Strategic Trade Theory Research Articles

The Ramifications of China’s Maritime Equipment Industry Policies for the EU

ABSTRACT This article utilizes strategic trade theory (STT) to assess China’s build-up of its maritime equipment (ME) industry. It does so by analyzing how maritime equipment has been addressed in Five-Year-Plans (FYPs) on the development of the maritime economy since 2013. Thus, it illustrates the importance of constructing integrated demonstration development zones and building-up technological capacities for the ME industry’s development. It also details the Chinese government’s objective to develop national champions in the ME industry, which corresponds with the broader context of China’s Innovation-Driven Development Strategy (IDDS) since 2016. Though trade data illustrates China has not yet taken over the EU’s current leadership position in the ME value chain, it does signal that dependence on the EU has been inversed for several categories of the ME industry. EU policymakers need to reflect on the possible ramifications of China’s approach for both the EU’s economic and security domains in deciding on if, how, and to what degree the EU and its member states should address China’s ME build-up.

A Study on the Competition for Semiconductor Hegemony among Korea, China and U.S.A.

4차 산업혁명의 핵심인 반도체 산업에서 한국은 메모리반도체 강자로 자리잡았다. 메모리반도체 시장에서의 패권 다툼은 신흥 도전국의 시장 진입 시도와 이를 억제하려는 패권국의 노력이 다양한 형태로 나타나고 있다. 국가안보와 연계된 반도체 산업의 특성상 기업간 경쟁 차원을 넘어, 각국 정부는 전략적으로 개입하여 산업정책과 무역정책을 구사하고 있다. 한국이 메모리반도체 패권을 유지하는 데 필요한 실질적인 전략수립을 위해, 본고에서는 세력전이 이론, 동맹전이 이론, 헤게모니 쇠퇴 이론, 전략무역 이론에 입각하여 메모리반도체 시장에서의 시장 지배자와 시장 진입자간 패권경쟁 양태를 살펴본다. 경제 이론과 국제정치 이론을 접목시켜 볼 때, 현상 유지를 원하는 시장 지배자인 패권국은 후발주자 진입 억제를 위해 무역제재, 인수합병 저지, 배타적 가격 전략, 사다리 걷어차기 등 전략을 구사한다. 현상 타파를 원하는 시장 진입자인 신흥 도전국은 자국 산업 경쟁력 제고를 위한 세제 지원, 보조금 지급, 무역 보복, 인재 스카웃, 인수합병, 동맹 참여 등을 시도한다. 시장 환경이 결코 한국의 메모리반도체 패권유지에 유리한 방향으로 순조롭게 흘러가지 않는 국면에서, 국가안보를 확보하기 위한 정부의 외교적 노력의 필요함을 주장했다.Korea has been a dominating presence in the memory semiconductor industry which has played a key role in the 4th Industry Revolution Era. There are many forms of competition for hegemony, such as the attempts of new challengers to enter the market and the efforts of super powers to deter them. Semiconductor industry is not just a matter of economy, but a matter of national security, which leads to government engagement in trade and industrial policy. This research is written in order to offer ideas for an adequate action plan that the Korean semiconductor industry needs to implement. This research focuses on hegemony competition in the memory semiconductor market between dominant firms and market entering firms using recent examples, and is based on the power transition theory, alliance transition theory, hegemonic decline theory and strategic trade theory. According to economic and international political theories, dominant firms - as super powers - want status quo. So they block exporting important semiconductors to competitors, stop M&A s by competitors, use limit pricing strategy and kick away the ladder, which can deter challengers from entering their market. Challengers want to change the regime. As a result, they reduce corporate taxes, offer subsidies for firms, implement retaliation on trade, scout for top talented engineers and scientists, try to merge other firms and join alliances in order to enhance their competitiveness in the market. Under the unfavorable circumstances for Korean firms to maintain dominance, this research emphasizes the importance of diplomatic efforts to guarantee national security.

