How might China-US industrial policies affect the Philippines?: a quantitative exercise

Abstract

The recent industrial policy competition between the two economic hegemons, US and China, prompts developing countries to consider if and how they should respond. Using a multicountry, multisector Ricardian trade model with sectoral scale economies, we simulate different scenarios when a developing country like the Philippines takes a passive and active stance. We find welfare gains for the Philippines when it responds by implementing its own industrial policy, and welfare losses from inaction. Timing, however, matters. If the Philippines moved earlier before China and US engaged in industrial policy competition, the welfare gains are larger. Although the magnitude of gains is small, the results suggest an increased demand for industrial policy when the guardrails of the international trading system are lost due to the defiance of its benefactors.

JEL classification: F12, F13, F17