Abstract
This paper studies how demand-side industrial policy affects domestic production and foreign direct investment (FDI). I use the U.S. Inflation Reduction Act (IRA) to quantify the effects of consumer subsidies and domestic content requirements on production, employment, consumption, and supply-chain structure in the electric vehicle (EV) industry. I develop a multi-sector general equilibrium trade model with heterogeneous consumers and producers, multi-stage production, and taxation. The quantitative results show that the IRA increases domestic output and employment in the EV battery industry and attracts FDI, but at the cost of lower aggregate EV sales. The magnitude of this trade-off depends on the stringency of the domestic content requirement: looser thresholds generate larger employment and FDI gains but amplify the decline in overall EV adoption. Holding fixed the induced battery-industry FDI, the IRA industrial policy delivers larger employment gains than import tariff-based policies.
Abstract
We estimate sector‐specific transport mode elasticities in international trade using newly available bilateral trade data disaggregated by mode and sector for 2016–2019. We rely on an instrumental variable approach that exploits the interaction of global, mode‐specific cost shocks with exogenous bilateral geography to identify elasticities for 21 manufacturing sectors. The estimates reveal substantial heterogeneity, ranging from statistically insignificant values near zero to 11.4, with high value‐to‐weight sectors such as pharmaceuticals and energy exhibiting greater sensitivity to mode costs than bulk and heavy goods sectors such as motor vehicles/parts and paper products. We embed these estimates in a multi‐country, multi‐sector general equilibrium trade model with endogenous mode choice and input–output linkages. In a counterfactual experiment using observed global changes in air, sea, and road costs, we show that accounting for heterogeneous sectoral mode elasticities alters both the average and the distribution of welfare effects across countries. These results highlight the importance of incorporating modal heterogeneity in empirical and quantitative analyses of trade.