Application of Strategic Trade Theory

Japanese-United States Semiconductor Battles

Strategic Trade Theory, as it is defined by Robert E. Kennedy (1996) is a new way of analyzing the trade relationships between two countries which in effect turns against some of the traditional theories of comparative advantages. Kennedy states: "The theory of comparative advantage is one of the most widely accepted economic principles among economists. The theory, as well as substantial historical evidence, suggests that free trade raises national income, while government intervention in trade relations generally lowers a nation's wealth" (Kennedy, 1996, 1).

But. argues Kennedy, the comparative advantage theory does not apply equally well to imperfectly competitive industries. Since industries exist within a nation, he argues, then it might be possible to increase a nation's wealth by increasing its composite industries to increase their wealth through a series of government controls. This theory is called "competitive trade," and Kennedy points out that there are four main theories that are dominating the scholarly discussion of this new theory. Those four theories are: The Advantage of Market Power; The Advantage of Production Economies of Scale; The Advantage of Learning by Doing; and, the Advantage of Externalities.

The Advantage of Market Power exists when one country "exercises significant market power over the supply of a good, such as Saudi

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n between Japan and the United States regarding the two nations' semiconductor policies, the competitive advantage theory falls flat. The battle first came to light more than 10 years ago. As Russell (1987) noted, "it is no larger than a few grains of rice, but it was big enough to cause one of the most serious episodes between the U.S. and Japan since the end of World War II. It is the tiny microchip, a sophisticated bit of silicon that is the indispensable heart of the techtronic age, the raw material for everything from talking teddy bears to personal computers to. . . missiles" (28). That article detailed the threats and counter-threats made between Japan and America concerning the semiconductors Japan was making and selling to America for a lower cost than those same chips made by American manufacturers. The second argument made against the competitive trade theory is that the assumptions are dependent on "somewhat obscure assumptions about industry structure and behavior" (Kennedy, 1996, 2). One of the assumptions is that two companies in two countries are competing on the basis of quantity produced, not quality, price, R&D, or other factors. This concept shall be called "Mutuality of Manufacturing" and it will be te
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Approximate Word count = 1339
Approximate Pages = 5 (250 words per page)

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