Strategic trade policy refers to trade policy that guides large, multinational firms to favorable outcomes when interacting with other multinational firms in oligopolistic industries. An oligopoly is a market structure in which a small number of firms dominate an industry. Strategic trade policy has existed for nearly as long as international trade itself, with roots going back to ancient Greece.
In strategic trade policy, economic policymakers seek to help domestic firms compete with foreign firms by transferring profits from the foreign to the domestic. The process typically evolves in three stages. In the first stage, the government subsidises the research and development costs of the domestic firm. In the second stage, the domestic firm, girded by government subsidy, increases its research and development investment. Finally, when confronted with subsidised research and development from its competitor, the foreign firm reduces its own research and development investment and exports, essentially surrendering the market to its subsidised competitor.
Critics of strategic trade policy claim that government interference distorts the market by allowing less-efficient firms to enter markets that they could not enter otherwise. This increases cost across the industry. Additionally, with the global nature of capital in investment, domestic individuals may own stock in both foreign and domestic firms, so policies often hurt domestic investors. Finally, strategic trade policy disrupts business by subjecting the market to political whims.
