International Trade the World Economy Charles van Marrewijk

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 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

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

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

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

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)

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)