Question

What is strategic trade policy? What are the pros and cons of such a policy by a nation in its dealings with other nations?

Answer 1

Trade policy defines some rules ,regulations and standards of trade which are mutually agreed between countries.

A strategic trade policy focuses on the trade policy in the presence of Oligopoly( where few sellers dominates the market). In a market with only few firms and positive profits, each firm likes to expand its market share at the other's expense. In such a case, if one firm produces more , then the other firm must have to produce less in order to maintain the profit in the market. Else the production on an average will increase and it will lead to lower prices as well as lower profits. Strategic trade policy emphasizes on trade agreements which restricts any such interventions so that trade could occur smoothly.

Pros of Strategic Trade Policy:

1) In order to shift excess profits from an Oligopoly firm towards home country, Government policy( Strategic trade policies) plays the most important role.

2) Subsidies, grants and loans at lower than market interest rates are some of the forms of supporters to the home firm where Government policies are playing a crucial role and hence regulating the trade.

Cons of Strategic Trade Policy

1) Less efficient firms can also enter into the market by Government support of subsidies and hence increases the average cost.

2) A continued state support is necessary for successful implementation of the policy, irrespective of any political force.