Empirical Justification For Strategic Trade Policies To Develop An ’infant Industry’ Analysis Of The Protective Measurements Of The PRoC To Promote The Development Of The Local Automotive Industry

The claim by many scholars that the Chinese state lacks the capability to practice pro-active industrial policy will be put into doubt in this research as it argues the contrary by examining the development of the Chinese automobile industry and the evolution of its industrial policies since the industry establishment in 1949. This research aims to answer the question, if the promotion of an ’Infant Industry’ can be achieved by the means of protective measures in form of strategic trade policies. The goal is to analyze which policies and measurements were used to influence trade flows and how these trade policies impact the infant industry and the Chinese economy itself. The effectiveness of such protective measures to achieve industrialization and welfare maximization owing to the promotion of an infant industry will be analyzed with focus on the Chinese automotive industry. The domestic infant industry is uncompetitive and experiences dynamic learning effects while the competitive foreign industry is mature and produces a good that is an imperfect substitute for the domestic good. The policy makers can protect the infant industry using domestic production subsidies, tariffs, quotas or other regulations in order to maximize domestic welfare over time. Assuming some reasonable restrictions on the flexibility over time of the policy instruments, this research subsequently compares the effectiveness of the different instruments. The automotive industry as recipient of strategic trade policies is of particular interest as nations that succeeded in promoting a strong domestic automotive industry now benefit from high net-exports and high GDP levels inter alia driven by this particular industry.In addition, an international competitive automotive industry is able to promote positive side effects on other domestic industries (e.g. steel, electronics etc.). Casu quo, virtually all sizeable automotive industries are or were highly protected. The pivotal research question, to what extent strategic trade policies can be used to promote the development of the automotive industry in China, will be answered through a historical-and empirical contemplation. The goal is to investigate if, despite the argumentation of free trade in economic trade theory, protective measurements are able to overcome the negative effects of restricted trade in order to justify the industry protection, if they aim to develop and promote an infant industry. The central state’s policy may have been ineffective at first, but continued to improve, layer-by-layer, by taking into account results of local experiments, and being propelled by a strong catch-up consensus providing performance standards to establish national industries. The industry development process thus renders its industrial policy model effective in the long term.