An obvious and controversial extension of new trade theory is the implication that governments should consider strategic trade policies. Strategic trade policies would suggest that governments should nurture and protect firms and industries where first mover advantages and economies of scale are likely to be important, as doing so can increase the chance that a firm will build economies of scale and eventually end up a winner in the global competitive race.
The strategic trade policies are deliberate moves by a country in an attempt to protect local firms and companies by shifting profits from foreign to domestic firms. The government can, therefore, use trade policy tools in raising its economic welfare at the expense of other countries. These strategic policies can include export subsidies, import tariffs and quotas, and direct financing to firms that are faced by stiff global competition.
It is interesting to note that in the absence of government intervention, firms that entered a particular industry first is likely to deter the entry of other potential rival firms; this is what is referred to as first-mover advantage. This is the case since the firm that entered the industry-first enjoys economies of scale and have a production cost advantage over rivals that would want to join the market later. Strategic trade policies have been very successful in preventing the foreign takeover of local markets thus protecting the interests of the state and the local economy. (Blecker, 2016)
Strategic trade policies, however, have their own limitations. Although they have been proven to be very effective in the short –term, in the long run, these policies will weaken domestic industries due to lack of innovation since there is limited competition. Eventually, the quality of domestic products will deteriorate. Although the protection gives time to the local firms to develop, in the long run, the products will be less competitive in international trade. Subsidies and tariffs may also aid less efficient firms to enter industries. Finally, yet importantly, firms that have joined industries due to successful government intervention need assurance that such support will always prevail even with political changes since such firms will fail when the support is withdrawn. (Rugman, A & Verbeke, 2017)
Blecker, R. A. (2016). Beyond the" Twin Deficits": A Trade Strategy for the 1990s: A Trade Strategy for the 1990s.
Routledge.Rugman, A & Verbeke. (2017). A Global corporate strategy and trade policy. Routledge.
by EssayRoyal, Dec. 10, 2019, 5:36 p.m.