Chapter 27 Strategic trade policy

Abstract

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.