1

Strategic Trade Policy

and the New WTO Round

Joaquim Ramos Silva*

jrsilva@iseg.utl.pt

Horácio Crespo Faustino*

faustino@iseg.utl.pt

Since the emergence of the theory of strategic trade policy in the early eighties,

it has had a significant influence on the design of world trade policies. In spite

of well founded theoretical criticism and large controversy over its main points,

strategic trade policy has a strong political appeal and more importantly, to a

large extent, it has been implemented. Taking into consideration its objectives

and instruments, it is particularly suited for the greatest world economic

powers, like those of the Triad when they aim at the control of global imperfect

markets, in the most dynamic products and areas. This is particularly the case of

high-technology industries like information technology, where important

projects in the spirit of strategic trade policy have been launched through large

amounts of R&D subsidies or others forms of public aid, which are mostly

unthinkable for many smaller and/or developing nations. In these

circumstances, strategic trade policy has had a large and deep impact at a global

* ISEG/UTL. The authors would like to thank AvisAnne Julien for editorial assistance.

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scale, far beyond the relatively limited number of the sectors and firms targeted

for public assistance.

Strategic trade policy leads to further concentration of world income, and there

is a likely connection between the "golden" growth period of the USA, after

1992, and poor performance and crises in a large part of the remaining

economies. Indeed, in the nineties, there was a widening gap between the

evolution of world trade and production because of the increasing rate of the

first and the decreasing rate of the second, entailing a much higher elasticity of

trade in relation to output than in previous postwar decades. The collapse of

formerly central planned economies in the beginning of the nineties and the

series of financial crises in the developing countries and newly industrialized

economies after the middle of the decade, with their depressive effects on trade

and production, do not explain all the slowdown of world output, far from it.

The link between this evolution and the implementation of strategic trade

policies, particularly at the level of the Triad, should be explored for a deeper

understanding of this unbalanced process.

In any event, the pursuit of these trends without change toward an increasing

and larger world competition and wider participation in the process, will help

the growing wave of globalization critics that can damage liberalization

policies, namely in developing countries, where they have finally started over

10 or 15 years ago.

In this paper, we maintain that there is a link between the global uneven

development of the 1990s and the non-cooperative dimension, in contrast with

usual GATT thinking, of strategic trade policies that were implemented,

particularly in the Triad. In our view, after the Seattle inconclusive conference,

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at the end of 1999, the millennium round fell into a stalemate, but future

negotiations should clearly reinforce the cooperative game dimension of world

trading system and take the global impact of "national" strategic trade (and

investment) policies more seriously into consideration.

After this introduction, the paper is organized as follows: in section 1, we give a

brief account of the early debate on strategic trade policy and expose its basic

rationale; section 2 addresses to the crucial issue of the definition of a strategic

sector; section 3, is devoted to the analysis of strategic trade policy in practice,

particularly in the context of the Triad; the emphasis will be put in the

European Union case; section 4 is mainly concerned with developing countries

in their relation with liberalization policies stemming from the world trading

system in the light of the new WTO round: finally, section 5 presents some

guidelines for the new WTO round in order to overcome the dilemmas raised at

a global scale by the implementation national strategic trade policies.

1. A brief account of the early debate on strategic trade policy

Many authors, for instance Krugman (1989, p. 1201), have stressed the shifting

profit essence, from foreign to national firms, of strategic trade policy. This

change underlies the theoretical model of Brander-Spencer and it is possible

through the granting of subsidies by the government. The Figure 1 shows the

process which is described by Stegemann (1996, p. 85), in the following terms:

"It depicts each duopolist's reaction function, as well as two isoprofit

curves for the home firm. Without government intervention, the

equilibrium would be at point N, which is the familiar Cournot (Nash)

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equilibrium. The subsidy, by lowering the home firms' marginal cost, has

the effect of shifting its reaction curve to the right. Therefore, a new

Cournot (Nash) equilibrium is attained at a higher output level for the

subsidized firm and a reduced output for its foreign rival. To be optimal

from a national point of view, the rate of subsidization must be such that

it moves the equilibrium to point S, which is equivalent to Stackelberg's

asymmetric solution that would be attained if the home firm were able to

act as a leader in the absence of subsidization. The home firm's isoprofit

curve tangent to the foreign reaction curve at S represents a higher profit

than the one going through N. Both represent profits net of subsidy

payments. Thus the home country's income increases when the

intervention causes the equilibrium to move from N to S".

