The Political Economy of Strategic Trade Policies

This paper applies Grossman and Helpman's (1994) common agency model to investigate the formation of strategic export subsidy and strategic import tariff under both Cournot competition and Bertrand competition. The results of this paper indicate that even with political pressure, the Grossman-Helpman politically-determined export policy is identical to the rent-shifting export policy, which is export subsidy (export tax) in Cournot (Bertrand) competition. The politically-determined import tariff will be higher than the optimal level. This paper highlights the possibility that lobbying can restore the level of trade intervention to a more efficient one in the absence of the benevolent dictator.