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Free Trade vs. Strategic Trade: A Peek into Pandora's Box

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  • Gene M. Grossman
  • Giovanni Maggi
Abstract
We investigate whether a welfare-maximizing government ought to pursue a program of" strategic trade intervention or instead commit itself to free trade when domestic firms will have an opportunity to manipulate the government's choice of the level of" intervention. Domestic firms may overinvest in physical and knowledge capital in a regime of" strategic intervention in order to influence the government's choice of subsidy. In the event commitment to free trade may be desirable even in settings where profit-shifting would be" possible. We analyze the desirability of such a commitment when the government is well" informed about firms' types and actions, and when it suffers from an informational disadvantage."

Suggested Citation

  • Gene M. Grossman & Giovanni Maggi, 1997. "Free Trade vs. Strategic Trade: A Peek into Pandora's Box," NBER Working Papers 6211, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:6211
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    References listed on IDEAS

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    Cited by:

    1. Neary, J Peter & Leahy, Dermot, 2000. "Strategic Trade and Industrial Policy towards Dynamic Oligopolies," Economic Journal, Royal Economic Society, vol. 110(463), pages 484-508, April.
    2. Dewit, Gerda & Leahy, Dermot, 2004. "Rivalry in uncertain export markets: commitment versus flexibility," Journal of International Economics, Elsevier, vol. 64(1), pages 195-209, October.
    3. Žigić, Krešimir, 2011. "Does a ‘non-committed’ government always generate lower social welfare than its ‘committed’ counterpart? Strategic trade policy when consumer surplus matters," Journal of Comparative Economics, Elsevier, vol. 39(4), pages 533-556.
    4. J. Peter Neary & Paul O'Sullivan, 1999. "Beat 'em or Join 'em? Export Subsidies versus International Research Joint Ventures in Oligopolistic Markets," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(4), pages 577-596, December.
    5. Eugen Kováč & Krešimir Žigić, 2014. "International Competition in Vertically Differentiated Markets with Innovation and Imitation: Trade Policy Versus Free Trade," Economica, London School of Economics and Political Science, vol. 81(323), pages 491-521, July.
    6. repec:zbw:bofitp:2004_012 is not listed on IDEAS
    7. Kresimir Zigic, 2010. "Second-Best Trade Policies, R&D Spillovers and Government (In)ability to Precommit in an Intra-Industry Trade Framework," CERGE-EI Working Papers wp427, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    8. Dermot Leahy & J. Peter Neary, 2000. "Robust Rules for Industrial Policy in open Economies," Working Papers 200021, School of Economics, University College Dublin.
    9. Delia Ionascu & Kresimir Zigic, 2001. "Strategic Trade Policy and Mode of Competition: Symmetric versus Asymmetric Information," International Trade 0106001, University Library of Munich, Germany.
    10. Ulph, Alistair & Valentini, Laura, 2000. "Environmental regulation, multinational companies and international competitiveness," Discussion Paper Series In Economics And Econometrics 0037, Economics Division, School of Social Sciences, University of Southampton.
    11. K. C. Fung & Chelsea C. Lin & Ray‐Yun Chang, 2009. "The Political Economy of Strategic Trade Policies," Review of International Economics, Wiley Blackwell, vol. 17(3), pages 494-509, August.
    12. Gerda Dewit & Dermot Leahy, 2002. "Time-to-build investment and uncertainty in oligopoly," Working Papers 200207, School of Economics, University College Dublin.
    13. Zigic, Kresimir & Ionascu, Delia, 2001. "Free Trade versus Strategic Trade as a Choice Between Two 'Second-best' Policies: A Symmetric versus Asymmetric Information Ana," CEPR Discussion Papers 2928, C.E.P.R. Discussion Papers.
    14. Everaert, Greetje M.M., 2004. "The political economy of restructuring and subsidisation : an international perspective," BOFIT Discussion Papers 12/2004, Bank of Finland, Institute for Economies in Transition.
    15. Everaert, Greetje M.M., 2004. "The political economy of restructuring and subsidisation: an international perspective," BOFIT Discussion Papers 12/2004, Bank of Finland Institute for Emerging Economies (BOFIT).
    16. Dewit, Gerda & Leahy, Dermot, 2006. "Investment timing under uncertainty in oligopoly: Symmetry or leadership?," Journal of Economics and Business, Elsevier, vol. 58(1), pages 1-19.
    17. Kyle Bagwell & Robert W. Staiger, 2000. "GATT-Think," NBER Working Papers 8005, National Bureau of Economic Research, Inc.
    18. Dermot Leahy & J. Peter Neary, 2001. "Robust rules for industrial policy open economies," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 10(4), pages 393-409.
    19. Kresimir Zigic, 2011. "Strategic Interactions in Markets with Innovative Activity: The Cases of Strategic Trade Policy and Market Leadership," CERGE-EI Books, The Center for Economic Research and Graduate Education - Economics Institute, Prague, edition 1, number b06, May.
    20. Zigic, Kresimir, 2000. "Strategic trade policy, intellectual property rights protection, and North-South trade," Journal of Development Economics, Elsevier, vol. 61(1), pages 27-60, February.

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    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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