Border Adjustments Supplementing Nationally Determined Carbon Pricing

As agreed on in the Paris Agreement, each country determines its own contribution to combat climate change on a voluntary basis. There is no mechanism to force a country to comply with its own nationally determined contributions. This bottom-up approach builds on unilateral actions and yields a kind of carbon pricing, which is not necessarily identical across countries. As a consequence, these nationally determined climate policies have drawbacks in terms of carbon leakage and loss of competitiveness for firms producing in high carbon price countries. To reduce these negative effects, border adjustments (BAs) may be appropriate subsequent to more stringent environmental regulation. We model a three-stage game involving carbon price competition in the first stage, the introduction of BAs in the second stage and oligopolistic competition between firms in the third stage. Strategic trade theory suggests that the qualitative results about the optimal BA policy may vary with the underlying type of competition, namely Bertrand and Cournot competition. However, our results are similar for both types of competition. We conclude that BAs are suitable for supporting a more stringent environmental policy. Moreover, we find that anticipation of the implementation of BAs in the second stage yields higher average carbon prices in the first stage since high carbon price countries increase their carbon prices whereas the other countries partially offset.

The Development of the Strategic Trade Policy and Its Application in China

Strategic trade policy theory, first advocated in 1985, is an important part of the new trade theory. Strategic trade policy emphasizes the importance of public policy under the monopolistic competition, leaving some space for government to increase the national welfare. This article presents the background and the basic framework of the strategic trade policy, and discusses the development of the strategic trade theory internationally and for its application in China. It points out that strategic trade policy develops fast and it needs to integrate more characteristics of developing countries like China into consideration. The measure of the strategic trade policy should be improved in China. The effect of the strategic trade policy becomes more complicated than expected because nothing stands still. Regional trade agreements are the new hidden form of strategic trade policy for China and requires further research.

Luckstead, Jeffrey. “Essays in Policy Analysis: Strategic Trade Theory and the Elimination of Agricultural Subsidies.” PhD Dissertation, Washington State University. Outstanding Doctoral Dissertation

Luckstead, Jeffrey. “Essays in Policy Analysis: Strategic Trade Theory and the Elimination of Agricultural Subsidies.” PhD Dissertation, Washington State University. Outstanding Doctoral Dissertation

US and Chinese Strategic Trade Policies and Product Differentiation in the ASEAN Apple Market

ABSTRACTWe investigate oligopolistic competition between US and Chinese apple exporters in the ASEAN market using strategic trade theory and the NEIO literature. We also analyze competition in the US and Chinese domestic markets. The US supplies higher quality apples to ASEAN than China, resulting in product differentiation. The results show that US exporters had a higher markup than Chinese exporters through the 1990s; however, as the share of Chinese apples expanded, the US markup declined and the Chinese markup increased dramatically. Competitive pricing prevails both in the US and Chinese domestic markets.

STRATEGIC TRADE AND DELEGATED COMPETITION WITH ENDOGENOUS QUALITY CHOICE: IS EXPORT POLICY NEEDED?

This paper introduces the relative-performance contract into a vertically differentiated product market and examines how the optimal trade policy and quality choice respond to the incentive mechanism. We find that the high quality firm makes better use of the delegation than the low quality firm in a cross-border decentralized model. The main difference between the present paper and the strategic trade theory literature is that in this paper the optimal policy is free trade, which does not depend on whether firms compete by prices or quantities, and on whether the goods are substitutes or full complements.

EXPORT SUBSIDIES, COST DIFFERENTIAL AND PRODUCT QUALITY

This paper presents a vertical product differentiation model to examine the relationship between optimal trade policies and product qualities for different export countries under Cournot quantity competition as well as Bertrand price competition. We can also use this quality model to explain why Japan as a high production-cost country may have incentives to offer high subsidies. This is a case that cannot be explained by the strategic trade theory models à la Brander and Spencer (1985) or Eaton and Grossman (1986).

US Federal research & development funding: Strategic trade policy tool, by-product of military competition,or politics as usual?

ABSTRACT Svensson (1998, Kyklos 51(2): 259–75) asked whether strategic trade theory or aspects of sectors' political influence accounted for OECD governments' research and development funding, but he did not consider the roles of military spending or electoral politics. We examine US government research and development (R&D) expenditures during 1958–1998 to assess all these perspectives. Because expenditures were often undisclosed, disclosure itself must also be modeled. Disclosure and reported spending levels are affected by the same considerations that affect funding for other programs. While some variables invoked by strategic trade theory or models of arms races have their expected relation to reported funding, the marginal effects of employment, political concentration, and electoral votes are far larger. For the US it thus appears that the role of strategic trade policy or military security in government R&D expenditure patterns is relatively modest. Its government R&D funding is largely a matter of politics as usual.

Shifting regimes of governance in the coffee market: From secular crisis to a new equilibrium?