Briefly, it must be pointed out that the aim of the government consists of a

change in the set of credible actions of national firms (reaction function) in

order to shift at the level of the industry the international (non-cooperative)

equilibrium to the advantage of domestic firms (there will be a move to the

right of the reaction function). By acting at first (central hypothesis of the

Brander-Spencer model), the national government puts domestic firms in the

leading position (Stackelberg's leader).

This model had important implications for the international trade theory. In

fact, the new development emphasized the relevance of imperfect competition

and of high-technology industries intensive in R&D. As a consequence,

economic policy namely through trade and industrial policies (strongly

correlated due to close relationship between the market structure and the trade

performance), had no barriers to oppose free trade as an optimum policy and to

sustain neo-protectionist measures aiming to increase the welfare of the

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country. The emergence of a different international trade theory also meant that

there were new sources of trade and specialization that would imply a different

trade policy, and accordingly, objectives, instruments and effects also different

from the previous ones. The new international trade theory stressed that what

was considered as exogenous or endogenous distortions by traditional theory

was not occasional or secondary, but rather the rule, the essential. Therefore,

the theory of endogenous distortions was not the correct theoretical instrument

to analyze the new situation. It was not a question of overcoming market

failures, but rather of deriving benefits from them in exclusive national profit.

For strategic traders, the road was open to protectionist policies theoretically

based on not only the new international trade theory but also on industrial

economics and on game theory.1 As referred to above, these measures would

increase the national welfare of a country through the extraction of monopoly

rents to foreign firms. In accordance with, in the conditions presently prevailing

in the world market, this was the best available policy: a second best.

1 At first sight, strategic trade policy does not seem to have a very strong and clear protectionist content, because at the national level, it does not necessarily call for more tariff or non-tariff barriers or other formal ways of entry deterrence. However, through subsidies national firms receive an additional support for increasing their monopolistic control over the world market at the expenses of foreign firms. In this sense, subsidies in the context of strategic trade policy, because they are aimed at limiting the competition of foreign firms, can be considered as protectionist, or better, as expressed in the main text, being the same policy with different look, a form of neo-protectionism.

Fore

ign

outp

ut

Home output

Foreign reaction function

Home reaction functions

SN

6

The extraction of monopoly rents to foreign firms was not however the unique

argument of the neo-protectionists, although it was in fact, a new one. Another

argument, already old but reappeared due to neo-protectionists, was related to

the existence of externalities (external economies) in some industries,

particularly in high-technology industries with spillovers. According to this

view, innovative firms were unable to reap all the benefits that R&D activities

generate. In the atomistic model, the activity of innovation also entails external

economies but this is more the result of learning-by-doing, which allows

keeping, theoretically, the perfect competition assumptions.

If we consider that external economies in the innovative industries were linked

to the investment in R&D - functioning as a part of the total fixed costs of the

firm - then these industries may well be in imperfect competition and the

conditions are gathered to be taken by the governments as strategic sectors

targeted for subsidies. The single difference between strategic economic policy

based on external economies and the strategic trade policy based on imperfect

competition of the international markets is the following: in the first case, the

policy does not affect other countries whilst in the second case, what one

country gains the other loses (it is a zero sum game). In any case, for its

defenders, neo-protectionism would be beneficial for the country. This

conclusion is objectionable and the supporters of free trade will counter-attack

with further arguments.

In effect, the theoreticians of international trade were divided in two opposite

sides: those like J. Brander, B. Spencer, L. Thurow, L. Tyson, among others,

supported strategic trade policy and those like A. Dixit, G. Grossman, J. Eaton,

J. Bhagwati and others criticized this policy. Some of the most representative

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positions of the two groups were collected and edited by Krugman (1986). In

the beginning, Krugman himself adopted a position of benevolent neutrality in

relation to strategic trade policy.

Starting from a supportive attitude toward neo-protectionism another logical

question arose: as national income is the income of factors of production, how

does the allocation of factors influence the way that this income increases and

thus, how national welfare increases as well? The answer will also imply

answers to a lot of new questions: which sectors must concentrate these factors?

How these strategic sectors will be identified? Which criteria will be used in

this identification? Who will define these criteria?

In the USA, these questions became politically inflammable with the arrival of

the Clinton Administration in the White House in the beginning of 1993 which

brought some leading strategic traders to the political forefront, like economic

advisers or secretaries such as Laura Tyson and Robert Reich. In this context,

measures inspired by the logic of strategic trade policy received fresh impetus,2

still more important because it appeared veiled in academic reasoning. At the

same time the concern over international competitiveness was increasing in the

search for the improvement of productivity and national welfare in the US.

