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Between free trade and protectionism: strategic trade policy and a theory of corporate trade demands

Published online by Cambridge University Press:  22 May 2009

Helen V. Milner  and
David B. Yoffie
Helen V. Milner
Affiliation:
Assistant Professor of Political Science at Columbia University, New York.
David B. Yoffie
Affiliation:
Associate Professor of Business Administration at Harvard Business School, Boston, Massachusetts.
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Abstract

Conventional theories of the political economy of trade argue that industries in import-competing businesses favor protectionism, while multinational firms and export-dependent corporations advocate unconditional free trade. However, many multinational industries have recently advocated “strategic” trade policies: that is, they are willing to support free trade at home only if foreign markets are opened or foreign governments reduce subsidies to their firms. If demands for strategic trade policy were adopted by the United States, they could represent a threat to the General Agreement on Tariffs and Trade (GATT) and the multilateral trading system. This article seeks to explain the emergence of these new corporate trade demands and thereby broaden theories of the political economy of trade. The article begins with the widely supported position that multinational and export-oriented firms prefer unconditional free trade. Building on concepts from theories of industrial organization and international trade, the article then hypothesizes that rising economies of scale and steep learning curves will necessitate that these firms have access to global markets via exports. If growing dependence on world markets is combined with foreign government subsidies or protection, the trade preferences of firms will shift from unconditional free trade to demands that openness at home be contingent on openness overseas. The manner in which firm demands then get translated into industry demands will vary with the industry's structure. If the industry consists of firms with symmetric strategies, it will seek strategic trade policy; but if the industry is highly segmented, it will turn toward protectionism. The article concludes with a preliminary test of these hypotheses in four brief studies of the politics of trade in the semiconductor, commercial aircraft, telecommunications equipment, and machine tool industries.

Type
Articles
Information
International Organization , Volume 43 , Issue 2 , Spring 1989 , pp. 239 - 272
Copyright
Copyright © The IO Foundation 1989

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References

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18. This assumes that market size is limited and that no technological innovation would make existing products or processes obsolete. See Ghemawat, Pankaj, “Sustainable Advantage,” Harvard Business Review 64 (09–10 1986), pp. 53–58Google Scholar .

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24. Strategic groups have been defined by economists in various ways. The dimensions of strategic groups could range from marketing strategies to dimensions that are only important for international trade (such as global versus domestic production strategies) or for specific product segments. Our analysis of strategic groups focuses only on dimensions of industries that are related to the firms' positions in international trade and competition. For an operational definition, see footnote 26.

25. For a discussion of reputation, see footnote 19.

26. Measures for these variables come from the literature on industrial organization. For economies of scale, we use minimum efficient scale when possible; otherwise, we use capital expenditure as a percentage of total sales. For learning effects, we use declining average production costs per unit over time. Changes in any one variable alone would increase market imperfections and thereby predispose firms to become more strategic about trade; simultaneous changes in both variables would greatly intensify the demand for strategic trade policy.

For indicators of strategic groups, we have not used conventional concentration ratios, since we do not believe they adequately capture the concept of strategic groups. We define strategic groups in terms of the key structural variables of each industry, which can range from different end uses to different manufacturing strategies. See Caves and Porter, “From Entry Barriers to Mobility Barriers”; and Porter, “The Structure Within Industries.”

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