ABSTRACT This paper employs a global value chains (GVC) perspective to recent developments in the coffee market, associated with the behavior of market structure in a context of widening spreads around declining prices and affirms that due to their imperfect inclusion in the global economy, primary markets have entered ‘terminal crisis’. The paper asserts that while the role of state-territorial regimes of governance has noticeably weakened in the current (‘terminal crisis’) context, the combined strategic positioning of (‘related’) players, residing at highly imperfect, monopolized nodes has become the key shaper of development and this has had a de-stabilizing effect on the poorest. The paper observes that systemic crisis appears to be resolvable, subject to the ability of emerging new redistributive outcomes to reposition the coffee system at a qualitatively new equilibrium. In contributing to a more systematic (value-chain centered) line of enquiry on the relationship between development and inequality, the paper analytically expands key relationships in the GVC framework (using extra inputs from strategic management, economic trade and convention theory) and offers to policymaking a framework for ‘combating’ falling terms of trade in primary markets by means of new economic relations.

Imperfect Competition and Strategic Trade Theory: Evidence for International Food and Agricultural Markets

Strategic trade theory offers a way of conceptualizing and testing for strategic government interventions in imperfectly competitive international markets. This survey critically assesses recent empirical evidence, with a focus on food and agricultural markets. One finding is that while many international markets are characterized by oligopoly, price-cost markups tend to be small, and the potential gains from intervention are modest at best. In turn, empirical work has turned up few examples in which government intervention has been optimal in a strategic trade sense. Nonetheless, governments are found to frequently intervene on behalf of domestic firms and play a major role in shaping the nature of international competition. Suggestions for future research are made.

Strategic trade and delegated competition

Strategic trade theory has been criticized on the grounds that its predictions are overly sensitive to modeling assumptions. Applying recent results in duopoly theory, this paper considers three-stage games in which governments choose subsidies, firms' owners choose incentive schemes for their managers, and then the managers compete in the product market. We show that if firms' owners have sufficient control over their managers' behavior, then the optimal strategic trade policy does not depend on the mode of product-market competition, i.e., whether firms compete by setting prices or quantities.

Public Enterprise Strategies in a Market Open to Domestic and International Competition

The emerging literature on interaction between strategic trade theory and mixed oligopoly uses a simple example to argue that if the domestic market is open to foreign competition and the government uses a production subsidy then it is socially preferable to pri- vatise the domestic public enterprise even if it is just as efficient as its private counterparts. This study evaluates the robustness of this result by extending it to a general framework. Furthermore, it argues that allocative efficiency gains attributed to privatisation may also be explained by giving the public enterprise a first mover advantage (as a Stackelberg leader). Thus it suggests it is the timing of the game rather than the ownership structure which is responsible for the inefficiency associated with the presence of a public enterprise in a market open to international competition.

Competitive Competition Law? An Essay Against International Cooperation

This paper draws on strategic trade theory to explore the conditions under which different national competition law systems can compete. I assume that each state seeks to maximize a weighted sum of producer and consumer welfare within its territory, the weighting in turn reflecting public choice considerations. I further assume the tolerance or promotion of inefficient forms of inter-firm cooperation and monopolization discourages investment in the protected economic sector and makes it less likely that firms in that sector will innovate. Working within these assumptions, the question becomes whether states have sufficient incentives to discourage inefficient inter-firm cooperation and monopolization in cases where foreign consumers bear the lion's share of the costs of monopoly rents. In a static model, individual states should prefer such arrangements, resulting in a collective action problem due to global losses of welfare. If, however, protected economic sectors bear a sanction in the form of higher costs of capital and lower rates of innovation, the collective action problem may dissipate. The critical question thus becomes the strength of the assumption that private or state-sponsored protection reduces incentives for investment and innovation. Strategic trade theory also addresses the institutional conditions for governments to engage in successful protection. I argue that the tolerance of organizational combinations that reduce global welfare but produce local benefits is simply one aspect of such protection. The core common problem involves governmental capacity to distinguish industrial structures that advance efficiency from those that reflect rent-seeking. In trade law, one asks whether governments should protect local industries to promote positive externalities. In competition law, the symmetrical question is whether governments should sanction foreign industries to deter negative externalities. I conclude by considering governmental capacity to pick industrial winners and losers. The empirical case for governmental success at distinguishing efficiency-enhancing from rent-seeking industrial structures is mixed at best. Moreover, the instances where the distinction seems easiest to make - cartelization of primary products - more often involve greater governmental involvement in the promotion of inefficient industrial structures than in their dismantling. The implication of this evidence is that it is plausible to assume that protection resulting from competition policy, like protection produced by governmental intervention, does deter investment and innovation and thus contains its own punishment.

