Theory of Strategic Trade Policy in North–South Trade: Optimal Northern and Southern Tariffs in an Inherently Asymmetric Environment

The theory of strategic trade policy posted a challenge to the prevailing concept of free trade. The key claim of the theory is that a significant share of international trade takes place in an imperfectly competitive environment that, in turn, requires oligopoly theory as an underlying concept. The government is viewed as an important actor in this context that possesses the ability to alter the above strategic interactions in favor of the domestic firm, and, in favor of domestic consumers and the domestic treasury. Thus, it may be socially beneficial for a government to intervene by tariffs, subsidies, quotas, etc. in order to secure higher domestic social welfare. The main issues of this monography are an inquiry into strategic trade policy in the “North South” intra-industry trade context from both a Northern and Southern perspective. The context of North South trade implies that international trade takes place among ex ante asymmetric actors. This asymmetry can, among other things, arise from a) the presence of unilateral R&D spillovers b) the difference in unit costs of production or c) different quality costs among the firms. Given the above asymmetries, the book explores some properties of optimal strategic trade policy as well as its sensitivity and its social welfare implications with respect to different modes of competition, information asymmetry and variations in ability of government to pre-commit to its policy choice.