignty over their industrial policies.Footnote 17 Among many other relevant aspects, this system accepts qualifying unlawful industrial measures that are triggered by societal interests. Certain components of industrial policy are out of the WTO’s reach.
The purpose of this book is to examine the extent to which industrial policy is regulated by the WTO regime with particular reference to legal constraints and flexibilities as applied to both general and topic-based industrial policies. The seven chapters are grouped into two parts.
Part I is dedicated to general tools of industrial policy. It explores the relationship between industrial policy and the world trading system and looks into governmental actions of protecting and supporting domestic industries. In particular, Chapter 1 begins with the economics and practice of industrial policy, followed by the discussion of the evolution of the GATT/WTO system, its major “controlling” functions, and implementation flexibilities vis-à-vis national industrial policies. Chapter 2 elaborates on most common protective measures, including border restrictions, taxes, product standards, and protection of services industries. Chapter 3 examines the stimulating side of industrial policy, namely, subsidies in manufacturing and services sectors and support measures involving upstream producers.
Part II carries out a detailed study of some special topics of industrial policy. More specifically, Chapter 4 analyzes the issue of “zoning” of industrial policies, that is, when countries incentivize industrial activities within certain locations of their territory designated as, for example, special economic zones. Such free zones are regulated by multilateral customs rules and fall within the WTO jurisdiction. Chapter 5 concerns “localization” or import substitution measures that many governments used in the past and continue to rely on even these days. This chapter discusses some global trends, the economics and WTO-consistency of localization policies, with one section dealing with an emerging trend toward forced “localization” of electronic data. Chapter 6 is about the “greening” of industrial policies in the context of trade rules. It covers border carbon adjustments, renewable energy subsidies, environmental labeling programs, WTO environmental exceptions, and the problem of “trade–environment” harmonization at the international and domestic levels. Finally, Chapter 7 focuses on WTO issues associated with “creative economy” – an industrial policy of supporting economic development through a merger of culture, technology, and innovation.
