International Trade & the World Economy;  Charles van Marrewijk
CHAPTER 11; STRATEGIC TRADE POLICY
Introduction
Market power and tariffs
The non-equivalence of tariffs and quota's
Strategic trade policy
The nature of competition
Evaluation of strategic trade policy
Application: the aircraft industry
Conclusions
International Trade & the World Economy;  Charles van Marrewijk
CHAPTER 11; STRATEGIC TRADE POLICY
Introduction
Market power and tariffs
The non-equivalence of tariffs and quota's
Strategic trade policy
The nature of competition
Evaluation of strategic trade policy
Application: the aircraft industry
Conclusions
International Trade & the World Economy;  Charles van Marrewijk
Introduction
Objectives / key terms
Strategic trade
Non-equivalence
Brander-Spencer model
Bertrand competition
Eaton-Grossman model
Informational requirements
Jagdish Bhagwati (1934 - )
International Trade & the World Economy;  Charles van Marrewijk
CHAPTER 11; STRATEGIC TRADE POLICY
Introduction
Market power and tariffs
The non-equivalence of tariffs and quota's
Strategic trade policy
The nature of competition
Evaluation of strategic trade policy
Application: the aircraft industry
Conclusions
International Trade & the World Economy;  Charles van Marrewijk
Market power and tariffs
price
demand
A
pmon
MC
F
pworld+t1
B
pcomp
pworld+t0
pworld
D’
E’
C
D
E
MR
quantity
International Trade & the World Economy;  Charles van Marrewijk
CHAPTER 11; STRATEGIC TRADE POLICY
Introduction
Market power and tariffs
The non-equivalence of tariffs and quota's
Strategic trade policy
The nature of competition
Evaluation of strategic trade policy
Application: the aircraft industry
Conclusions
International Trade & the World Economy;  Charles van Marrewijk
The non-equivalence of tariffs and quota's
price
demand
demand’
MC
D
pquota
A
B
pworld+t
pworld
C
imports
MR
quantity
International Trade & the World Economy;  Charles van Marrewijk
CHAPTER 11; STRATEGIC TRADE POLICY
Introduction
Market power and tariffs
The non-equivalence of tariffs and quota's
Strategic trade policy
The nature of competition
Evaluation of strategic trade policy
Application: the aircraft industry
Conclusions
International Trade & the World Economy;  Charles van Marrewijk
Strategic
trade
policy
4
Austrian firm
reaction curve
Austrian firm
reaction curve
after subsidy
output Bolivian firm
3
Cournot
2
Brander-Spencer
1
Bolivian firm
reaction curve
Austrian firm
iso-profit curves
0
0
2
4
output Austrian firm
6
8
International Trade & the World Economy;  Charles van Marrewijk
CHAPTER 11; STRATEGIC TRADE POLICY
Introduction
Market power and tariffs
The non-equivalence of tariffs and quota's
Strategic trade policy
The nature of competition
Evaluation of strategic trade policy
Application: the aircraft industry
Conclusions
International Trade & the World Economy;  Charles van Marrewijk
The nature
of competition
8
Austrian firm
iso-profits
price of Bolivian firm
7
Bolivian firm
iso-profit
Austrian firm
reaction curve
6
EatonGrossman
5
Bertrand
4
Austrian firm
reaction curve
after tax
Bolivian firm
reaction curve
3
3
4
5
6
price of Austrian firm
7
8
International Trade & the World Economy;  Charles van Marrewijk
CHAPTER 11; STRATEGIC TRADE POLICY
Introduction
Market power and tariffs
The non-equivalence of tariffs and quota's
Strategic trade policy
The nature of competition
Evaluation of strategic trade policy
Application: the aircraft industry
Conclusions
International Trade & the World Economy;  Charles van Marrewijk
Evaluation of strategic trade policy
Strategic trade policy seems to give an intellectual motivation for
government interaction in the trade system to benefit the domestic
economy. There are, however, several important reservations:
• Competition for resources; in general equilibrium the expansion of
the protected sector comes at the cost of another sector where those
resources might have been used more effectively.
• Entry and exit of firms; will erode supernormal profits.
• Retaliation; will result in a trade war.
• Informational requirements (regarding nature of competition, cost
structure, demand, strategic interaction, etc.); most important
argument, since these are clearly beyond the control of any
government in the world.
International Trade & the World Economy;  Charles van Marrewijk
CHAPTER 11; STRATEGIC TRADE POLICY
Introduction
Market power and tariffs
The non-equivalence of tariffs and quota's
Strategic trade policy
The nature of competition
Evaluation of strategic trade policy
Application: the aircraft industry
Conclusions
International Trade & the World Economy;  Charles van Marrewijk
Application: the aircraft industry
Large IRS (learning-by-doing) in the civil aircraft industry make this
sector a primary target for government intervention (USA-EU)
100
time to build
75
50
25
0
0
10
20
number of aircraft
30
40
International Trade & the World Economy;  Charles van Marrewijk
CHAPTER 11; STRATEGIC TRADE POLICY
Introduction
Market power and tariffs
The non-equivalence of tariffs and quota's
Strategic trade policy
The nature of competition
Evaluation of strategic trade policy
Application: the aircraft industry
Conclusions
International Trade & the World Economy;  Charles van Marrewijk
Conclusions
• With imperfect competition tariffs and quota’s are no longer
equivalent.
• Tariffs are less restrictive than quota’s as tariffs leave the forces of
foreign competition intact.
• Strategic trade policy: provide competitive advantage to domestic
firms by providing a credible pre-commitment in competition game.
• Nature of optimal strategic trade policy very sensitive to type of
competition and dynamic structure of competitive game model.
• Also other weaknesses in strategic trade policy arguments
(competition for resources, entry & exit, retaliation, information)