1. Blond-Spencer's model of "promoting exports with subsidies"

Blond and Spencer (James Brander &: Borbara Spencer is the initiator of strategic trade policy theory. They believe that the traditional trade theory is based on a perfectly competitive market structure, and the corresponding free trade naturally becomes the optimal policy. However, in the real economic life of the contemporary world, imperfect competition and economies of scale are the largest and most common phenomena. In many industrial fields, trade is controlled by a limited number of enterprises, which are powerful enough to control market prices. Based on the research results of industrial organization theory and game theory, they creatively discussed the influence of government subsidy policy on export production and trade under the conditions of imperfect competition and economies of scale, and established the basic framework of strategic trade policy research.

The traditional trade theory based on perfect competition and constant returns to scale has always scoffed at government subsidies. The reason is simple: no matter whether a country implements production subsidies or export subsidies, its social welfare situation will deteriorate, and the only beneficiaries are foreign consumers who can buy cheaper imports. However, if there are economies of scale and imperfect competition, the above conclusions will be invalid. Now, figure (1) is adopted to demonstrate as follows:

Suppose Y is a competitive commodity produced under the condition of constant scale income, and X is produced under the condition of increasing returns to scale. The fixed cost of its initial investment is F, and then it is produced at the constant marginal cost (that is, the slope of the marginal cost curve in Figure (1)). F is a special case of production possibility curve with the property of protruding to the origin, which means that X industry belongs to increasing returns to scale.

now suppose that there are two completely similar countries, and each country has a monopolist who produces X products. Both oligarchs follow Cournot's competitive behavior pattern, that is, each enterprise assumes that when it changes its output, the output of the other enterprise remains unchanged. In a competitive market monopolized by sellers, the price must be higher than the marginal cost. The equilibrium between the two countries is reached at point A, where the slope of the price line P* is greater than that of F, which indicates that the price is greater than the marginal cost. In view of the fact that the situation of the two countries is completely similar, no net trade occurs, and the production points and consumption points of the two countries are the same, both of which are point A.

in order to achieve economies of scale, a country (let's call it its own country) implements a little production or export subsidy, which stimulates production and moves the production point to point B in Figure (1), thus enabling it to export X products. Under the assumption that our country is a big country, the expansion of production of X product will inevitably make the price of the product fall in the international market, to the level of P' as shown in Figure (1), and the consumption is point C. At this time, the social welfare level of our country has improved, which obviously exceeds the welfare level of the country without subsidies. Under the assumption that our country is a small country, the welfare level of our country will be further improved if it is exchanged at the new production point B according to the original world price ratio P*.

how can domestic welfare be improved? The fundamental reason is that the initial price level exceeds the marginal cost. It is precisely because the price (the value of goods to consumers) is higher than the marginal cost (the value of resources needed for additional production of one unit of products), which has formed a stimulus and prompted the government to use subsidies to encourage export production. A little subsidy can really improve welfare.

the implementation of domestic subsidies to expand the production of X products means that China has a large share in the international market, and the market share occupied by China is the market share lost by foreign manufacturers. Under the conditions of economies of scale and imperfect competition, domestic subsidies may worsen foreign economies, which is in sharp contrast to the fact that domestic subsidies improve foreign economies under the conditions of constant returns to scale and perfect competition.

Blond-Spencer's strategic trade policy theory tells people that a government that implements such a trade intervention policy as minor subsidies can enable domestic manufacturers to gain a larger share of monopoly profits in the world competition. The domestic income is lost by foreign countries. In fact, this is just the extraction and transfer of monopoly profits around the world. As long as there is a pure economic profit greater than zero in an economic activity in the world market, it is possible to stimulate and drive the government to subsidize domestic enterprises strategically in such industries and markets, so as to help them seize a larger share of the world profits.

ii. Krugman-Baldwin Game Model

American scholar P.R.Krugman once made a simulation analysis on the application of strategic trade policy in aviation industry against the background of the competition between Boeing and European Airbus. He assumed that in the international market of large and medium-range passenger aircraft, the competition between Boeing and Airbus in the United States was a duopoly, and both companies needed to make a decision on whether to build a new aircraft. Because the scale economy of aircraft manufacturing is huge, and the market can only accommodate one company, whoever takes the lead in entering and manufacturing new aircraft can monopolize the monopoly profit of 111 units; If the two companies enter and compete for production at the same time, they will not make a profit, but both will lose, resulting in a loss of 5 units each (see table (1)). Therefore, the strategic choice of the two companies can only be: production or not.

