Fiscal And Monetary Policy Ate Trade And Industrial Policy In Last Three Decades, The Latter Is Now Back With A Vengeance

In the three decades since the collapse of the Soviet Union, the global economy has moved toward the free movement of capital, people, goods, and services. There has been a calibrated approach under the leadership of the World Trade Organization (WTO) toward the reduction of tariff and non-tariff barriers (NTBs) on imports and exports.

Though trade never became as free as free libertarians would have idealised, the Western nations put export control restrictions on arms and defence technologies and non-tariff barriers were used to protect the domestic market in East Asia, to the extent of European economies, but free traders never had it better.

Similarly, the East Asian economies and India, too, continued to put capital controls and had ‘managed’ exchange rates but more capital was moved from one jurisdiction to another in the form of foreign direct investment, foreign institutional investment, hawala, and money laundering.

As far as the movement of people is concerned, it went to a historic high, through legal and illegal routes. European Union moved people completely within its jurisdiction while the United States allowed people to enter the country through legal and illegal routes. The developing Asian countries were happy to supply millions of people yearly as long as they got billions of dollars in remittances.

Amid the free movement of capital, people, goods, and services in a coordinated approach, fiscal and monetary policy became the main tools of economic policymaking.

Central banks worldwide tried to balance growth and inflation with the quantity of money and credit in an economy. In the process, they were granted more independence by the elected governments and started acting as independent institutions with control over the money supply in the economy.

Fiscal policy became the main tool for the government to control inflation and spur economic growth. Devoid of other policy tools, they taxed and borrowed like never before to cover the increasing ambit of spending.

Tax to GDP ratio has grown exponentially across the developing and developed world and yet the government borrowings are at a record high. As of the end of 2022, global public debt was 92 per cent of GDP, or $91 trillion. Developing countries' total public debt increased from 35 per cent of GDP in 2010 to 60 per cent in 2021.

The retreat of trade and industrial policy increased the scope and importance of fiscal and monetary policy. This is evident from the reduced importance of trade and industry ministries across the world since the 1990s and the increased emphasis on central banks and finance ministries.

For example, in Japan, the Ministry of International Trade and Industry (MITI) was the main ministry to manage the economy between 1949 to 2001, books have been written on its laurels for making Japan an industrial powerhouse. However, in 2001 it was merged with the Economic Planning Agency (EPA) to form the Ministry of Economy, Trade and Industry (METI).

Most of the East Asian and Southeast Asian economies modelled their bureaucracy after Japan gave its rise from the ashes in World War II to the second largest economy in the world in the 1980s to 2009, for almost three decades until it was overtaken by China.

Most of these countries gave more importance to trade and industrial policy in their early stage of development and some continue to do so to date.

As per a report by the Centre for Digital Economy, the rejection rate of the commerce ministry's recommendations to impose anti-dumping and countervailing duties on different imported products by the finance ministry has gone up substantially between September 2020 to October 2022.

From September 2020 to October 2022, as many as 70 anti-dumping and countervailing duties recommendations of the commerce ministry were rejected out of 120. From 1991 to 2020, only seven recommendations were turned down by the finance ministry out of 1,052 cases recommended by the commerce ministry's investigation arm — the Directorate General of Trade Remedies (DGTR).

This not only shows a lack of homogenous views on the Trade and Industrial policy between the two ministries but also the prevailing powers of the Ministry of Finance over the Ministry of Commerce and Industry.

However, the tide is turning across the world with the return of Industrial policies. As per a report by the International Monetary Fund, there were more than 2,500 industrial policy interventions worldwide last year. Moreover, the report says “the recent surge in such measures has been driven by large economies, with China, the European Union, and the United States accounting for almost half of all new measures in 2023.”

Ignored for almost three decades, trade and industrial policy is back with a vengeance. Every other day some export control or import tariff measure is being imposed by the largest economic units of the world. Out of the four pillars of freedom of globalisation (capital, labour, goods, and services), only services are going strong while the other three are in retreat.

Industrial policies are often implemented by line ministries, and designed and coordinated by the Ministry of Trade and Industry. With the retreat of the industrial policy in fashion, the trade and industry ministries are again in the limelight that they have craved for the last three decades.

In the United States, the Secretary of Commerce Gina Raimondo has gotten more attention from the media and policy circles than the Secretary of Treasury (America’s finance minister) Janet Yellen throughout the Biden Presidency.

In European capitals too, the minister responsible for Trade and industry has gotten more footfall from the business world and media than the finance ministers.

The fiscal and monetary policy experts ruled the roost in the golden period of globalisation, and both of them do not study firms closely. With their hyper-financialised economies, Western society handed over control of the economic policy to mathematical models and their developers.

East Asian economists, especially those from South Korea like Ha-Joon Chang, and Keun Lee, and some financial journalists like FT’s Joe Studwell kept the Trade and Industrial policy economics alive under the domain of the so-called heterodox approach to economics.

However, with the decline of Neoclassical/orthodox economics in the last three years, it seems that some heterodox schools will become mainstream in the coming years.