Furthermore, the emphasis on the relevance of competitiveness also became

associated with the corresponding emphasis on the then new concept of

globalization.

2. The definition of a strategic sector: main issues at stake

2 For example, Garten (1995, p. 58-9) presents some empirical evidence of this, in particular the financing of American exports for big projects was several times multiplied between 1993 and 1994-95.

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It was stressed above that the main objective of strategic trade policy consists of

a support and a stimulus to the growth of sectors3 regarded as strategic aiming

to increase national income. This would be possible through the rise of the

remuneration of factors in the strategic sectors higher than their opportunity

cost. This increase - made possible through the sharing of the monopolist rent

to the benefit of national oligopolized firms and to the detriment of foreign

firms - would more than compensate the likely reduction of the remuneration of

factors in the non-strategic sectors and the costs of structural adjustment due to

a shift in the allocation of factors. In this context, subsidies to factors

temporarily non employed and to firms of the strategic sectors, namely to

export and to R&D, underlie all the process. Therefore the factors in the

strategic sectors would gain a rent and its increase would be possible at the cost

of the rent extracted to foreign firms. Summing up, a trade policy is strategic to

the extent that the action of one of the players (national government in

collusion with the domestic oligopolized sector) aims to induce a reaction of the

other player (government or foreign firms) in order to get a gain (appropriation

of a greater share of the rent arising from international trade in the market of a

certain product).

It must be previously emphasized that, in practical terms, the definition of a

strategic sector is one of most critical points for strategic trade policy theorists.

It is well established in economic theory, and empirical studies have largely

confirmed that any kind of public protection, through subsidies in this case, will

contrive lobbyist pressures in order to benefit from the rent, very often leading

far away from the "initial intention" and entailing economic losses. In these

3 In context of this paper, we mainly focus sectors, areas or products rather than firms; this work will be done later.

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circumstances, a great deal of attention has been given by these authors to the

definition of a strategic sector. Afterwards, we present the main points of their

arguments.

As we have just referred to, the strategic sector can be defined as the sector

where factors (labor and capital) benefit from rents. These rents are due to

economies of scale, technological innovation, learning-by-doing, entry

deterrence, in short to monopolistic power, and not to the quality of factors. So,

in this analysis, we must bear in mind that:

"'Rent' in economic parlance, means 'payment to an input higher than

what that input could earn in an alternative use'. It could mean a higher

rate of profit in an industry than is earned in other industries of

equivalent riskiness, or higher wages in an industry than equally skilled

workers earn in other sectors" (Krugman, 1986, p. 12).

As this rent rewards the factor beyond normal remuneration (opportunity cost),

several difficulties arise in order to know in which firms are the factors that

must take advantage from it. Let us mention some of them:

i) we need to know within each industry what are the firms that may

positively contribute for this rent;

ii) we need to separate the rent from the differences of quality of

factors: if an industry employs more skilled workers than another

one, it is natural that its marginal productivity will be higher, and

consequently its wages will be higher too without benefiting from

a rent:

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iii) when there are external economies in the industry - what means

that the private cost is greater than the social cost - how can they

be measured?

Usually it would be enough to compare the remuneration of labor and capital in

the different sectors without regard to these considerations.

Another range of difficulties in the definition of a strategic sector concern the

proper industrial structure of each country. Indeed, different industrial

structures will need specific policies and incentives, and even inside the same

sector of a country, firms will react differently. In these circumstances, it is

particularly hard to have a strategic policy that can be appropriate for all

countries, and in all sectors. Obviously, the study of each case is the best

solution.

Barbara Spencer specifically addressed the problem of how to define a strategic

sector in her paper "What Should Trade Policy Target?" (1986). She stressed

the relevance of the following elements:

- the sector must have the potential for gaining additional profits higher

than the subsidy;

- an oligopolistic structure;

- high concentration in relation to competing foreign industry;

- high level of barriers to entry, notwithstanding legal barriers,

investment in excess capacity and/or R&D;

- the sector must be submitted to strong international competition;

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- the sector must have a comparative advantage, economies of scale and

learning effects; the costs in R&D and capital must be the main part of

the costs of the new products;

- the public intervention must occur in the beginning of the life cycle of

the product; this intervention must appear as a credible threat and to

discourage a similar intervention of a foreign country;

- the technology of the firms in the sector should generate a

technological spillover effect in all the national economy; the

government should favor the transfer of technology to national firms;

- in the beginning, the costs of the factors in the subsidized sector

should not be increased, because in these circumstances the initial

advantage would disappear.

