Strategic Trade Policy

Definition

Strategic trade policy refers to government intervention in international trade to promote the development of specific domestic industries, often with the goal of gaining a competitive advantage in global markets. This approach aims to shape the structure of trade and production to benefit the home country's economic interests.

5 Must Know Facts For Your Next Test

1. Strategic trade policy aims to create or maintain a competitive advantage for domestic industries in global markets, often by targeting specific sectors or industries.
2. Governments may use strategic trade policy to promote the development of 'infant industries' by temporarily protecting them from foreign competition until they can become more competitive.
3. Export subsidies are a common tool of strategic trade policy, providing financial support to domestic producers to help them sell their products at lower prices in foreign markets.
4. Strategic trade policy is often closely linked to a country's broader industrial policy, which seeks to shape the structure of the economy to achieve specific economic development goals.
5. The use of strategic trade policy is controversial, as it can lead to retaliation from trading partners and may result in inefficient resource allocation within the domestic economy.

Review Questions

• Explain how strategic trade policy differs from free trade and how it can be used to promote domestic industries.
  • Unlike free trade, which relies on open markets and competition, strategic trade policy involves government intervention to shape the structure of trade and production to benefit the home country's economic interests. Governments may use strategic trade policy to protect 'infant industries' from foreign competition through temporary trade barriers, such as tariffs or quotas, or to provide export subsidies to domestic producers to help them sell their products at lower prices in global markets. The goal is to create or maintain a competitive advantage for specific domestic industries, often in line with a broader industrial policy aimed at economic development.
• Analyze the potential benefits and drawbacks of using strategic trade policy, particularly in the context of 34.1 Protectionism: An Indirect Subsidy from Consumers to Producers and 34.3 Arguments in Support of Restricting Imports.
  • The potential benefits of strategic trade policy include the development of domestic industries, the creation of jobs, and the acquisition of a competitive advantage in global markets. However, the drawbacks can be significant. Protectionist measures, such as those described in 34.1, can lead to higher prices for consumers and an indirect subsidy from consumers to producers. Additionally, as outlined in 34.3, arguments in support of restricting imports often focus on protecting domestic jobs and industries, but these policies can also result in retaliation from trading partners, inefficient resource allocation, and a loss of consumer welfare. The use of strategic trade policy is a delicate balance, and its effectiveness and appropriateness depend on the specific economic and political context.
• Evaluate the role of government in shaping international trade through strategic trade policy, considering the broader economic and political implications.
  • The government's role in shaping international trade through strategic trade policy is a complex and often controversial issue. On one hand, strategic trade policy can be used to promote the development of domestic industries, create jobs, and enhance a country's competitiveness in global markets. This aligns with the arguments in support of restricting imports, as described in 34.3. However, as outlined in 34.1, these protectionist measures can also lead to higher prices for consumers and an indirect subsidy from consumers to producers. Additionally, the use of strategic trade policy can result in retaliation from trading partners, distort market signals, and lead to inefficient resource allocation within the domestic economy. Ultimately, the role of government in shaping international trade through strategic trade policy requires a careful balance between promoting domestic economic interests and maintaining a well-functioning global trading system.

Related terms

Infant Industry Protection: A policy that imposes temporary trade barriers, such as tariffs or quotas, to shield newly established domestic industries from foreign competition until they can become more competitive.

Export Subsidies: Government financial support provided to domestic producers to help them sell their products at lower prices in foreign markets, making them more competitive.

Industrial Policy: A government's coordinated efforts to shape the structure of the economy, often by providing targeted support to specific industries or sectors deemed important for economic development.