Trade Policy and

International
Competitiveness
 Strategic Trade Policy and
International Competitiveness
 Strategic trade policy is government
intervention with a view to improve the
competitiveness of domestic firms in
international trade through direct subsidy,
tariff or relaxation of environmental
standards.
 Through its creation and maintenance of
greater competitiveness, the country could
capture and maintain higher market shares
for its products in the world market.
 Strategic Trade Policy and
International Competitiveness
 The scenario amounts to the
standard case of oligopolistic rivals
engaged in strategic game setting in
the world market stage where the
relative gains from trade accruing to
a country depends on the trade
policies.
 The number of competitors is
relatively small.
Example of Strategic Trade Policy
 Two firms, one Airbus
industry, new aircraft Boeing No
Produce
decision. Prod’n
• Produce or Not Produce -5 0
Produce. -5 100
 Payoff Table at right. No Prod’n 100 0
• Payoffs to each given 0 0
strategy choice of
other.
• Assume particular
structure.
 Example of Strategic Trade Policy
 Features:
• If both firms choose to produce new aircraft,
both suffer losses.
• If either firm is sole producer, then they make
substantial profits.
 Equilibrium:
• Advantage to firm that moves first. First-mover
captures entire market, no incentive for other
firm to enter. No unique equilibrium.
• A firm could guarantee market if it had a
credible commitment to enter.
Effects of Strategic Trade Policy
 Targeted government
Airbus
subsidy can provide a
Boeing
credible entry Produce
No
commitment. Prod’n
• Assume EU guarantees Produce 20 0
Airbus a $25 mill. -5 100
Subsidy to produce
new aircraft. No Prod’n 125 0
 New Payoff Table at 0 0
right.
• Payoffs to Airbus
change.
Effects of Strategic Trade Policy
 Features:
• Profitable for Airbus to enter regardless of
Boeing strategy.
• Boeing knows Airbus will enter, so Boeing will
not enter to avoid loss.
 Equilibrium with Subsidy
• Subsidy ensures Airbus produces new aircraft
& Boeing does not enter.
• EU Subsidy acts as deterrent to U.S. firm,
allows EU industry to capture industry.
 Assessment of Strategic Trade
Policies
 Long-term strategic policies such as
enhancing knowledge and technology
would be beneficial.
 Short-term strategic policies such as
subsidy are prone to provoke retaliation
from trading partners and ineffective.
 Some study shows that the gain from
strategic trade policies are relatively small
compared to the potential gains from
trade.
 Import Substitution Polices and
International Competitiveness
 The rationale of import substitution
policies is simply to promote the
domestic production of import-
competing products as a means of
achieving rapid industrialization.
 Import substitution policy is a
disguised protectionism and
represents an impediment to
competitiveness.
 Outward-Oriented Trade Policies
and International Competitiveness
 Export orientation would expose domestic
firms to market competition in the
international market.
 International competition would prove to
be healthy or even desirable toward
fostering greater competitiveness.
 There is a concern of immiserizing growth
due to the export promotion as the terms
of trade deteriorates.