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4. See Evans, John, The Kennedy Round in American Trade Policy: The Twilight of GATT? (Cambridge, Mass.: Harvard University Press, 1971), chap. 2CrossRefGoogle Scholar ; and Keohane, “Reciprocity in International Relations.”

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7. There is a very large theoretical and empirical literature on the subject of which domestic groups seek protection. See, for example, Stolper, W. and Samuelson, P., “Protection and Real Wages,” Review of Economic Studies 9 (11 1941), pp. 58–73CrossRefGoogle Scholar ; and Kxueger, A., “Political Economy of the Rent-Seeking Society,” American Economic Review 64 (06 1974), pp. 291–303Google Scholar . For empirical tests of similar theories, see, for example, Caves, Richard, Multinational Enterprise and Economic Analysis (Cambridge: Cambridge University Press, 1976)Google Scholar ; Baldwin, Political Economy of U.S. Import Policy; Pincus, J., Pressure Groups and Politics in Antebellum Tariffs (New York: Columbia University Press, 1977)Google Scholar ; Ray, E., “Determinants of Tariff and Nontariff Trade Restrictions in the U.S.,” Journal of Political Economy 81 (02 1981), pp. 105–21CrossRefGoogle Scholar ; and Lavergne, R., The Political Economy of U.S. Tariffs (Toronto: Academic Press, 1983)Google Scholar .

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9. Milner, Helen, Resisting Protectionism: Global Industries and the Politics of International Trade (Princeton, N.J.: Princeton University Press, 1988)Google Scholar .

10. In addition to direct investment in the competitors' market and investing in other lowwage countries, a third strategy was to license technology and earn a royalty on the firm's fixed research and development investment. As long as multinational firms could earn a substantial return with any of these three strategies, one should expect them to remain committed to free trade.

11. The key variable in this analysis is mobility of factors of production. In the absence of mobility, such as in most agricultural production, it is not surprising that foreign protectionism would produce domestic demands for retaliation or reciprocity. However, in industries in which key factors (such as capital) are mobile and multinational firms have unique products that could not be easily replicated by domestic producers, foreign trade barriers could even be the preferred option. Since protectionism increases local prices, a multinational firm might be able to earn excessive returns behind tariff or quota barriers.

12. Yoffie, David B., “Zenith and the Color Television Fight,” Harvard Business School Case no. 9–383–070, rev. 04 1986Google Scholar .

13. Stein, Arthur, “The Hegemon's Dilemma,” International Organization 38 (Spring 1984), pp. 355–86CrossRefGoogle Scholar ; and Keohane, “Reciprocity in International Relations.”

14. See Brander, J. and Spencer, B., “Tariffs and the Extraction of Foreign Monopoly Rents Under Potential Entry,” Canadian Journal of Economics 14 (08 1981), pp. 371–89CrossRefGoogle Scholar ; Dixit, A., “International Trade Policies for Oligopolistic Industries,” Economic Journal 94 (Supplement 1984), pp. 1–16CrossRefGoogle Scholar ; Spencer, B. and Brander, J., “International R&D Rivalry and Industrial Strategy,” Review of Economic Studies 50 (10 1983), pp. 707–22CrossRefGoogle Scholar; Auquier, A. and Caves, R., “Monopolistic Export Industries, Trade, Taxes, and Optimal Competition Policy,” Economic Journal 89 (09 1979), pp. 559–81CrossRefGoogle Scholar ; Eaton, J. and Grossman, G., “Optimal Trade and Industrial Policy Under Oligopoly,” Quarterly Journal of Economics 101 (05 1986), pp. 383–406CrossRefGoogle Scholar ; DeMeza, D., “Commercial Policy Toward Multinational Monopolies,” Oxford Economic Papers 31 (07 1979), pp. 334–37CrossRefGoogle Scholar ; and Krugman, Paul, Strategic Trade Policy and the New International Economics (Cambridge, Mass.: MIT Press, 1986)Google Scholar .

15. Brander, J., “Rationales for Strategic Trade and Industrial Policy,” in Krugman, , Strategic Trade Policy, p. 25Google Scholar .

16. Krugman, Strategic Trade Policy, chaps. 2 and 4.

17. The third condition, rising R&D requirements, also creates market imperfections. However, these imperfections are not internal to the firm, like scale and learning; rather, they are “external economies” that are typically captured by other parties—not the individual firm— through “spillover” effects. Hence, while strategic trade policy for an industry with high R&D requirements can be used to increase a nation's welfare, there is no reason to believe that high R&D requirements will change the incentives for individual firms to demand strategic trade policy.

18. This assumes that market size is limited and that no technological innovation would make existing products or processes obsolete. See Ghemawat, Pankaj, “Sustainable Advantage,” Harvard Business Review 64 (09–10 1986), pp. 53–58Google Scholar .

19. Ceteris paribus refers here 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 economies of scale or steep learning curves 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.

20. Caves, , Multinational Enterprise and Economic Analysis, pp. 43–44Google Scholar. 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 that have large economies of scale or significant learning effects.

21. Caves, R. E. and Porter, M. E., “From Entry Barriers to Mobility Barriers: Conjectural Decisions and Contrived Deterrence to New Competition,” Quarterly Journal of Economics 91 (05 1977), pp. 241–61CrossRefGoogle Scholar .

22. While this footwear example is hypothetical, it has some similarities to the actual structure of the American footwear industry. See Yoffie, David B., Power and Protectionism: Strategies of the Newly Industrializing Countries (New York: Columbia University Press, 1983)Google Scholar, chap. 5. Although there are over 200 American shoe companies, footwear is a highly segmented industry. In Resisting Protectionism, Milner also describes how these types of differences within the American footwear industry impeded the creation of a unified trade position.

