Quiz 12: Controversies in Trade Policy


The policy of strategic trade policy refers to the policy of deterring foreign investment and production by imposing tariff or subsidy to protect the domestic industry. It is a method of altering the rules of the game to shift the excess returns from imperfectly competitive foreign firms to domestic firms. Such capture of profits from foreign competitors would mean the subsidy raises national income at other countries' expense. So, the disadvantage of strategic trade policy is that such policy leads to "rent seeking" and beggar-thy-neighbor policies which increase one country's welfare at the cost of other country's welfare. It provokes counter retaliation by the suffering country and may run the risk of trade war which makes everyone worse off.

Identification of certain industries which have future prospects to grow most means more investment will pour from the private sectors to those industries. The growth tag attached to some industries by the government itself establishes the fact that these industries will reap profits. This will automatically draw the attention of the profit oriented private sector and does not need policy of supporting the growth of these industries.

Japan supported research effort that helped build domestic technological capacity. Any investment by Japan on applied research into industrial application will help that country's industries. It will try to concentrate on the specific industrial problems and accordingly innovates to reap the strong technological externalities of that research and earn excess returns. But if Japan spends more on basic research, its benefits can be appropriable by a variety of firms and industries of not only Japan but also by other countries. The benefits from basic research will generate knowledge spillovers that may counter market failures. It is on this basis that United States demanded more investment by Japan on basic research.