How Large or Small is the Policy Space? WTO Regime and Industrial Policy

Abstract

The paper identifies the need for improvements in space for developing and least developed countries under the current world trading system by examining the use of WTO dispute settlement system with descriptive statistics and case studies. The paper shows an asymmetry in the utilization of the dispute settlement system and the consequence of using the system between developed and developing countries. For instance, the paper demonstrates that the United States and some other developed countries use WTO rules effectively, resulting in the defeat of developing countries in disputes. These developing countries are forced to abandon their measures. By contrast, the United States and the other developed countries continue to use WTO-inconsistent policies in need without being much effectively challenged. Based on our findings, we suggest what should be done within the practices of the current rules, what can be done to change the current global rules, and what developing countries can still try under the current rules.Keywords: Industrial Policy, WTO Dispute, Policy Space, WTO SCM Agreement. SubsidiesJEL Classification: F13, F53, K33, K41, O25I. IntroductionSince the past decade, renewed interest on has been observed by both developed and developing economies (OECD 2013), which reflect partly the disappointing economic performance under the Washington Consensus during the 1980s and 1990s and the effect of the 2008 global financial crisis (Lin and Stiglitz 2013; Lee 2013a; Lee and Mathews 2010). Although is often a broad concept, it is traditionally defined, according to early works such as that of Johnson (1982), as sector-specific policies that improve the structure of a domestic industry to enhance the international competitiveness of a countiy. New more recent literature on the subject includes the works of Cimoli, Dosi, and Stiglitz (2009), as well as those of Lin (2012), Lee (2013b), Lee and Mathews (2013), and Wade (2012). Two most recent works are that of Un and Stiglitz (2013) as well as a new flagship report by the Organization for Economic Cooperation and Development (OECD 2013) that attempts to suggest new and broader uses of to include not only sector-specific (or vertical) interventions but also horizontal ones. Thus, the OECD (2013, p.102) defines as targeted government actions aimed at supporting production transformation that increases productivity, fosters the generation of backward and forward linkages, improves domestic capabilities, and creates more and better jobs.The revived interest in seems to reflect an emerging consensus that all the well-known experiences of successful economic development have not emerged spontaneously. Rather, these experiences have been achieved through strong policies that stimulate modem economic activity and creates a virtuous circle of rising productivity, technological upgrading, and social progress in low-income countries that would typically require assistance through a combination of public investment in infrastructure, human capital, and a set of incentives broadly labelled as industrial policy (Cornla and Vos 2014). In other words, is now to be understood not merely as promoting manufacturing industries, but also promoting modem production and service activities in general (Comia and Vos 2014). Empirical research, such as those by Aghion, Dewatripont, Du, Harrison, and Legros (2012) and Shin and Lee (2012), verify the positive effect of in contrast to earlier literature that found its effect to be insignificant, such as in the work of Beason and Weinstein (1996) or Lee (1996).One reason for the mixed outcome of may be the difficulty of verifying the average positive effect of because the effects tend to appear only under certain conditions, depending upon specific contexts (Shin and Lee 2012). …