23. Porter, , “The Structure Within Industries,” p. 215Google Scholar .

24. 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 for specific product segments. Our analysis of strategic groups focuses only on dimensions of industries that are related to the firms' positions in international trade and competition. For an operational definition, see footnote 26.

25. For a discussion of reputation, see footnote 19.

26. Measures for these variables come from the literature on industrial organization. For economies of scale, we use minimum efficient scale when possible; otherwise, we use capital expenditure as a percentage of total sales. For learning effects, we use declining average production costs per unit over time. Changes in any one variable alone would increase market imperfections and thereby predispose firms to become more strategic about trade; simultaneous changes in both variables would greatly intensify the demand for strategic trade policy.

For indicators of strategic groups, we have not used conventional concentration ratios, since we do not believe they adequately capture the concept of strategic groups. We define strategic groups in terms of the key structural variables of each industry, which can range from different end uses to different manufacturing strategies. See Caves and Porter, “From Entry Barriers to Mobility Barriers”; and Porter, “The Structure Within Industries.”

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

29. The chief executive officer of one of the largest merchant semiconductor firms reported in an interview that elimination of tariffs allowed his firm to cut the positions of twenty-one full-time bookkeepers who were responsible for reporting to the U.S. Customs Department on the firm's imports from its overseas assembly operations. He noted that getting tariff cuts from Japan was much less important than his firm's ability to import freely.

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

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

32. Instat, Inc., “Information Company for the Electronics Industry,” mimeograph, Semiconductor Industry Conference, New York, 4 06 1987Google Scholar . By 1987, the Japanese market had reached 49 percent of the world market, compared to 39 percent for the United States.

33. Semiconductor Industry Association (SIA), “Japanese Market Barriers in Microelectronics,” memorandum in support of a petition pursuant to Section 301 of the Trade Act of 1974 as Amended, 14 06 1985Google Scholar .

34. Yoffie, “The Global Semiconductor Industry.”

35. SIA, “Japanese Market Barriers.”

36. 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.

37. Coleman, J. and Yoffie, D., “The Semiconductor Industry Association and the Trade Dispute with Japan,” Harvard Business School Case no. 0–387–205, 1987Google Scholar .

38. Interviews with SIA officials, April 1987, Washington, D.C.

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42. Testimony of Robert Bateman (Washington representative, Boeing Co.), in U.S. Congress, Senate Committee on Commerce, Hearings Before the Subcommittee on Foreign Commerce and Tourism, 92d Congress, 2d sess., 1972, p. 350Google Scholar.

43. Testimony of James Worsham (vice president, McDonnell Douglas), in U.S. Congress, House Committee on Energy and Commerce, Hearings Before the Subcommittee on Commerce, Consumer Protection, and Competitiveness, 23 06 1987Google Scholar, unpublished draft.

44. “Aircraft Industry Survey,” The Economist, 1 June 1985; and Howard Banks, “Airbus Comes of Age,” Forbes, 23 02 1987, pp. 36–37Google Scholar .

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47. Testimony of Jack Pierce (treasurer, Boeing Co.), in U.S. Congress, Senate Committee on Commerce, Hearings Before the Subcommittee on Export-Import Bank Extension, 97th Congress, 2d sess., 1978, p. 551Google Scholar; and testimony of James McMillan (vice president, McDonnell Douglas), in U.S. Congress, Senate Committee on Commerce, Export Policy, Part 4, Banking, Housing and Urban Affairs: Hearings Before the Subcommittee on International Finance and Commerce, 97th Congress. 2d sess., 1978Google Scholar.

48. Testimony of T. A. Wilson (chairman, Boeing Co.), in U.S. Congress, House Committee on Ways and Means, Competitive Conditions in the U.S. Civil Aircraft Industry and Forest Products Industry: Hearings Before the Subcommittee on Trade, 98th Congress, 2d sess., 1984, pp. 3–5Google Scholar.

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52. “Airbus Soars on American Anger,” Sunday Times, 8 02 1987Google Scholar.

53. The Economist, 5 July 1986; and Salter, “Turbulent Skies.”

54. Testimony of Worsham, James, in Hearings, 23 06 1987Google Scholar .

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

56. Ibid., pp. 235–36.

57. See the Carterphone decision, in U.S. Congress, Senate Committee on Finance, The Telecommunications Trade Act of 1984: Hearings Before the Committee on Finance, 98th Congress, 2d sess., 1984, pp. 1–3Google Scholar.

58. U.S. International Trade Commission (USITC), Changes in the U.S. Telecommunications Industry and the Impact on U.S. Telecommunications Trade, no. 1542 (Washington, D.C.: USITC, 1984), p. 19Google Scholar .

59. Ibid., p. 22.

60. Ibid., p. 19.

61. U.S. Congress, Senate Committee on Finance, Private Advisory Committee Reports on the Tokyo Round of the Multilateral Trade Negotiations, 96th Congress, 1st sess., 1979Google Scholar ; and USTIC, no. 1542, pp. 8–9.

62. Paul, J., ed., High Technology, International Trade and Competition: Robotics, Computers, Telecommunications, and Semiconductors (Park Ridge, N.J.: Noyes Press, 1984), p. 115Google Scholar ; and Standard and Poor's Industry Survey: Telecommunications (New York: Standard & Poor, 08 1986), p. 34Google Scholar .

63. The Washington Post, 20 May 1984, pp. Gl and Gl1; and The New York Times, 1 June 1984, pp. Dl and D33.

64. National Journal 17 (16 03 1985), p. 590Google Scholar .

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

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