Foreign Trade Policies and Domestic Industrial Growth: A Conceptual and Empirical Review

Abstract

The relationship between foreign trade policy and domestic industrial growth has remained one of the most enduring and contested questions in development economics. This article presents a conceptual and empirical review of that relationship, tracing the debate from early import-substitution and export-promotion strategies through contemporary discussions of industrial policy, trade liberalization, and global value chain integration. Drawing on classic contributions from Krueger, All and Rajapatirana, Greenaway and Nam, and more recent empirical work by Harrison and Rodríguez-Clare, Aitken, Hanson and Harrison, and country-specific studies of China, South Asia, and Latin America, the review examines the channels through which trade openness affects industrial output, productivity, and technological upgrading, as well as the conditions under which selective trade and industrial interventions have succeeded or failed. The article finds that while outward-oriented trade regimes are generally associated with stronger and more sustained industrial growth than heavily protected regimes, the relationship is neither automatic nor unconditional: institutional capacity, the sequencing and credibility of reform, exposure to foreign direct investment and associated spillovers, and the presence of complementary domestic policies each shape the extent to which trade liberalization translates into durable industrial expansion. The review concludes with implications for policymakers navigating the choice between trade neutrality and selective industrial promotion in contemporary developing economies.