Strategic Trade Policy and the Threat of Regionalism

Paola Conconi

June 2001

We examine the formation of trade agreements when markets are characterized by

imperfect competition and governments can alter the strategic interaction between

oligopolistic …rms through the use of import tari¤s and export subsidies. Using a simple

three-country model of intra-industry trade, we show that whether preferential trade

agreements are stepping stones or stumbling blocs towards the attainment of multilateral

cooperation depends on the degree of product di¤erentiation and industry concentration.

However, when import tari¤s are the only available policy instrument, global free trade is

always sustainable. Our analysis provides a rationale for the recent attempts to strengthen

international rules against the use of export subsidies. It also suggests that focusing on one

dimension of strategic interaction only might result in drawing incorrect conclusions about

the outcome of the trade negotiations.

KEYWORDS: Imperfect Competition, Trade Negotiations.

JEL Classi…cation: F12, F13.

Address for correspondence:

Paola Conconi

Department of Economics

University of Warwick

Coventry, CV4 7AL, United Kingdom.

Tel: +44 (0)24 7657 2857.

Fax: +44 (0)24 7652 3032.

E-mail: P.Conconi@warwick.ac.uk.

Homepage: http://www.warwick.ac.uk/~ecren.