Strategic Trade Policy with Unionized Firms: When Activism is the Efficient Choice

This paper revisits the issue (dating back to the Brander and Spencer’s approach, 1985) of the well-known inefficiency of the activist regime where Governments set subsidies for their own exporter firms. It is shown that such policies may be efficient (i.e., national social welfares are higher than under free trade) when firms are unionized under the usual Right-to-Manage arrangement and the product is sufficiently differentiated. That is, the emerging Nash equilibrium regime implies a subsidy policy which is Pareto-efficient, removing the unpleasant Prisoner’s Dilemma structure of the standard Brander and Spencer’s result. As an alternative interpretation this result suggests that, in such cases, it is always convenient the unilateral public intervention because welfares will be superior to those under free trade, also in the case of “retaliation” by the rival Government.