An Alternative to Free Trade or Protectionism: Why Corporations Seek Strategic Trade Policy

See Schattschneider E.E. , Politics, Pressures, and the Tariff (Englewood Cliffs, NJ: Prentice-Hall, 1935); Bauer Raymond de Sola Pool Ithiel Dexter Lewis , American Business and Public Policy (Chicago, IL: Adline, 1972); Baldwin R. , The Political Economy of U.S. Import Policy (Cambridge, MA: MIT Press, 1986).

Aggarwal V. Keohane D. Yoffie D. , “The Dynamics of Negotiated Protectionism,” APSR (June 1987).

Keohane Robert , “Reciprocity in International Relations,” International Organization, 40 (Winter 1986): 1–28.

Porter Michael , “The Structure Within Industries and Companies' Performance,” The Review of Economics and Statistics, 61 (May 1979): 214–27.

See Brander J. Spencer B. , “Tariffs and the Extraction of Foreign Monopoly Rents Under Potential Entry,” Canadian Journal of Economics, 14 (August 1981); Dixit A. , “International Trade Policies for Oligopolistic Industries,” Economic Journal, 94 (supplement, 1984): 1–16; Auquier A. Caves R. , “Monopolistic Export Industries, Trade, Taxes, and Optimal Competition Policy,” The Economic Journal, 89 (September 1979): 559–81; Krugman Paul , Strategic Trade Policy and the New International Economics (Cambridge, MA: MIT Press, 1986).

Brander in Krugman , op. cit., p. 25.

Krugman , op. cit., chapters 2 and 4.

This assumes that market size is limited and that no technological innovation would make existing products or processes obsolete. Ghemawat Pankaj , “Sustainable Advantage,” Harvard Business Review, 64 (September/October 1986): 53–58.

The ceteris paribus refers to the reputation of the foreign government for successfully intervening in its domestic industries. For decades, governments around the world have intervened in their economies. However, most of these interventions, especially by Latin American and European countries, have failed. Numerous factors, including poor government policies and inept management, have produced these failures. Hence, multinational firms that face large scale economies and/or steep learning would not want to fight half the governments in the world just because those governments were intervening in their own industries. In the absence of some competitive loss, the costs would outweigh any benefits. On the other hand, if a foreign government had a reputation for successful industrial intervention, firms might seek strategic trade policy preemptively, even before their competitive positions suffered.

Many economic studies have shown that the building of new plants abroad may be inefficient if there are significant scale economies or learning effects in production. DFI will limit domestic production volumes, plus foreign operations may not reach an efficient scale of operations. Caves Richard , Multinational Enterprise and Economic Analysis (Cambridge, MA: Cambridge University Press, 1982), pp. 43–44. Caves also discusses in this book the alternative approach of technology licensing. However, like direct investment, simply earning royalties would not be attractive in industries which have significant scale or learning effects.

Porter , op. cit., p. 215.

Strategic groups have been defined by economists in various ways. The dimensions of strategic groups could range from marketing strategies to dimensions that are only important for international trade, such as global versus domestic production strategies, or specific product segments. Our analysis of strategic groups will focus only on dimensions of industries that are related to the firms' positions in international trade and competition.

For a discussion of reputation, see Reference 9.

Our research strategy involved examining the initial trade demands of these four industries and following their trade position over time. We interpreted a shift in demands by researching their Congressional testimony, public statements, filings with the ITC, and interviews. Interpretation problems could exist in examining publicly stated interests, since demands for protectionism could simply be couched in strategic terms. We took two steps to guard against this: First, we defined an industry's demand as strategic only if the industry communicated to the government that its strategy was conditional; that it wanted to close the home market only if the foreign market was not (further) opened. Second, we discounted communicated demands unless we found evidence that firms made efforts to gain access to foreign markets—e.g., they had high international marketing expenditures, important foreign assembly operations, or sales operations. Next we traced any shift in demands to shifts in the economics of the industry. Lastly we looked at the degree of openness of foreign market(s) and foreign government intervention. Evidence of successful protection or export subsidies abroad is presumably the proximate catalyst for changes in corporate demands. Without evidence of this intervention, the firms' requests for aid were more likely disguised appeals for unconditional protection. Finally we should note that the cases only represent a partial test: The sample is small because there are few real world examples, to date, of demands for strategic trade policy; and the relationship between the empirical work and the model was iterative. We continued to refine the model as we learned more about our cases.

