key term - Strategic Trade Policy

Definition

Strategic trade policy refers to government interventions in international trade that aim to promote the competitiveness and profitability of domestic industries, often through the use of tariffs, subsidies, or other trade barriers. The goal is to create or maintain a strategic advantage for domestic firms in specific industries that are deemed important for the country's economic or national security interests.

5 Must Know Facts For Your Next Test

1. Strategic trade policy is often justified by the argument that it can help domestic industries overcome initial disadvantages and become globally competitive.
2. Governments may use strategic trade policy to target industries that are seen as crucial for economic growth, such as high-tech manufacturing or research-intensive sectors.
3. The use of strategic trade policy can lead to retaliation from other countries, potentially escalating into trade wars and reducing overall economic welfare.
4. Proponents of strategic trade policy argue that it can help capture the benefits of imperfect competition and economies of scale in international markets.
5. Critics argue that strategic trade policy can distort market signals, lead to inefficient resource allocation, and create opportunities for rent-seeking and political influence.

Review Questions

• Explain how strategic trade policy can be used to support the development of domestic industries.
  • Strategic trade policy can be used to support the development of domestic industries through the use of trade barriers, such as tariffs or quotas, to protect them from foreign competition. This is often referred to as 'infant industry protection,' where the goal is to allow newly established domestic industries time to become more competitive before exposing them to international competition. The rationale is that these industries may have initial disadvantages, such as smaller scale or less experience, and need temporary protection to develop their capabilities and become globally competitive.
• Analyze the potential benefits and drawbacks of strategic trade policy from the perspective of economic efficiency and national competitiveness.
  • The potential benefits of strategic trade policy include the ability to capture the benefits of imperfect competition and economies of scale in international markets, as well as the potential to develop domestic industries that are crucial for economic growth and national security. However, the drawbacks include the potential for distortions in market signals, leading to inefficient resource allocation, and the risk of retaliation from other countries, potentially escalating into trade wars and reducing overall economic welfare. Additionally, strategic trade policy can create opportunities for rent-seeking and political influence, which can further distort economic outcomes.
• Evaluate the role of comparative advantage in the context of strategic trade policy, and discuss how it might influence a country's decision to implement such policies.
  • Comparative advantage is a fundamental concept in international trade that suggests countries should specialize in the production of goods and services in which they have a relative efficiency advantage. In the context of strategic trade policy, the concept of comparative advantage may be challenged, as governments may seek to intervene in the market to promote the development of industries that may not align with the country's comparative advantage. This can be justified by the argument that strategic trade policy can help domestic industries overcome initial disadvantages and become globally competitive, even if they do not have a comparative advantage in the short term. However, the long-term viability and efficiency of such policies are often debated, as they can distort market signals and lead to suboptimal resource allocation.

Related terms

Infant Industry Protection: The practice of temporarily shielding newly established domestic industries from foreign competition through trade barriers, to allow them to develop and become more competitive.

Industrial Policy: Government policies that aim to influence the structure of the economy, often by targeting specific industries for development or support.

Comparative Advantage:

The ability of a country to produce a good more efficiently than another country, leading to specialization and gains from trade.