Question

What are the key assumptions that allow strategic trade policy to work effectively in the Brander-Spencer analysis, what are the key conclusions of the analysis? Discuss. What do you think are the potential problems with the Brander-Spencer analysis? Discuss.

Answer 1

James Brander and Barbara Spencer in 1980's developed the economic model of international trade based on the assumption that it is possible for the government to subsidize domestic firms in order to make it possible to compete with foreign producers and thus increases national welfare.

The conclusion is different from most international trade models in which government non interference is regarded as socially optimal.Thus Brander and Spencer model support government subsisdy to enhance national welfare in contrast to other international trade models which favor government non interference.

The problems are that the model does not develop  an applicable policy which favors government subsidy. and points out to certain examples when such intervention by the government may be justified.The approach is problematic as the approach is not consistant. Again there is a conjectural variation parameter which may not stay stable when subsidy is given to the domestic industries.Thus the model is not applicabe for econometric testing and parameter estimation.It is difficult to say on which industries this model will be applicable.