Recent events emphasize the growing interdependence between government policy and international financial markets. The shifting patterns of ownership of firm permitted through international trade in equities alter the coalitions in support of particular policies and thereby change the nature of government intervention. This paper focuses specifically on the influence of international financial markets on the use of strategic trade policies.
An extensive literature, beginning with a series of papers by James Brander and Barbara Spencer (in 1983 and 1985), reveals the potential benefits from strategic trade policies with imperfectly competitive international markets. These gains derive from the government's ability to indirectly While manipulate market share among oligopolies to shift profits from foreign firms to domestic ones.
The use of explicit export subsidies continues to be prohibited by the World Trade Organization as it was under the GATT, countries often use indirect forms of intervention to provide export assistance. U.S firms, for example, can benefit from low-interest loans made available through the Export-Import Bank Since imperfect competition characterizes many international markets, the scope for strategic intervention is potentially quite broad. We show that the application by government of such policies will be limited, however, by the nature of uncertainty in exporting firm profits in conjunction with the growing importance of international financial markets.
The benefits of profit shifting via strategic subsidies arise only when domestic firms are owned Lee (1990) and Dick (1993) show how the optimal strategic subsidy is primarily by domestic residents. reduced by higher degrees of cross-national ownership of firms. Our first objective, therefore, is to endogenize the patterns of flml ownership, given the nature of technological uncertainty that characterizes oligopolistic industries, in order to detennine the subsidy that emerges in a political economic equilibrium.
While we expect ownership structure to affect the adoption of particular trade policies, we also know that investors will assess the impact of future trade policies on equity values and dividends when selecting the assets that will comprise these portfolios. We therefore include not only the effects of uncertainty on portfolio selection, but also forecasts of future trade policy, which itself is detennined endogenously.
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Privatization And Endogenous Strategic Trade Policy
