Background
Strategic trade policy refers to government interventions in international markets designed to enhance the competitive position of domestic firms above and beyond what free market competition would achieve. These policies often aim to shift profits and market share from foreign competitors to domestic firms.
Historical Context
The concept emerged prominently in the 1980s with the development of “New Trade Theory,” which highlighted the potential benefits of government intervention in the presence of economies of scale and imperfect competition.
Definitions and Concepts
Strategic Trade Policy is defined as a set of trade policies where a government strategically uses subsidies, tariffs, and other tools to directly benefit its domestic firms. Unlike other forms of trade policy that may aim purely to protect domestic industries, strategic trade policy targets alterations in the behavior of foreign competitors, to the advantage of the home country’s industries.
Major Analytical Frameworks
Different schools of thought have contributed to our understanding of strategic trade policy:
Classical Economics
Strategic trade policy doesn’t fit easily within classical economic frameworks, which emphasize the benefits of free trade and the comparative advantage principle.
Neoclassical Economics
Neoclassical theories maintain some skepticism towards strategic trade policy due to potential government failure and the difficulty in correctly identifying which industries to support without incurring efficiency losses.
Keynesian Economics
Although Keynesian economics supports broader government intervention to stabilize the economy, Keynesians traditionally focus less on trade policies directly compared to domestic fiscal and monetary policies.
Marxian Economics
From a Marxian perspective, strategic trade policies can be viewed as tools used by capitalist states to strengthen the competitive position of their national capitalists within the global market.
Institutional Economics
Institutional economists may examine strategic trade policy in terms of the complex interplay between governments, institutions, and market actors, emphasizing the timing and contextual conditions that determine policy success or failure.
Behavioral Economics
From a behavioral economics standpoint, assessing the potential biases and irrational behavior of policymakers and firms is crucial. Risk aversion, overconfidence, and herding behavior can all impact the effectiveness of strategic trade policy.
Post-Keynesian Economics
Post-Keynesians focus on the economies of scale and the role of large corporations in influencing strategic trade policy, stressing the necessity of understanding market imperfections in policy decisions.
Austrian Economics
Austrian economists generally oppose strategic trade policies, emphasizing market process, individual entrepreneurship, and the decentralized decision-making of market participants.
Development Economics
In the context of development economics, strategic trade policy plays a critical role in how developing countries can use such policies to promote industrialization and economic growth.
Monetarism
Monetarist perspectives typically align with a free trade ideology, arguing that interference in international trade through strategic policies could result in inflationary pressures and misallocation of resources.
Comparative Analysis
Strategic trade policies can provide domestic firms with an edge over international competitors, yet their application demands careful analysis of the global market response. A comparative approach involves assessing the relative gains from policy intervention in comparison to expected countermeasures from trading partners.
Case Studies
Several countries have historically employed strategic trade policies. Japanese intervention in the consumer electronics and automobile industries in the latter half of the 20th century is commonly cited, as are some subsidy policies in the European aerospace industry (e.g., Airbus).
Suggested Books for Further Studies
- “The Strategic Approach to International Relations: Game Theory and Shadow of the Future” by Marrese and Ruotolo.
- “The New International Economics” by Paul Krugman.
- “Strategic Trade Policy and the New International Economics” edited by Paul Krugman.
Related Terms with Definitions
- Export Subsidy: A government policy to encourage export of goods and discourage the sale in the domestic market through financial incentives.
- Trade Protectionism: Use of government regulations to limit the import of goods and services.
- Comparative Advantage: The ability of a country to produce goods and services at a lower opportunity cost compared to other countries.
- Trade Liberalization: The removal or reduction of trade barriers, such as tariffs and quotas, to promote free trade.
