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Strategic Trade Policy and the New International Economics.

Strategic Trade Policy and the New International Economics. Edited by Paul R. Krugman. Cambridge, MA, The MIT Press, 1986. 313 pp. $12.50, paper.

"Strategic" is one of those wonderful words that always seems to have a positive connotation and can be used in a variety of ways, depending on one's preferences or objectives. There are at least three senses of "strategic" in this collection of papers that were presented at a 1984 conference sponsored by the Export -Import Bank. First, of most interest to economists, is the theory of government policies affecting the strategic decisions of oligopolists in international markets, Second, of most interest to students of public policy, are the strategic considerations involved in the game of trade negotiation. And third, of most interest to special interests, is the designation of certain industrial activities as "strategic" in the sense of being so important they should be pursued for their own sake.

The three papers that set forth the arguments for and against an active commercial policy-export subsidies in particular-in an imperfectly competitive world do a good job of distilling this relatively new strand of theory to an accessible form. At the risk of taking the distillation process too far, I took the basic analysis to be: In an international economy in which few firms are competing for market share given the projected output of their rivals, a production subsidy will induce the domestic industry to raise output. As the foreign competition adjusts to the new output structure by reducing production, the domestic industry captures increased market share and shifts the resulting profits to the domestic economy in an amount that will more than offset the subsidy.

The argument is intriguing, but as the critique offered by Gene M. Grossman concludes, even given in theory, "...a firm basis for an ideal targeting policy. ...[H]ow close could economists and policymakers come to identifying this ideal?" Although Barbara J. Spencer's essay encourages the research necessary to find out, there can be no illusions about the ease of the task. If anything, the seven characteristics of good policy targets she outlines each hold the seeds for significant dispute. For example, her third factor, "[t]he domestic industry involved in exporting should be more concentrated or equally as concentrated as the rival foreign industry," not only leads to measurement disputes about the meaning of concentration but also raises the issue of the income distribution effects of subsidizing the most concentrated industries. For example, as Spencer points out, one implication of this policy criterion is that " . . . high worker rents due to unionization might be used as an indication that the industry could be a candidate for targeting by the government."

The second meaning of strategy-the efforts of government to influence the behavior of other governments-is reviewed by J. David Richardson. His paper very clearly summarizes the implications of the theory of "prisoners' dilemma" games for trade negotiators. The dilemma: mutually cooperative moves will benefit both parties most. However, the structure of the game makes noncooperative initiatives seem best, which costs both players on the first play. However, Richardson goes beyond that simple framework to report on the results of repeated plays and the strategy that works best in that more realistic structure. He finds, with the help of a quote from Robert Axelrod, a game theory researcher, " . . . the best kind of strategy over repeated play is 'nice, forgiving, clear and provocable."' Active protection or promotion of one's international trade finds a justification in the provocable nature of an effective foreign economic policy,

The third meaning of strategy, the selection of industries worthy of government support on the basis of their presumed importance to the Nation, is indulged in a paper by Michael Borrus, Laura D'Andrea Tyson, and John Zysman that outlines the development of the Japanese semiconductor industry. They characterize the success of that industry as" . . . a planned result of a concerted policy effort." In an essay examining Japanese industrial policy in some detail, however, Kozo Yamamura warns that such policies may be " . . . more effective than many economists would admit but substantially less so than maintained by the Americans urging adoption of industrial policy a la Japanese. I am also persuaded that the effectiveness of Japanese industrial policy was achieved at the cost of economic efficiency and political 'fairness' . . . "

The technical material in Strategic Trade Policy and the New International Economics is enlightening, yet presented without the daunting formal apparatus of the more rigorous literature from which it drew. The volume as a whole is well balanced by the editor, both in the selection of contributors and in the introductory essay. I recommend it to anyone who is interested in the essentials of this new approach to trade policy.

--RICHARD M. DEVENS, JR. Office of Current Employment Analysis Bureau of Labor Statistics
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Author:Devens, Richard M., Jr.
Publication:Monthly Labor Review
Article Type:Book Review
Date:Mar 1, 1989
Words:799
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