Imperfect Competition and Strategic Trade Policy in the Food Industries

The current GATT negotiations on farm policy are aimed at removing distortions in the international trade of agricultural products. However, a large proportion of the world's trade in food and agricultural products occurs in high-value processed food products where markets can often be described as having imperfectly competitive market structures, characterised by high seller concentration, economies of scale and product differentiation. In this context, recent developments in the international economics literature have focussed on the impact of imperfect competition in international markets. In particular, a theoretical rationale has been given for the use of protectionist trade policies. Therefore, the overall aim of this paper is to explore the relevance of these theoretical developments to trade in highly processed food and related products. The paper is outlined as follows: Section 1 presents an outline of the arguments for active trade policy where markets are imperfectly competitive. Section 2 considers the optimal policies for an exporting and importing country respectively. The results indicate that even though export subsidies and import tariffs may be justified, such policies may be inferior to alternative forms of trade intervention such as maximum export and import prices. The application of the theoretical results to the US brewing and processed cheese sectors is presented in Section 3, whilst Section 4 provides a summary and conclusion.