Strategic Trade Policy

Until 15-20 years ago the theory of international trade considered with few exceptions markets with perfect competition. Assuming perfect competition, free trade maximizes the welfare of the participating countries according to Ricardos theorem of the comparative advantage. However, the optimum-tariff-theory, the terms of trade-argument and the infant-industry-argument rejected this general claim. The continued existance of national trade policies, trade restrictions, importtaxes etc. raised the question, why do governments use these instruments of trade policy if they were not welfare-increasing. The success of other models, especially that of the japanese Ministery of Industry and Trade (MITI), gave economists the opportunity to rethink their models. By the beginning of the 1980's the theory of international trade started to drop the assumption of perfect competition and to think about models of imperfect competition and increasing returns to scale. The question was how to integrate the results and the models of the theory of industrial organisation into the theory of internantional trade. Models of imperfect competition prove a strategic relationship between firms profits and losses. Necessarily, such a relationship between firms in international competition results in a strategic relationship between national trade policies. But also in perfect-competitive markets there is a relationship between national trade policies, since even in a ricardian world as presented in chapter 3 the behaviour of the domestic government can influence the welfare of a foreign country. Regarding the game-theoretical definition of the term 'Strategy' given in chapter 2, it is clear, that an advise to a politician must contain all kinds of market-structures, so perfect-competitive markets must be evaluated as well as markets with imperfect competition. The theory of Strategic Trade Policy (STP) tries to integrate increasing returns to scale and imperfect competition into the theory of international trade. STP as part of the New international economics also tries to develop strategical aspects of trade policy. The new aspect of STP is the strategical analysis of governments behaviour in international trade policy. This is a game-theoretical approach to explain international trade restrictions and policy. The purpose of this paper is to present the results of this integration of the theory industrial organisation into the international trade theory and to look at strategical aspects of trade-policy; more generally this paper tries to answer the question under which market-conditions which trade-policy maximizes domestic welfare. It is a pure theoretical approach to this question and there is no empirical data presented. Knowing about the structure of the game that governments and firms play the models of STP are more understandable. For this reason trade policy is modelled as a game in chapter 2 before strategic aspects of the traditional theory of international trade and the new international economics are presented in chapter 3 and 4; the latter one is often linked with the term 'STP'. Chapter 5 tries to evaluate the results of the theory of STP both from a practical and a theoretical point of view.