DP18820 The Social Footprint of Globalization: Towards the Introduction of Strategic Industries in Quantitative Trade Models
We argue that our understanding of industrial policy in the presence of `strategic' industries that exert positive externalities on the national economy may benefit from an extension of quantitative general equilibrium trade models making the extent and pattern of trade-induced reallocations more salient. To make these features relevant for national welfare, we introduce the notion of the `social footprint' of globalization as the result of suboptimal trade-induced structural transformation in the presence of externalities. For proof of concept, we use simple workhorse models featuring two countries and two industries (only one of which is `strategic') to highlight the role of the `scale elasticity' of the strategic industry and the consequences of the most common assumptions on market structure in quantitative trade analyses.
