What is strategic trade policy? Discuss the lessons of the strategic trade policy literature.Table of Contentss1.

Introduction2.Definition of Strategic Trade Policy3.Factors that affect Strategic Trade Policy: A Literature Review3.1 The Policy Options: Classification Encourage or Unity Encourage3.2 Factors that affect Strategic Trade Policies3.2.1 Information Symmetry3.2.

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2 Cost Difference, Elasticity of Demand and Product Characteristics3.2.3 The Impact of Foreign Direct Investment ( FDI )4.Lessons Learnt from LiteratureMention

1. Introduction

With the rapid development of the planetary economic system and international trade, the strategic trade policies have become more and more of import.

The nucleus characteristic of strategic trade policy is the governments’ intercession in the international trade, which helps the domestic endeavors to obtain competitory advantage. But on the inquiry of whether and how to implement strategic trade policies, different authoritiess have different considerations. The cognition about corporate information, the grade of merchandise features, ( i.e. merchandise lastingness, snap of demand for the merchandise, etc. ) , the cost difference, the industry features and industry concentration will wholly be the factors that will hold an impact on the strategic trade policies of different states.

This essay will chiefly discourse the factors that are mentioned or tested in the anterior literature and seek to happen some utile information about what could be done in the hereafter.The essay will be structured as follow: in the 2nd session, the essay will briefly present the definition of strategic trade policies. In the 3rd session, the essay will reexamine the anterior literature about the factors that affect the pick of strategic trade policies. In the last session, the essay will seek to happen lessons that can be learnt from the anterior literature.

2. Definition of Strategic Trade Policy

Strategic Trade Policy theory began in Western developed states, which was foremost proposed in the 1980s by the Brander and Spencer. As an of import constituent of the new trade theory, strategic trade theory is known as the “ strategic ” because the authorities will take foreign companies or authorities responses into history in the preparation of assorted trade policy.

In imperfect competition, particularly in the presence of extra monopoly net incomes under oligopolistic market construction, a authorities intercession through trade can impact their concerns and their foreign rivals ‘ actions to back up the development of domestic endeavors. In add-on, the intercession can besides better the national public assistance through the extraction and transportation of foreign monopolies net incomes. By and large, strategic trade policies are carried out under the status of imperfect competition and economic systems of graduated table. The usage of a authorities production support, export subsidies, revenue enhancement inducements and other support and protection of the domestic market of trade policy instruments will advance the rapid growing of the national strategic industry and spread out the economic systems of graduated table, which could further heighten the international fight of these industries and acquire more extra net incomes from international markets.

3. Factors that affect Strategic Trade Policy: A Literature Review

Analysis of strategic trade policy is by and large based on the theoretical account of Brander and Spencer ( 1985 ) . The theoretical account assumes the being of two national authoritiess ; each with export endeavors to export merchandises to a 3rd state markets, and is besides oligopolistic monopolies on 3rd country’s market with Cournot competition. Theories of strategic trade policy thenceforth are most discussed in this background.

It is deserving adverting that Dirk et Al. ( 2007 ) validate estimations positions of Brander and Spencer ( 1985 ) through the usage of experimental simulation instead than existent measured informations. The method is in conformity with the premises of Brander and Spencer ( 1985 ) and utilize fake market environment to verify the theory of strategic trade policy decisions. The decisions obtained have some divergence with Brander and Spencer ( 1985 ) .

First, from the authorities ‘s point of position, merely in a really limited figure of instances the authorities will follow the policy of subsidies to makers. Furthermore, with the transition of clip, the figure of policies adopted by the authorities will bit by bit cut down subsidies. Second, from the seller ‘s position, in the sub-game where a seller is subsidized while another seller is non subsidized, there is no sub-game perfect equilibrium. Decision shapers at a given authorities subsidies are non ever willing to give.

3.1 The Policy Options: Classification Encourage or Unity Encourage

The nucleus of strategic trade policy is the subsidies on exports, but whether all export industries or sectors are unified in the sum of subsidies, or they should be treated otherwise for different industries remains a inquiry for all the authoritiess.

