Strategic Trade Policy
NBER Working Paper No. 5020
This paper reviews the literature on strategic trade policy. Strategic trade policy is defined as trade policy that conditions or alters a strategic relationship between firms, implying that strategic trade policy focuses primarily on trade policy in the presence of oligopoly. The key point is that strategic relationships between firms introduce additional motives for trade policy, over and above terms of trade and other effects that arise in all market structures. I demonstrate this general point using a simple game theoretic framework, then present the major results of strategic trade policy using two models: the 'third market' model, in which oligopolistic firms in two exporting nations export the good in question exclusively to a third country; and the 'reciprocal markets' model, in which firms in two countries compete in each others' markets. The paper makes the well-known point that slight differences in model structure can give rise to strikingly different trade policy implications, but also seeks to emphasize the robust general points that emerge from the literature.
Published: Chapter 27 in Gene Grossman and Kenneth Rogoff (ed.) Handbook of International Economics, Vol. III (elsevier: Amsterdam). pp. 1395-1455, 1995.
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