Page 229 - Global Political Economy_Understanding The International Economic Order

CHA PTER E IGHT
ernment policies can assist national firms to generate positive exter-
nalities (e.g., technological spillovers) and to shift profits from foreign
firms to national firms. Economists have long appreciated that a na-
tion with sufficient market power could enact an optimum tariff and
thereby shift the terms of trade in its favor. By restricting imports and
decreasing the demand for a product, a large economy may be able
to cause the price ofthe imported good to fall. Strategic trade theory,
however, goes much farther than optimum trade theory in recogniz-
ing the capacity of a nation to intervene effectively in trade matters
and thus to gain disproportionately. A government’s decision to sup-
port a domestic firm’s plans to increase its productive capabilities
(preemption) or even to signal intention to build excess productive
capacity exemplifies a strategic trade policy. Through use ofa direct
subsidy to a firm or outright protection ofa domestic industry, the
government might deter foreign firms from entering a particular in-
dustrial sector. Since a minimum scale ofproduction is necessary to
achieve efficiency, especially in many high-tech industries, the advan-
tage ofbeing first (“first-mover advantage”) encourages a strategy of
preemptive investment.
Strategic trade theory departs from conventional trade theory in its
assumption that certain economic sectors are more important than
others for the overall economy and therefore warrant government
support. Manufacturing industries, for example, are considered more
valuable than service industries because manufacturing has tradition-
ally been characterized by higher rates ofproductivity growth and
has produced higher profits, higher value-added, and higher wages.
Some economic sectors, especially such high-tech industries as com-
puters, semiconductors, and information processing, are particularly
important because they generate spillovers and positive externalities
that benefit the entire economy. Because a new technology in one
sector may have indirect benefits for firms in another sector, firms
that do extensive research and development are valuable to many oth-
ers. However, because firms may not be able to capture or appro-
priate the results oftheir research and development activities, many
will underinvest in these activities. Proponents ofstrategic trade the-
ory argue that such a market failure indicates that firms should be
assisted through direct subsidy or import protection, particularly in
high-tech industries, which frequently raise the skill level of the labor
force and thus increase human capital. If, as the proponents of strate-
gic trade believe, such special industries do exist, then free trade is not
optimal, and government intervention in trade matters can increase
national welfare.
216