Strategic trade emerged during the 1970s in particular

Strategic trade emerged during the 1970s in particular -...

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Strategic trade emerged during the 1970s in particular, as trade began to increase between the developed world. Before this time period, most trade occurred between the developed and the developing world, and involved complementary products – raw materials from the developing world to the developed, manufactured products to the developing world. In essence, the idea of comparative advantage still held. However, this shifted in the 1980’s – most trade occurred between the developed world, and dealt with competitive products – states essentially competed for market share in similar products, not necessarily derived from comparative advantage. Strategic trade advocates offering subsidies to national firms in certain markets in order to insure that the national firm is able to dominate that market.
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Unformatted text preview: The issue here is exploiting economies of scale – production costs lower the more a firm produces. However, the problem with exploiting such economies of scale is getting into the market in the first place – in the sense that there is a high cost of entry into the market (a company must make a certain amount before it is profitable) and some markets are so large that only one company can make a profit. The firm that gets to market first wins and then can exploit monopoly rents – in essence, that firms products become “locked in” as the standard. If two similar firms enter the market, neither one will be able to profit. Strategic trade theory calls upon governments to subsidize industries in order to get them over the high initial cost of entry into the market....
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