Milner , “Resisting the Protectionist Temptation,” p. 347.

Grunwald J. Flamm K. , The Global Factory: Foreign Assembly in International Trade (Washington, D.C.: The Brookings Institute, 1985).

Yoffie David B. , “The Global Semiconductor Industry,” Harvard Business School Case, no. 9-388-052, 1987.

Okimoto Dan Sugano T. Weinstein F. , eds., Competitive Edge: The Semiconductor Industry in the U.S. and Japan (Stanford, CA: Stanford University Press, 1985).

Instat, Inc., “Information Company for the Electronics Industry,” mimeo, Semiconductor Industry Conference, the Grand Hyatt, NYC, June 4, 1987. By 1987, the Japanese market had reached 49% of the world market, compared to 39% for the U.S.

Semiconductor Industry Association (SIA), Japanese Market Barriers in Microelectronics, memorandum in support of a petition pursuant to Section 301 of the Trade Act of 1987 as Amended, June 14, 1985.

Ibid.

In 1984, a small semiconductor manufacturer, Micron Technology, also filed a dumping suit against Japanese producers of 64K DRAMs. This suit, however, was not widely supported.

Interviews with SIA officials.

Salter M. , “Turbulent Skies: Airbus vs. Boeing,” Harvard Business School Case, no. 0-386-193, 1987.

Bateman Robert , (Washington representative, Boeing Co.), Testimony at Hearings before the Senate Subcommittee on Foreign Commerce and Tourism, Committee of Commerce, 92nd Congress, January-February 1972, p. 350.

Worsham James , (V.P., McDonell Douglas), Testimony at Hearings of the House Subcommittee on Commerce, Consumer Protection, and Competitiveness, Energy and Commerce Committee, June 23, 1987, unpublished draft.

“Aircraft Industry Survey,” The Economist, June 1, 1985; Banks Howard , “Airbus Comes of Age,” Forbes, February 23, 1987, pp. 36–7.

Toh Rex Higgins Richard , “The Impact of Hub and Spoke Network Centralization and Route Monopoly on Domestic Airline Profitability,” Transportation Journal, 24 (Summer 1985): 16–27.

Airbus' share of the world market was approximately 17% between 1980 and 1985. See U.S. Dept. of Commerce, U.S. Industrial Outlook, 1987 (Washington, D.C.: GPO, 1987), pp. 34–37. However, Airbus reportedly grabbed 44% of all new orders during the first quarter of 1987. Dow Jones News Service, May 7, 1987.

Pierce Jack , (Boeing Treasurer), Testimony at Hearing before the Senate Subcommittee on Export-Import Bank Extension, 97th Congress, March-April 1978, p. 551; McMillan James , (V.P., McDonnell Douglas), Testimony at Hearings on Export Policy, Part 4, before the Senate Subcommittee on International Finance and Commerce, on “Banking, Housing, and Urban Affairs,” 95th Congress, March-April 1978.

Roetman O.M. , (V.P., Boeing Co.), Testimony before the Subcommittee on Commerce, Consumer Protection, and Competitiveness, Committee on Energy and Commerce, June 23, 1987, unpublished draft.

Lewis Paul , “Airbus Group Acts to Mollify U.S.,” NYT, December 24, 1985.

“Airbus Soars on American Anger,” Sunday Times, February 8, 1987.

The Economist, July 5, 1986; Salter , op. cit.

Worsham James , Testimony at House Hearings, original emphasis.

Brock Gerald , The Telecommunications Industry: Dynamics of Market Structure (Cambridge, MA: Harvard University Press, 1981), p. 235.

U.S. Government, ITC, Changes in the U.S. Telecommunications Industry and the Impact on U.S. Telecommunications Trade, no. 1542, (Washington, D.C.: USITC, 1984), p. 19.

U.S. Government, Senate Finance Committee, Private Advisory Committee Reports on the Tokyo Round of the MTN, print, 96th Congress, 1st sess., 1979; USTIC, no. 1542, pp. 8–9.

