The Impact Of Government Intervention On International Trade Under Perfect Competition

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Perfect competition brings out the idea of traditional trade theory and free trade is seemed the optimal policy. However the theory did not applied perfectly in the reality of international trade, which masses of intra-industry trade and trade between similar countries are under imperfect competition. (Brander, 1995) Therefore the idea of strategic trade policy arises. In this essay game theory and oligopoly theory are going to be used to illustrate the application of government intervention to support domestic firms. Moreover, the impact of government intervention in international trade under perfect competition will be outline for a comparison with that of imperfect competition, and an insight of to what extent the game theory and oligopoly theory support a greater degree of government intervention in international trade will be shown.

According to “The New Palgrave Dictionary of Economics”, the definition of strategic trade policy is trade policy that “affects the outcome of strategic interactions between firms in an actual or potential international oligopoly.” (Durlauf and Blume, 2008) It is basically a policy to shift profits from foreign to domestic firms in order to improve domestic welfare. For example, government intervention to subsidise domestic firms is an application of strategic trade policy. The term ‘strategic’ in the context is not related to military purposes but to strategic interactions between firms. (Durlauf and Blume, 2008) For further explanation of
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