Now Boeing Company wants to get ahead of others by virtue of its traditional competitive advantage, and take the lead in production and obtain a monopoly profit of 111 units. European governments tried to turn the tide, so they implemented a strategic trade policy. The main point is that before Boeing started construction, the government promised to provide Airbus with a subsidy of 11 units. In this case, if Boeing insists on participating in the competition to build new aircraft, it will inevitably lead to a loss of 5 units, while Airbus can still make a profit of 5 units. Knowing that subsidized Airbus will definitely produce this kind of aircraft, Boeing has no choice but to give up the market and withdraw from the competition. In this way, Airbus squeezed out Boeing with a little subsidy, and now it can monopolize the monopoly profit of 111 units and easily repay the subsidy. If these two products are both exported to a third country, then the subsidy of 11 units in Europe has actually played the role of transferring 111 units of monopoly profits, which were originally in the pocket of Boeing Company in the United States under normal competition conditions.

The above analysis shows that although subsidies reduce the losses of Airbus, subsidies are supported by open or hidden tax increases, which will lead to the transfer or redistribution of national income and bring additional costs to the European economy. Thus, Europe is not the winner. The worst is the United States, where Boeing's monopoly profits have been eaten away in vain, and the benefits enjoyed by American consumers by using cheap planes are far from making up for the losses caused by the sharp drop in national income. As far as welfare effect is concerned, strategic trade policy is like a double-edged sword, which strikes both sides with one sword. The real profiteers are other countries outside Europe and America. They can enjoy low plane prices without paying any price.

III. Strategic Tariff Policy and Its Application

The central idea of the so-called "strategic tariff policy" is that under the condition of imperfect competition, a government can use tariffs to limit the monopoly high prices of foreign manufacturers selling in its own market, forcing them to automatically absorb some depressed prices; It can encourage domestic potential producers to enter the domestic market occupied by foreign manufacturers and break the monopoly of the latter in this market. In both cases, the country can use tariffs to extract part of its monopoly profits or rents from foreign monopolists, thus reducing the outward loss of such monopoly rents. What's more, if the new entrants' domestic enterprises not only recapture the domestic market under the protection of tariffs, but also further penetrate into foreign markets, then they can directly grab monopoly rents from foreign manufacturers in foreign markets.

If export subsidies win domestic enterprises a strategic advantage in foreign markets, then tariffs can cultivate them a strategic advantage in their own markets. In this sense, the strategic tariff policy is another masterpiece of new protectionism.

Coincidentally, Blond and Spencer still initiated the strategic tariff policy. In 1981 and 1984, they put forward and demonstrated the basic idea of strategic tariff policy. They believe that in an imperfect competitive market, the price of monopoly producers is higher than the marginal cost, so they can earn monopoly profits. Whenever a country imports such goods, it is equivalent to paying a monopoly rent to foreign exporters. In order to enjoy this monopoly rent for a long time, foreign manufacturers will inevitably try their best to prevent new local manufacturers from entering the market. The first strategy that foreign monopoly manufacturers consider is to choose a certain export volume and occupy a large market, so that the output of local new entrants can not reach the level enough to cover the cost, that is, to make the entrants unprofitable and give up their entry on their own, so as to effectively deter domestic manufacturers from entering.

in the case that new domestic manufacturers are blocked from entering the market, the domestic government can first use tariff tools to extract part of the monopoly rents of foreign monopoly manufacturers. As long as the country's demand curve is flexible, the increase in tariffs will inevitably force foreign manufacturers to lower their original high monopoly prices, and the losses caused by this price reduction will be borne and absorbed by foreign investors themselves. Of course, some tariffs are passed on to domestic consumers by raising the prices of imported goods, thus partially offsetting the effect of transferring profits. In addition, the whole world will also have a net loss. However, as far as domestic interests are concerned, tariff is an attractive policy measure as a means to increase income without potential entrants, because this increase in income is extracted from foreigners rather than from domestic residents. Furthermore, if the domestic government uses all the tariff revenue to subsidize domestic consumers, tariffs can realize the transfer of some monopoly profits without harming the interests of consumers, thus improving the national income level of the country.

the above investigation shows that the tariff strategy aimed at improving the terms of trade is exactly the same as the policy proposition of the traditional optimal tariff theory. The difference between the two is that the strategic tariff policy does not require that the country that collects tariffs must be a big country in the sense of economics (that is, the price setter in the world market). As long as the price demanded by foreign monopoly manufacturers is higher than their marginal cost, as long as discriminatory prices can be adopted between the domestic market and other markets and the phenomenon of arbitrage can be eliminated, then it is possible to reduce prices by formulating appropriate tariff policies, and this low-level tariff of extracting monopoly rents by using the strategy of depressing prices is expected to be completely absorbed by foreign enterprises.

