Sabotage as Industrial Policy

Abstract We characterise sabotage, exemplified by recent US policies concerning China’s semiconductor industry, as trade policy. For some (but not all) goods, completely destroying foreigners’ productivity increases domestic real income by shifting the location of production and improving the terms of trade. The gross benefit of sabotage can be summarised by a few sufficient statistics: trade and demand elasticities and import and production shares. The cost of sabotage is determined by countries’ relative unit labour costs for the sabotaged goods. We find important non-monotonicities: for semiconductors, partially sabotaging foreign production would lower US real income, while comprehensive sabotage would raise it.