Page 138 - Global Political Economy_Understanding The International Economic Order

NEW ECONO MIC TH EORIE S
export” accounts in part for Japanese industrial success in the decades
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after World War II. STT implies that a government can assist a firm
to establish a monopolistic or oligopolistic position in world markets.
For example, in a market capable ofsustaining only a limited number
ofproducers, a state subsidy to a domestic firm may deter foreign
firms from entering the home or even foreign markets and thereby
confer on subsidized firms a dominant or monopolistic position. Vari-
ous strategic trade tactics have become important in the efforts of
national governments to influence the location ofindustry worldwide.
STT clearly implies that governments should assist national firms
in order to generate positive externalities (that is, technological spillo-
vers) and also to shift profits from foreign firms to national firms. 43
Economists have long appreciated that a nation with sufficient market
power could impose an optimum tariff and thereby shift the terms of
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trade in its favor. By restricting imports and decreasing the demand
for a product, a large economy may be able to cause the price of the
imported good to fall. STT, however, goes much farther than opti-
mum tarifftheory in its recognition ofa nation’s ability to intervene
effectively in trade matters and thus to gain disproportionately. A
government’s decision to support a domestic firm’s plans to increase
its productive capabilities (preemption) or to signal an intention to
build excess productive capacity is an example ofa strategic trade
policy. By using a direct subsidy to a firm or by giving outright pro-
tection to a domestic industry, the government might deter foreign
firms from entering a particular industrial sector. Since a minimum
scale ofproduction is necessary to achieve efficiency, especially in
many high-tech industries, the advantage ofbeing first (first-mover
advantage) encourages a strategy ofpreemptive investment. Thus,
government intervention through “preemption” or first strike be-
comes especially important in certain industrial sectors.
The new strategic trade theory departs from conventional trade
theory in its assumption that certain economic sectors are more im-
portant than others for the overall economy and therefore warrant
government support. The manufacturing industries, for example, are
considered more valuable than service industries because manufactur-
ing is characterized by higher rates ofproductivity growth; many be-

42
Henry Rosovsky. “Trade, Japan, and the Year 2000,” New York Times, 6 Septem-
ber 1985, Sec. 1.
43
A frequently cited example is Airbus, an aircraft developed by a British-French
consortium.
44
An optimum tariff is one that improves a country’s terms of trade to the detriment
ofits trading partners.
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