Question

Can you please answer:

What is strategic trade theory and how does it affect strategic trade policy?

Thanks!

Answer 1

Answer
Strategic Trade Policy (STP) is defined as government policy which attempts to shift excess profits in an oligopolistic (having few big producers) international markets towards the home country firms.Therefore ,government can adopt certain measures to give an edge to domestic firms over the foreign firms to increase domestic production and make goods more competitive in the International market . These policies typically would take the form of subsidies, such as outright grants, loans at lower-than-market interest rates, promises to purchase a large volume of production, etc. The aid could also be more innovative--such as setting industry standards to benefit home country firms.
The main idea is to raise the level of domestic welfare in a given state by shifting profits from foreign to domestic firms.

Impact and Mechanism

According to strategic trade policy, a government can help raise national incomes if it can ensure that the firms that gain first-mover advantages in such industries are domestic rather foreign.There are two phases to its impact

1.The home government is able to enact an export subsidy for the home firm’s output of the homogenous product.

2.In the second stage, the firm of each country chooses the quantity to produce and sell to the third country.

In a market with only several players and positive profits, each firm would like to expand market share at the other's expense. But if the other firm produces more, you have an incentive to produce less--otherwise, production on average will increase, leading to lower prices and lower profits.The more you produce, the less your competitor produces, and vice versa. Intuitively, if your competitor expands capacity in a market with a limited demand, you will sell less, not more, to maintain prices.Therefore it would be beneficial for you to gain a greater Market share than your competitor.

For eg Boeing versus Airbus. Since the 1970's, the aircraft industry has been at the center stage of many trade disputes between the European community and USA  as a result of the subsidies that the European Community has given to Airbus.

To compete globally a nation must have industries that are competitive towards the global market. These industries should be protected and nurtured with strategic trade policies.