The paper "What Is Strategic Trade, Anti-Competitive Protectionism" is a great example of a business assignment. Strategic trade is defined as a trade policy which is adopted by governments so as to influence strategic trade interactions between its firms and other international firms in an oligopolistic market or an industry with a few firms as the main players. Essentially, strategic trade aims at shifting excess profits towards the firms of the home country. It involves the adoption of policies such as subsidies, import tariffs, outright grants, promises of buying large volumes of production as well as the issuing of loans at interest rates that are below the standard market rates.
Through strategic trade policies, governments assist the local firms to get an upper hand over foreign firms in the market. Since this is an intervention, trade agreements are emphasized in order to limit any harmful effect of strategic trade policies by different governments (Durlauf, Steven & Lawrence, 2008, p. 1-2). The idea of strategic trade aims at helping raise domestic welfare in a given country. Governments, therefore, pursue policies that can help their local industries that face global competition from foreign firms.
These policies can only be enacted in a market where there is strategic interaction between the main firms in the industry. In such a market, the action of a given firm significantly affects the action of the other firms. This is mainly present in duopolistic and oligopolistic markets where there are few players and actions of one firm influences the decisions of the others. For instance, if one firm increases its production the other firm may be forced to reduce its own because the increase in supply would lower prices and profits (Gandolfo, p.231, 1998). The theory of strategic trade is centered on the assumption of an international duopoly in the market.
The theory has been studied extensively since its advancement is 1983 by Brander and Spencer. The picture in mind is that of two firms. One is a domestic firm and the other is a foreign firm but both are competing in a third country market and the state of that market is an oligopoly. According to the theory, when a domestic firm which competes in an international oligopoly market receives support from the government of its home country, it is able to compete successfully with the other firms (Siebert, 2002, p. 245).
The firm is able to cut its operating costs and increases its profits as a result. This contributes to a significant improvement in national welfare. In the first model of strategic trade policy by Spencer and Brander, implementation of the policy takes three stages. In the first stage, the firm is given an export subsidy or research and development (R& D) subsidy, or both.
This helps initiate the process of shifting profits from foreign firms to the domestic firm thereby increasing the overall welfare of the country. After this stage, the policy enters the second stage. The research and development subsidy enables the domestic firm to commit and initiate higher levels of research and development. Research and development are crucial for the survival of a company, especially where the market is competitive and where firms are continually revising the design and range of their products. Nowadays, R& D is necessary due to the evolving technology and firms can no longer rely on acquisitions and strategic alliances in order to be able to benefit from the innovations of other firms.
Lastly, in the final stage, the domestic firm has developed an upper hand over the foreign firm thus forcing it to reduce its exports. As a result, the domestic firm is able to compete effectively with the foreign firm in the third country (Grossman, 1995).
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