E.g., Japan's world market share in telecommunication equipment rose from 2.7% to 4% between 1983 and 1984, while U.S. share remained stable at about 6.3%. National Journal, March 16, 1985, p. 590.

Adams W. , ed., The Structure of American Industry, 6th ed. (New York, NY: Macmillan, 1982), pp. 307–14.

The industry structure was complicated by its multinationality. Several foreign owned firms, including Northern Telecom (Canadian), Mitel (Canadian), Siemens (German), and NEC (Japanese), had American manufacturing operations. Northern Telecom, in particular, was a large player in the U.S., and was occasionally considered an American company in international trade negotiations. For the purposes of this article, however, we are considering the “industry” to be American-owned companies.

Lenway Stephanie A. , in The Politics of U.S. International Trade (Cambridge, MA: Ballinger, 1985), pp. 179–80, describes a split among U.S. firms, claiming some wanted greater access and some closure of the U.S. market. Curran suggested that it was the USTR that wanted to push for the negotiations with the Japanese telecom monopoly, NTT, while U.S. firms wanted closure of the U.S. market. But this is odd given that the U.S. firms visited Japan to discuss the NTT case before and during the actual negotiations. See U.S. Government, House Ways and Means Committee, Trade with Japan, hearings, 97th Congress, 2nd sess., 1980, pp. 155–61.

Lenway , op. cit., p. 186.

Yoffie David B. , “Motorola and Japan,” Harvard Business School Case, no. 9-383-070,1983.

U.S. Government, Senate Finance Committee, Export of U.S. Telecommunications Products, hearings, 99th Congress, 1st sess., 1985, pp. 57–67.

For instance, AT&T, GTE, and Rolm all expanded their sales operations in Japan in the mid-1980s in an effort to penetrate that market. Business Week, June 17, 1985, p. 112a.

Business Week, May 21, 1984, pp. 179–81.

Carlsson B. , “Firm Strategies in the Machine Tool Industry in the U.S. and Sweden,” working paper (October 1984); Collis D. , “The Machine Tool Industry,” Harvard Business School Case, no. 9-387-087, 1986.

NMTBA, Economic Handbook of the Machine Tool Industry (Washington, D.C.: NMTBA, various years).

Milner , op. cit., pp. 320–42.

Collis D. , “The Machine Tool Industry and Industrial Policy, 1955–82,” Harvard Business School Business History Seminar, February 1987, pp. 10–21; Sciberras E. Payne B. , Machine Tool Industry: Technical Change and International Competitiveness (Essex: Longman, 1985), chapter 8.

Sciberras Payne , op. cit.; Guenther G. , “Machine Tools: Imports and the U.S. Industry, Economy, and Defense Industrial Base” (Washington, D.C.: CRS, July 1986).

Japanese policy involved in creation of a single firm to develop NC units for industry, provision of a broad R&D subsidy, and continued protection of the standardized NC segment. Imports into the U.S. rose from 10% of consumption in 1973 to 25% by the early 1980s, with the Japanese share rising to about 45% of all of these imports. See NMTBA, Economic Handbook, p. 126. The Japanese controlled about 70% of all U.S. imports of NC lathes and machining centers by 1985. Moreover, the Japanese share of world exports of machine tools grew from 3.5% in 1970 to 15% by 1983, while the U.S. share fell from 11.7% to 4.8% over the same period. See Collis , op. cit., p. 22.

Carlsson , op. cit., p. 17; Sciberras Payne , op. cit., p. 93.

Sciberras Payne , op. cit., p. 49.

Porter Michael , ed., Competition in Global Industries (Boston, MA: Harvard Business School Press, 1986), chapter 1.

Scott Bruce Lodge George , eds., U.S. Competitiveness in the World Economy (Boston, MA: Harvard Business School Press, 1985), chapter 1.

Baldwin R. , The Political Economy of U.S. Import Policy (Cambridge, MA.: MIT Press, 1986); Aggarwal Keohane Yoffie , op. cit.

Yoffie David B. , “Protecting World Markets,” in McCraw Tom , ed., America Versus Japan: A Comparative Study in Business Government Relations (Boston, MA: Harvard Business School Press, 1986).