This chapter focuses on the concept of strategic trade policy. The analysis of strategic trade policy is part of a broader research agenda that has been very active since the beginning of the 1980s. Over this period, international trade economists have sought to incorporate oligopoly and other forms of imperfect competition into the formal analysis of international trade and trade policy so as to make contact with important empirical regularities and policy concerns. The chapter defines strategic trade policy as the trade policy that conditions (or alters) a strategic relationship among firms. This definition implies that the existence of a strategic relationship among firms is a necessary precondition for the application of strategic trade policy. The basic game theoretic structure of strategic trade policy is discussed in the chapter. It also focuses on the “third-market” model, in which rival oligopolistic exporters from two countries compete only in a third market. The chapter develops the basic strategic export subsidies model in this context, along with some of the more important qualifications and extensions. It presents the reciprocal markets model, in which oligopolistic firms in two countries compete in those two countries. The chapter also reviews some of the major calibrated simulations of strategic trade policy. Show
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* I am grateful to Gene Grossman for inviting me to write this chapter and for his very helpful comments. In addition, I am very much indebted to Kyle Bagwell, Clive Chapple, David Collie, Murray Frank, Keith Head, Jota Ishikawa, Larry Qiu, Michael Rauscher, John Ries, Barbara Spencer, and Scott Taylor for their help. I also thank Avinash Dixit and Tony Venables (my two discussants), and other participants at the March 1994 Handbook Conference held at Princeton University. Strategic trade policy refers to trade policy that affects the outcome of strategic interactions between firms in an actual or potential international oligopoly. A main idea is that trade policies can raise domestic welfare by shifting profits from foreign to domestic firms. A well-known application is the strategic use of export subsidies, but import tariffs as well as subsidies to R&D or investment for firms facing global competition can also have strategic effects. Since intervention by more than one government can lead to a Prisoner’s Dilemma, the theory emphasizes the importance of trade agreements that restrict such interventions. Keywords
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This chapter was originally published in The New Palgrave Dictionary of Economics, 2nd edition, 2008. Edited by Steven N. Durlauf and Lawrence E. Blume This is a preview of subscription content, access via your institution. Fig. 1  Fig. 2 Fig. 3 Bhagwati, J., V. Ramaswami, and T. Srinivasan. 1969. Domestic distortions, tariffs and the theory of optimum subsidy: Some further results. Journal of Political Economy 77: 1005–1010. CrossRef Google Scholar Brander, J. 1981. Intra-industry trade in identical commodities. Journal of International Economics 11, 1–14. Reprinted in Intra-industry trade, ed. P. Lloyd and H. Grubel. Camberley: Edward Elgar, 2002. Google Scholar Brander, J. 1986. Rationales for strategic trade and industrial policy. In Strategic trade policy and the new international economics, ed. P. Krugman. Cambridge: MIT Press. Google Scholar Brander, J., and B. Spencer. 1981. Tariffs and the extraction of foreign monopoly rent under potential entry. Canadian Journal of Economics 14, 371–389. Reprinted in Readings in international trade, ed. J. Bhagwati. Cambridge: MIT Press, 1987. Google Scholar Brander, J., and B. Spencer. 1984. Tariff protection and imperfect competition. In Monopolistic competition and international trade, ed. H. Kierzkowski. Oxford: Oxford University Press. Reprinted in Imperfect competition and International trade, ed. G. Grossman, Cambridge: MIT Press, 1992. Google Scholar Brander, J., and B. Spencer. 1985. Export subsidies and international market share rivalry. Journal of International Economics 18, 83–100. Reprinted in International trade, volume 1. Welfare and trade policy, ed. P. Neary, Aldershot/Brookfield: Edward Elgar, 1995. Google Scholar Dixit, A. 1979. A model of duopoly suggesting a theory of entry-barriers. Bell Journal of Economics 10: 20–32. CrossRef Google Scholar Dixit, A. 1984. International trade policy for oligopolistic industries. Economic Journal 94(supplement), 1–16. Google Scholar Eaton, J., and G. Grossman. 1986. Optimal trade and industrial policy under oligopoly. Quarterly Journal of Economics 101, 383–406. Reprinted in Readings in international trade, ed. J. Bhagwati. Cambridge: MIT Press, 1987. Google Scholar Irwin, D. 1996. Against the tide: An intellectual history of free trade. Princeton: Princeton University Press. Google Scholar Krugman, P. 1984. Import protection as export promotion: International competition in the presence of oligopoly and economies of scale. In Monopolistic competition and product differentiation and international trade, ed. H. Kierzkowski. Oxford: Oxford University Press. Google Scholar Krugman, P. 1987. Is free trade Passé? Journal of Economic Perspectives 1(2): 131–144. CrossRef Google Scholar Ricardo, D. 1817/1951. On the principles of political economy and taxation. In The works and correspondence of David Ricardo, ed. P. Sraffa. Cambridge: Cambridge University Press. Google Scholar Spencer, B. 1986. What should trade policy target? In Strategic trade policy and the new international economics, ed. P. Krugman. Cambridge, MA: MIT Press. Reprinted in Structural change, industrial location and competitiveness, ed. J. Oxley and B. Yeung. Cheltenham/Northampton: Edward Elgar, 1998. Google Scholar Spencer, B., and J. Brander. 1983. International R&D rivalry and industrial strategy. Review of Economic Studies 50: 707–722. CrossRef Google Scholar Download references Author informationAuthors and Affiliations
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Editor informationEditors and AffiliationsCopyright information© 2008 The Author(s) About this entryCite this entrySpencer, B.J., Brander, J.A. (2008). Strategic Trade Policy. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95121-5_2264-1 What are the two components of strategic trade policy?Strategic trade policy has two components to raise national income - helping firms to capture first-mover advantages and intervening in an industry where foreign firms have already gained a first-mover advantage.
What is the meaning of trade policy?Trade policy can be defined as goals, rules, standards, and regulations that are involved in the trade between countries. These policies are particular to a specific country and are formed by its public officials.
What is an example of trade policy?Trade policy. includes any policy that directly affects the flow of goods and services between countries, including import tariffs, import quotas, voluntary export restraints, export taxes, export subsidies, and so on.
What are the 5 instruments of trade policy?Trade policy uses seven main instruments: tariffs, subsidies, import quotas, voluntary export restraints, local content requirements, administrative policies and antidumping duties.
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