Do patterns of trade and international competitiveness support the case for industrial policy?

Abstract

Although industrial policy is promoted as a means of achieving and preserving international competitiveness, the patterns of trade between countries are often ignored in both justifying industrial policies and measuring their impact. This paper examines the case for industrial policy using bilateral trade patterns over a 12-year period to measure changes in British industrial competitiveness. As Germany is widely portrayed as a model of industrial competitiveness, the research addresses the common view that Germany strengthened its leading position as an industrial European power, whereas UK is slowly falling behind because it lacks an active industrial policy. By studying competitiveness using various metrics related to export data, a more subtle and nuanced picture arises of what has happened to the UK vis-à-vis Germany with implications for policy-making. We analyse changes in the structural composition of British and German manufactured exports based on specific trade indices, including the revealed comparative advantage, the Grubel–Lloyd index, the marginal intra-industry index and factor intensity, calculated at industry and product level. The results have policy implications for how UK advances towards policy objectives of increasing exports to balance the economy, achieve sustainable growth and overcome the negative effects of the recent financial crisis.