Anderw et Al. ( 1997 ) divided all the merchandises into tradable and non-tradable merchandises. And They presence the general equilibrium of learning-by-doing outwardness effects under the conditions of the impermanent intercession of trade policy and trade policy of permanent of non-tradable goods, whose monetary values can alter with the alteration of endogenous trade policies and trade goods sectors. The analysis indicates the presence of multi-sectoral structural and dynamic theoretical accounts in the pick of blending conditions for the authorities intercession policies and differentiated greater trouble faced when the existent exchange rate and public assistance effects afterwards are non ever consistent with the predicted beforehand.Nuno ( 2005 ) examines assorted states that implement trade policy and non-trade policy dealingss ( such as environmental policy, etc.

) in order to happen the correlativity between these effects and policy execution. Zhang et Al ( 1998 ) proves averment made by Krugman in 1984 through the usage of multiple markets to accomplish stableness conditions of Nash equilibrium. In the instance of increasing returns to scale, import protection policy can play the consequence of export inducements. And these policies can farther develop the public assistance economic effects for export inducements.


2 Factors that affect Strategic Trade Policies

3.2.1 Information Symmetry

The first type is that is normally used as a research method is game theory and information symmetricalness. These games include competitory game between different states, competition game between authoritiess of different states ( whether to subsidise domestic houses ) , the national authorities and national competition game between endeavors ( companies such as whether to supply sufficient information to the authorities costs in exchange for authorities subsidies ) and so on.Qiu ( 1994 ) analyzed the state of affairs where authorities will separate between different companies or implement incorporate policy, combined with asymmetric information.

The decisions indicate that under Cournot competition, the assorted policies are superior to uniform policies ; while under Bertrand competition, unvarying policies will be better than assorted policies. However, Okajima ( 2003 ) pointed out that under the Bertrand competitory status of Qiu ( 1994 ) , there do non be policies that are better than the unvarying policy.

3.2.2 Cost Difference, Elasticity of Demand and Product Characteristics

Cost difference of export endeavors, endeavors in the snap of demand are of import factors for the authorities to make up one’s mind whether to implement subsidies. Subhayu ( 1997 ) analyzed the decisive function of governments’ execution of strategic trade policies from both the position of the snap of demand and the cost of symmetricalness. Neary ( 1994 ) analyzed the optimum strategic trade policies for domestic and foreign companies under the duopoly conditions, which indicates that the authorities should subsidise those domestic endeavors industries with comparative cost comparative advantage than foreign companies.

However, he assumed cost homogeneousness of the concern and did non give the optimum policy of the authorities ‘s behaviour under heterogenous conditions. Dermot et Al. ( 2001 ) further look into the optimum strategic policy under heterogeneousness cost conditions. If the authorities uses public financess and the societal cost is non high, so the optimum policy is based on the cost of different companies to offer different features subsidies. The lower the cost, the greater the endeavors will obtain grants.


2.3 The Impact of Foreign Direct Investment ( FDI )

Nicolas ( 2000 ) examines the impacts of strategic trade policy on a foreign direct investing ( FDI ) . He assumes that the two states were committed to pulling FDI competition. Cost of human resources in both states and the degree of duty protection are different. If a authorities implements strategic trade policies to maximise their ain public assistance, while the other states are non implementing strategic trade policy, the two states will vie in pulling FDI. The consequences show that compared to the states with high pay costs, the province that has low pay costs in its low duty degrees is less able to pull the FDI.

While at high duty degrees, it can pull more FDI. If both states are implementing strategic trade policy, for states with low pay costs, its import protection policy can hold the consequence of export inducements. But from the position of national public assistance point of position, although states with low pay costs can implement strategic trade policies to pull more FDI, but their public assistance is declining, despite its export increasing capacity.

4. Lessons Learnt from Literature

Strategic trade policy belongs to the authorities ‘s macro control. The research of strategic trade theory is chiefly based on the status of amiss competitory market construction and economic systems of graduated table, which seems to be related to its macroscopic visual aspect. However, in recent old ages many surveies have become more and more micro-oriented, particularly in the nature of the merchandise, such as lastingness, trade goods and to separate between non-tradable goods, etc. In add-on, the research focal points are besides move to snap of supply and demand, the cost of characteristics and industry features, the comparing of the figure of endeavors, and the industry concentration in countries.

In add-on, based on the traditional game theory research methods, the new theories bit by bit expand the Brander and Spencer ( 1985 ) theoretical account, which assumes complete information, the model of the single-stage game between the authorities and endeavors, to a multi-stage authorities and corporate game with asymmetric information. It can be learnt that the optimum strategic trade policies need to take into consideration the current economic system state of affairs of the state and the reaction of the related parties in order to maximise the out put of all the policies.


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