Sophisticated arguments for Activist Trade policy The Case for Government Support of High Technology Industries Subsidize the activity with externalities, not all activities in an industry For instance, R&D(as opposed to manufacturing) should be subsidized How Important Are Externa lities? Externalities are hard to measure empirically Problems of appropriability at the level of the nation(as opposed to the firm) are less severe but still important even for a nation as large as the United States Copyright C 2003 Pearson Education, Inc Slide 11-6
Copyright © 2003 Pearson Education, Inc. Slide 11-6 • The Case for Government Support of HighTechnology Industries – Subsidize the activity with externalities, not all activities in an industry. – For instance, R&D (as opposed to manufacturing) should be subsidized. • How Important Are Externalities? – Externalities are hard to measure empirically. – Problems of appropriability at the level of the nation (as opposed to the firm) are less severe but still important even for a nation as large as the United States. Sophisticated Arguments for Activist Trade Policy
Sophisticated arguments for Activist Trade policy Imperfect Competition and Strategic Trade policy In some industries where there are only a few firms in effective competition The assumptions of perfect competition will not apply Firms will make excess returns(profits) There will be an international competition over the excess returns a subsidy from the government to domestic firms can shift the excess returns from foreign to domestic firms Copyright C 2003 Pearson Education, Inc Slide 11-7
Copyright © 2003 Pearson Education, Inc. Slide 11-7 ▪ Imperfect Competition and Strategic Trade Policy • In some industries where there are only a few firms in effective competition: – The assumptions of perfect competition will not apply. – Firms will make excess returns (profits). – There will be an international competition over the excess returns. – A subsidy from the government to domestic firms can shift the excess returns from foreign to domestic firms. Sophisticated Arguments for Activist Trade Policy
Sophisticated arguments for Activist Trade policy The Brander-Spencer Analysis: An Example There are only two firms(Boeing and Airbus competing, each from a different country(United States and Europe) There is a new product, 150-seat aircraft, that both firms are capable of making Each firm decides either to produce the new product or Copyright C 2003 Pearson Education, Inc Slide 11-8
Copyright © 2003 Pearson Education, Inc. Slide 11-8 • The Brander-Spencer Analysis: An Example – There are only two firms (Boeing and Airbus) competing, each from a different country (United States and Europe). – There is a new product, 150-seat aircraft, that both firms are capable of making. – Each firm decides either to produce the new product or not. Sophisticated Arguments for Activist Trade Policy