Synthetically, in order to give public aid to the strategic sector it must have,

among others, the following features:

i) an oligopolized structure that will allow benefit from economies

of scale;

ii) sufficiently high barriers to assure that the benefits from the

economies of scale are not eliminated with the advent of new

firms;

iii) R&D investment must be the main strategic orientation of the

firms in the sector; in these circumstances, the strengthening of

national firms are viewed as a means of benefiting the economy as

a whole with the diffusion of technological spillovers.

Therefore, the sector is strategic because, with the help of the State, it has the

potential for taking possession of monopolist rents, or at least to compete with

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corresponding foreign sectors. It must be also noted that the definition of a

strategic sector is conditioned by the underlying theory: the theory of trade

policy under imperfect competition. More precisely, the sector is not only

strategic because it creates external economies as in the case of the support to

the strategic sector in the theory of trade policy under perfect competition, but

also because it can appropriate the rents from the foreign firms.

Finnaly, as far as the recommended instruments of trade policy are concerned,

the subsidies for production, exports, R&D, or capital are most commonly

used. According to Spencer and Brander (1983), subsidies for exports would be

preferable to subsidies for R&D from the point of view of optimal resource

allocation However taking into consideration the GATT rules, subsidies for

R&D or a mix of the two subsidies would be the best option.

3. Strategic trade policy in the Triad: the European Union case

Within the Triad, the strategic trade policy of each partner is closely related to

the strategic trade policy of the other two. In these circumstances, a very

important question we have to answer is which of the following scopes will be

adopted by economic policy makers in the EU, USA and Japan:

- an increasing liberalization following the pattern of multilateralism;

- or, a neo-protectionistic stance according to the defenders of strategic

trade policy.

Putting it another way: is it more likely that the three partners will play a

cooperative game according to the principles and norms of GATT/WTO or, on

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the other hand, is it more likely they will play a non-cooperative game in

conformity with the precepts of strategic trade policy?

Let us consider the case for the European Union. The claims for euro-

protectionism versus internal as well as external liberalization, are old and well

known (Pearce and Sutton, 1985). Afterwards, we refer to the main arguments

of both sides, beginning with those of euro-protectionism:

- The convergence of the two different objectives are not contradictory(

for example, the completion of the internal market and the

implementation of the monetary union through the increase of internal

competition, on the one hand, and the recovery of competitiveness in

the world market in relationship to the USA and Japan through the

usual instruments and measures of trade and industrial policy).

- Due to less advancement of the EU in terms of R&D applied to high-

technology industries, only temporary protection will allow them to

reach the appropriate level of international competitiveness (the

typical infant industry argument) leading European firms, not only US

and Japanese firms, to take advantage of economies of scale and other

benefits stemming from these industries.

- Free trade in relationship to main partners may be unacceptable in

terms of unemployment and other social costs resulting from

adjustment of declining sectors, and may also be unacceptable in

terms of uneven distribution of national income - the economic and

social cohesion argument usually associated with the gradualist

approach to structural adjustment.

- Trying to avoid retaliation from the USA and Japan, the protectionist

policy should not be generalized but should be selective and limited in

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time, i.e., only aiming at the promotion of strategic industries during a

certain period of time (for instance, four or five years) - this way the

theory of strategic trade policy is clearly based on the infant industry

argument.

- USA as well as Japan also protect - through not only subsidies for

R&D but also through public investment and procurement - their

emerging industries that are creating new technological capabilities.

- As far as the USA and Japanese Foreign Direct Investment(FDI) are

concerned, the EU should encourage it in so far as it contributes to the

creation of employment and to the diffusion of new technological

norms.

- At the level of the EU, industrial policy still differs from country to

country and even in the field of trade policy there are different non-

tariff barriers among member states. In order that Europe will not

become a US or Japan subcontractor in high-technology industries, it

is necessary to define a common industrial policy based on protection

of these industries (ie, from external competition) and on the

development of joint projects of member states.

