Industrial Policies with Great Power Governance

Insufficient market coordination and huge social gains make it necessary to implement industrial policies. It could be regarded as strategic industrial division that industrial policies in one country might target for some industries without comparative advantage world-wide. China as great power justifies such kind of strategic choice in industrial polices because of more benefit from scale economy as well as domestic market access. However, such kind of strategic behavior should not exist among different regions within a country, since it will result in deviation from the optimal long term and overall benefits. Thus, the analysis of China’s industrial policies should be put against the drop of great power governance. By looking into central and regional industrial policies, we do find such kind of strategic behavior by local governments. Because of information asymmetry, there might exist policy mistakes of industrial policies, which makes it important to use the idea of mechanism design in policy making. Taking the water pollution regulation and the new energy vehicles subsidy policy as examples, it is revealed that the existence of information asymmetry might lead industrial policies to some unintended consequences conflicting to policy aims. This suggests that potential general equilibrium effects, which means spillover effects of the policy in different dimensions, should be taken into consideration in the formulation of industrial policies. It could help industrial policies better serve the long term, overall, and multi-dimension policy goals.