Privatization and the Political Economy of Strategic Trade Policy

Abstract

This article considers the interdependence between international financial markets, privatization, and strategic trade policies. We describe an economy where portfolio allocations are chosen by risk‐averse agents who rationally forecast future trade policies. Assuming a government responsive to the policy preferences of voters, we show that ownership structure affects trade policy through the incentives for lobbying by private agents. Portfolios and trade policy are thus jointly determined in political‐economic equilibrium. Privatization of state‐owned industry exerts an important influence over the trade policies chosen by domestic and foreign governments by expanding the scope for individual diversification.