Continuing with the example of the European Union, we now look at the

arguments in favor of internal and external liberalization in more detail:

i) Except for endogenous distortions and for the infant industry

argument, the Treaty of Rome clearly specifies a reduction of State

intervention and the defense of free trade as an optimum policy -

the argument based on the theory of endogenous distortions.

ii) The infant argument is only acceptable in the very beginning of the

creation of an industry, ie, within the short term perspective; if a

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different view is adopted, almost all industries can be candidates

for public support;4 moreover, once in practice, the argument tends

too often to become permanent and long lasting. However,

appropriate implementation is costly and has to be closely

balanced within the logic of cost-benefit analysis. According to

some views, instead of a strict obedience to this argument it would

be better to promote the cooperation between firms and to

recommend a secondary role for the State in the field of

innovation, investment and in the creation of the "national

competitive advantage" in conformity with Porter's way of

thinking (Porter, 1990).

iii) The development of high-technology industries presupposes the

cooperation among member states (internal liberalization) and the

protection toward external competition. This protection is

inefficient because it diminishes the required competition for the

strengthening of these high-technology industries and of all

industries, and is also damaging in terms of world welfare.

iv) Infant industry argument is sustainable as far as the promotion of

new industries is concerned, but this does not necessarily imply

neo-protectionism and the distortion of international competition

under the form of strategic trade policy. This policy could only be

envisaged if the trade partners do not respect the same rules.

Which of the previous trends will prevail? It is a difficult question to

answer.The European Union does not yet have an active common industrial

policy and it has progressed through "natural" integration that respects trade

patterns. Also, the EU is lagging far behind the US in some highly strategic 4 On this issue, see Krueger, 1990.

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sectors like information technology. The support to Airbus and a few other

initiatives is not enough to transform EU into the leading player of strategic

trade policy at a global level.

4. Developing countries, trade liberalization and economic growth

Before analyzing our basic issue in regarding developing countries, more

closely, let us first look at the relationship between trade and economic growth.

To begin with, it must be stressed that the empirical studies that have tested the

positive influence of trade in economic growth, notwithstanding Ricardo or

Hecksher-Ohlin theories, face the problem that trade is an endogenous variable.

So it is difficult to accurately determine the way of causality between them.5

Recently, Frankel and Romer (1999), starting from the hypothesis that the

geographical features of countries have a strong effect on trade and that they are

plausibly not correlated with other determinants of income, have constructed

measures based on the geographical features of countries in order to obtain

instrumental variables for the estimation of trade's impact on income, and they

conclude that:

"The results … suggest that trade has a quantitatively large and robust,

though only moderately statistically significant, positive effect on

income" (p. 379).

5 For a survey of the literature on this issue, see for example WTO, 1998, pp. 42-46, which concludes as follows: "… an open trade regime stimulates growth … an open trade regime is not a panacea for growth: other components of the Economic policy regime must be right to unleash the full potential of the productive forces of the economy", p. 46.

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Thus, although the survey emphasizes the beneficial effects of trade on

economic growth, at the same time it recognizes that there is not enough

statistical evidence for that. Otherwise, the authors add that there are two other

flaws in the conclusions:

First, " … geographical variables provide only a limited amount of

information about the relationship between trade and income";

seconddly, " … the results cannot be applied without qualification to the

effects of trade policies … Thus, differences in trade resulting from

policy may not affect income in precisely the same way as differences

resulting from geography" (p. 395), nevertheless, they conclude that "our

results bolster the case for the importance of trade and trade-promoting

policies" (p. 395).

Therefore, following the theory of comparative advantage and the theory of

endogenous growth, trade liberalization is beneficial not only to developed

countries but also and mainly to developing countries because it leads to a more

efficient allocation of resources, promotes competition and the exploration of

economies of scale, and facilitates the diffusion of technology and knowledge.

Moreover, the next WTO round will be important in order to encourage

developing countries to pursue and consolidate liberalization policies, many

already launched during the 1980s. Two areas of negotiations, agriculture and

services, particularly agriculture, concern many developing countries because

they have a comparative advantage and liberalization is in its own interest.6 On

the other hand, the internationalization of the services is specifically linked to

FDI and to the role of multinational firms. So, after the adoption of the General

6 Using general equilibrium models, Nagarajan, 1999, and (for manufactured goods) Hertel and Martin, 1999, predicted high returns of the next WTO Round for developing countries.

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Agreement of Trade in Services (GATS) in the Uruguay Round, it is expected

that the liberalization in this sector will lead to further welfare gains for both

developed and developing countries. On the other hand, as referred to by

Krueger (1999):

"Until the Uruguay Round of multilateral trade negotiations, the

developing countries were generally observers. They benefited as 'free

riders' from the whatever reductions in trade barriers were negotiated

among developed countries …"

But now developing countries are full-scale members of the WTO and it is in

their self-interest to bargain for the end of Multifibre Arrangement (MFA) and

other neo-protectionist measures not yet covered by WTO rules such as anti-

dumping measures that mainly hinder developing countries' exports which

depend heavily on unskilled labor.

