27th April, 2013.Strategic trade is that trade where a certain policy is used by certain countries that affect the interactions between firms in an international setting. The aim behind such a policy is to ensure development in domestic industries where there is a shifting of profits from an international firm to local firms. This policy is in many contexts referred to as a theory and many authors describe this theory to be an activity that the government intervenes in the market to cater for its welfare in terms of free trade (Brander, 1995). The strategic trade policy has been in existence since 1980 where there was deep research on which trading policy would be applicable in an international context.
It is through strategic trade that there can be the possibility to bring in monopolistic competition or not. Though there had been models initially used to come up with effective policies, strategic trade as a policy presented interesting methodologies not available in other trade policies and this became subject to different governments on its practicability. Though economists argue differently compared to politicians, both argue that their reasoning targets industries in the determination of if they have the ability to be in a competitive position using low costs.
The policy is of importance to governments as this acts as an instrument that has the ability to shift firms that are foreign owned to domestically owned firms. Giving an example, two markets dealing with agriculture may be competing for commercial markets in an international setting. The firm that will succeed is the one that acquires excess returns out of the trading activity meaning that it will enjoy higher incomes than the one that does not have more profits. Using an empirical approach, strategic trade has become a possibility to many countries where markets in the agricultural sector have been characterized in an oligopolistic market but there is a drawback due to small price mark-ups. Government intervention has come in to aid strategic trade and through this, there is evidence that sectors such as agriculture that faces a limitation on trade will be exposed to other markets that will foster positive competition.
Taking the example of the agricultural sector that is encompassed in an oligopoly market, the type of trading activities is controlled by a small number of trading enterprises that are usually private.
Using the economic theory, such a market being controlled by a small number of individuals are likely to generate a lot of profits in their trading activities (Bagwell and Staiger, 2001). Using strategic trade theory, there are instances where the government can intervene to increase the share that is being gotten out of the profits generated. With such a policy in mind, this has lead to much interest in the government, but then again there is still the need to have knowledge on how world markets operate.
Brander and Spencer (1985) in their explanation of what is strategic trade use two examples of exporting countries that involve themselves in giving a particular country a product it does not produce. The authors say if the government of one of the exporters does not respond positively in terms of price, the other exporting country has to come up with strategies on how to reduce the quantity of output but still remain to be the company that has a larger share of profits generated in the country being given the goods (Bagwell, and Staiger, 2001).
This explains the rent shifting policy where profits generated from an oligopolistic market can be transferred into the domestic firm.