with the strengthening of a country's tariff policy, the potential of attracting new manufacturers from that country is increasing. When new domestic manufacturers want to enter the market, the focus of the domestic government's tariff policy is to induce foreign manufacturers to give up the competitive strategy of preventing domestic manufacturers from entering, and create conditions for domestic manufacturers to enter the domestic market occupied by foreign investors, so that they can operate and make profits, so as to regain some monopoly profits from foreign investors and reduce monopoly rent outflow. The government can first raise the tariff from a lower level to slightly lower than the minimum marginal tariff that prevents foreign businessmen from entering, and then raise the tariff rate by stages. With the continuous increase of tariffs, the domestic tariff revenue will gradually increase, and with the increase of commodity prices, the strategy of attracting domestic manufacturers will gradually work. The evolution of the situation is more and more unfavorable to foreign businessmen, until the tariff rises to a certain level, foreign businessmen give up the strategy of preventing entry, transfer some markets, and stick to the output as a price leader.

As long as the entry cost (especially the fixed cost) of new manufacturers is not too large, their profits may be high. Therefore, it is entirely possible for the domestic government to increase tariffs to a certain amount by stages so that domestic manufacturers can share the market share with foreign manufacturers. Of course, after the new domestic manufacturers enter the market, the total consumption will be reduced, and the tariff revenue will also decrease with the decrease of imports. Only when the profits obtained by domestic manufacturers (transferred from the monopoly rent of foreign manufacturers) are enough to offset the above losses, can China obtain net income. In fact, once domestic manufacturers survive in the fierce competition with foreign businessmen and gain a firm foothold, they will probably turn to export to foreign countries, directly compete with foreign monopoly manufacturers and share monopoly profits in foreign markets. The scene of performing in the domestic market is likely to be repeated in foreign markets. New manufacturers can make use of the profits from the domestic and foreign markets to make up for the initial fixed costs, and at the same time make up for the loss of domestic imports and consumer surplus caused by the increase in tariffs. It can be seen that the potential possibility of new manufacturers entering the two markets has had a great impact on the application of the tariff policy of the domestic government.

Blond and Spencer's strategic tariff policy theory shows that under the condition of imperfect competition, a country can use tariffs to stimulate domestic production and extract foreign monopoly rents. Although these two scholars have repeatedly stated that they only point out the feasibility of strategic application of tariffs under certain conditions, they are actually not in favor of putting them into practice. But extreme protectionists may still use this weapon to kill others. As everyone knows, this is a double-edged sword. Once a large-scale, escalating tariff war is triggered, it will inevitably lead to both losses, which is no different from the consequences of neoclassicism's best tariff strategy. In our view, Blond and Spencer vividly described a thrilling modern economic war among monopolists in the language of economics: the state is the general representative of monopoly capital, and it skillfully uses the best tariff strategy to safeguard the rights and interests of its national monopoly capital. However, even when the tariff is increasing, foreign monopoly manufacturers can still rely on the monopoly profits obtained by their own monopoly prices, retreat step by step, until they lose their monopoly position. Domestic manufacturers, on the other hand, attack frequently with tariffs as the backing, pressing hard step by step until they cross the national border and get their hands on other people's territory, and in the process, transfer the market share and monopoly profits of other countries to themselves. In this respect, the analysis of economics is profound and accurate, which helps people to understand and grasp the essence and consequences of the so-called "strategic tariff policy".

iv. Krugman's model of "promoting exports through import protection"

In p>1984, American scholar Krugman pointed out that under the conditions of oligopoly market and economies of scale, the protection of domestic market can play a role in promoting exports. To free traders, this is tantamount to heresy. However, no matter how bizarre it is, it makes sense in theoretical logic. It is true that no matter how to protect a product, it will never become an export commodity under the condition of complete competition and constant scale income. However, under the conditions of imperfect competition and increasing returns to scale, an enterprise engaged in production in the protected domestic market can obtain static economies of scale by expanding production and continuously reduce its marginal production costs; Can accumulate experience through a large number of sales to make the cost drop along the learning curve, and the profit is enough to cover and compensate the cost of research and development; Can ask for high prices in the domestic market through discriminatory price practices, and dump in foreign markets, so that their low-cost goods flood into foreign markets. Krugman's model of "promoting export through import protection" further enriches and develops the theory of strategic trade policy, which makes people see the mechanism, conditions and consequences of strategic trade policy more clearly.

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