Trade is a major engine of growth, however, if the spirit of strategic trade

policy - like other neo-protectionist approaches - influences the negotiations

then that will be harmful to both developed and developing countries. Indeed,

the core of the theory of comparative advantage, and its central proposition that

trade is a positive game is still alive, and should be reinforced. In conclusion,

the strategic trade policy like the import substitution policy followed by many

developing countries is linked with the pessimistic point of view about global

trade and investment. But, nowadays there is no theoretical and empirical

evidence for such pessimism.

5. Toward the new WTO Round

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! The issue of "free trade versus strategic trade policy" has not yet been clearly

solved at the level of the main theoreticians of international trade, through

both alternatives have influenced policy makers, particularly in the USA, EU

and Japan in one way or another. Taking into consideration the political

appeal of strategic trade policy, it certainly plays a major role in a few but

relevant fields for international trade.

! The testing of theoretical models gives us an idea of how difficult it is to draw

definite conclusions from this point of view. Everything is still in an open

state and the results of strategic trade policy depend on various factors: the

market structure, the type of competition among firms, the timing for the

action of the players (firms and governments), and the temporal size of the

game. The results are not conclusive and consequently cannot serve as a basis

for the policies of strategic traders; and perhaps, more often, they call them

into question, at least as far as they reinforce the asymmetrical development of

the world economy. However, strategic trade policy is based on big firms and

megaprojects in highly oligopolized or even duopolized world markets and

are aided by substantial public funding. How can we prevent that its spirit will

not influence the policies of those governments, namely in the context of

WTO?

! Critics as well as defenders of strategic trade policy theoretically recognize

that any intervention will likely diminish global welfare, even if it may

increase the welfare of one or more countries. So, it is always better to

achieve agreement on the elimination of tariff or non-tariff barriers and other

difficulties of access to markets than to follow the neo-protectionism. This is

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what the rounds can do, and since the birth of GATT, they have significantly

contributed to the consolidation of a free trade policy.

! The globalization of the economy does not alter the essentials of international

trade theory. The globalization phenomenon goes back to the industrial

revolution whose driving forces - technological change, internationalization

of the economies, and liberalization policies - remain the same although with

new qualitative developments.7

! The new international trade theory and the empirical evidence have shown

that the convergence of the level of development between countries brings

about a different type of trade: intra-industry trade (intra-product at a more

disaggregated level of analysis) arising from economies of scale and product

differentiation. Therefore, there is no reason to fear the increase of trade nor

the economic growth of developing countries; on the contrary, in terms of

welfare all the world has only but to gain. This way, the increase of the weight

in international trade and the strengthening of developing countries in the

world market, in the context of globalization, is nothing more than a wishful

consequence of a free trade policy of the GATT/WTO.

! It is obvious that the GATT has not been an institution able to fully achieve

its own objectives because the structure in the markets of the most dynamic

products, like those of high-technology industries, has been developing

toward imperfect competition. Furthermore, the US as well as the EU and 7 Baldwin and Martin (1999) consider two globalization waves (the first, between 1820-1914, the second, since 1960 until the present). They are similar as far as concerns the weight of trade and capital flows, and the level of trade barriers, but they are different due to the fact that the exchange of ideas (knowledge) is much more important in second wave. Moreover, the kind of trade (inter-industry in first case, intra-industry in the second) as well as the different nature of FDI and of multinational firms in the second wave emphasizes the contrast. The authors stress the fact that the initial conditions were also different: before the first wave the world was poor and agrarian, whilst before the second wave, the world was divided between rich and poor countries.

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Japan increasingly subsidize (i.e., they protect), some products of high-

technology industries. While this trend will not be turned upside down, or at

least disciplined according to the rules of GATT, a truly liberalization of trade

will be impossible, and the appeal of strategic trade policy over policy makers

will remain particularly difficult to weaken. Will the WTO and the new trade

round be able, through reciprocal concessions, to persuade the contracting

parties of the advantages of liberalization in the global economy? In any

event, a shift toward more cooperative games rather than non-cooperative, as

strategic trade policy, would surely have positive effects on the negotiations.

The mounting critiques of globalization require a broader and more systemic

view of the question.

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