Strategic Trade and Delegated Competition

Strategic trade theory has been criticized on the grounds that its predictions are overly sensitive to modeling assumptions. For example, Eaton and Grossman (1986) show that Brander and Spencer's (1985) seminal result - i.e., when firms compete by setting quantities the optimal policy involves governments subsidizing their domestic industries - is reversed if the firms compete by setting prices. Applying recent results in duopoly theory, this paper considers three-stage games in which governments choose subsidies, firms' owners choose incentive schemes for their managers, and then the managers compete in the product market. We show that if firms' owners have sufficient control over their managers' behavior, then the optimal strategic trade policy does not depend on whether firms compete by setting prices or quantities. In a linear-demand model in which managers are compensated based on a linear combination of their own firm's profit plus a (possibly negative) multiple of the rival firm's profit, the optimal policy is to subsidize if goods are substitutes and tax if the goods are complements.

Domestic airline concentration: a positive strategic trade analysis

This study questions the applicability of strategic trade theory to the world airline industry. The particular concern is whether domestic airline concentration involves strategic implications in terms of international airline market outcomes. Comprehensive panel data covering the international country-pair markets between 21 nations over the 1983–1992 period allows testing the impact of both home-nation and foreign-nation domestic concentration on the market-share of a national airline industry. The results support home-nation domestic concentration improving and foreign-nation domestic concentration decreasing the international competitive position of a national airline industry. Thus, the world airline industry does appear to manifest a rationale to consolidate domestic markets in order to enhance international competitiveness.

Strategic Trade Policy Reconsidered: National Rivalry vs Free Trade vs International Cooperation

Sharing the concerns of others about strategic trade policy, the authors nevertheless dispute free trade as the favored option. The 'free' in free trade is seen as freedom at a cost; it refers to strategic decisionmakers in transnational corporations being free to further their own ends despite resistance from others. The authors advocate 'trade strategies,' public policy initiatives aimed at democratizing strategic decisions concerning international trade. Rather than supporting national champions and national rivalry, and unlike earlier strategic trade theory, their arguments favor networks of smaller firms and a process where conflicts are recognized and addressed in a spirit of international cooperation. Copyright 1998 by WWZ and Helbing & Lichtenhahn Verlag AG

Union wage sensitivity to trade and protection: Theory and evidence

We develop a model featuring union-firm bargaining, strategic rivalry between the unionized domestic firm and its foreign competitor, and endogenous protection. The model frames a micro-level empirical study of the role of trade and trade policy in union wage determination. The results indicate that (1) trade flows and trade policy influence wages as much as the domestic factors usually considered, (2) imports and tariffs are negatively correlated with wages, and (3) there is little evidence of the trade flows endogeneity suggested by strategic trade theory or the tariff endogeneity that could explain the negative tariff coefficient.

Subsidized buyer credits: Atypical results in strategic trade theory

Using subsidized buyer credit as a policy tool, it is shown that the general result of strategic trade policy, namely that, by committing itself to an export subsidy, any government can favorably change the outcome of the Cournot oligopoly, does not necessarily hold.

An Economics Agenda for Neorealists

Economists, argues Samuel Huntington in the debate with Christopher Layne.and Robert Jervis about for the United States, are blind to the fact that economic activity is a source of power as well as well-being. It is, indeed, probably the most important source of power, and in a world in which military conflict between major states is unlikely, economic power will be increasingly important in determining the or subordination of states.1 What economic policies will in fact foster the pursuit of American primacy that Samuel Huntington seeks? What economic policies would, in contrast, lead to the redistribution of power in favor of America's rivals, complete with the hostility and antagonism of earlier big power struggles, that Christopher Layne fears? What, in short, is the economics agenda best suited for neorealists? Is there a special policy path, perhaps built around strategic trade theory, for those who wish to pursue relative gains at the expense of mutual gains, or political power at the expense of economic welfare? An economics agenda for neorealists should address three principal dangers to America's position in the international political system that emerge directly from U.S. economic policy: a persistent imbalance in trade and capital accounts, which mortgages the assets of future generations or turns over the assets of the current generation to foreigners; a lagging competitiveness of firms and workers, which undermines the growth rate and skill level of the nation's industrial base (and other sectors) in comparison to rival states; and a growing dependence on outsiders for critical products or technologies, which leaves the nation vulnerable to denial or manipulation by external suppliers.