Research On Trade Policy Under Network Externalities

Since 1980s, with the rapid development of information and communication technologies, a new generation of network industries are becoming the strategic industries the world especially the developed countries are striving to develop. Their most notable feature is network externalities. That is, the effectiveness of consumer spending on certain goods increases with the growth of other consumers. Essentially, the network externality is consumer side economies of scale. Still, being the same as economies of scale in the production process, it can also become a source of manufacturers'increasing returns and causes the economy to show an obvious positive feedback, easily leading to "winner takes all" in the market. Thus, competition in this field is more intense than in the traditional manufacturing industries. When the products possess network externalities, compatibility standard gets dramatically important. This makes the standard competition the basic form of competitions in the market. It can be said that whoever achieves the standard dominance will take control of the industry and then wealth. In the current highly open environment, in order to obtain the dominance in the international standard, transnational companies take various forms of strategic action and meanwhile, the state has a strong motivation for interference in the international competition and thus a variety of policy interventions make debut.In an open environment, the industrial competitions between countries are to a large extent reflected and realized through international trade, which inevitably presents opportunities for state interference in trade policy. As a result, trade policies act as a major way of supporting domestic companies to participate in the international competition of network industries and strengthening the country's competitive advantage. Based on the above understanding, this paper discusses the selection and working mechanisms as well as the factors of national trade policies under the condition of the network externalities thus to be better aware of the frictions and disputes triggered by policy intervention in the trade of products with network externalities.First, we analyze the country's basic trade will, namely the attitude towards trade when the products possess network externalities. When the products of domestic and foreign manufactures are compatible, the market expansion effect and the competition effect will enhance the network externalities, thus increasing profit, which largely offsets homogeneous firms'decreasing benefits due to intensified competitions so that the country will be motivated to trade. When the products of domestic and foreign manufactures are not compatible, whether to trade relies on the domestic firms' position in the standard competition. If the two standards co-exist in the international market, trade will benefit both countries. If a standard monopolizes the international market, the backward countries shall resist trade. In the last case, if the state can choose trade partners, backward countries may form regional trading blocs to seek a balance between gaining trade interests and maintaining national standards. It is thus clear that, producing homogeneous products (compatible products) may create more trade opportunities and product diversification (not compatible) is likely to cause backward countries to resist trade or to form regional trading blocs under the conditions of network externalities, which is quite different from the occasion where there is no network externalities.Second, we analyze the country's best strategic trade policy and its mechanisms under the condition of the network externalities. The analysis shows that the effect of strategic trade policy depends largely on the compatibility of domestic and foreign products. When the products are not compatible, the effect is similar to that under the condition of non-existent network externalities. The best option accordingly is to subsidize domestic firms in order to transfer profits from foreign firms to the domestic. The difference is that, due to consumers'expectations, the effect of this transfer is more significant than when there are no network externalities. In other words, even without considering the production-side economies of scale, network externalities in itself is enough to provide a basis for national strategic trade policies. When the domestic and foreign products are compatible, unless the production is large enough to cover the complete market, subsidies for domestic firms will meanwhile expand the output of foreign manufacturers. Consequently, the optimal trade policy may be reversed and the government need not take a strategic trade policy. A conclusion can be drawn that strategic trade policies under the condition of network externalities are mainly carried out around the incompatible products mostly in the early stage of market competition, which shares the same essence with the competition for dominance in the international standard. Because of this internal unity, some modern trade measures recognized by WTO as legitimate are often used as a tool of carrying out standard competition, and improving the competitive position of domestic firms. Especially when foreign manufacturers have first-mover advantages and speed up the establishment of a market installation base, the country has the motivation to implement a strategic anti-dumping to gain time and initiative for domestic firms to introduce new standards and establish a market installation base. Even if the anti-dumping is not implemented ultimately, the launch itself is sufficient to produce the effects of strategic trade policy.Third, we analyze the internal mechanisms and influencing factors of the national technical trade measures under the condition of network externalities. We note that in recent years, an emerging new trade protection method-technical standard barriers and intellectual property barriers is more closely linked to whether domestic and foreign products are compatible (in other words domestic firm's selection of compatibility). Generally speaking, when the network externalities are strong and have a comparative advantage, the domestic firms tend to choose a strategy of incompatibility. At this time, the country's mandatory implementation of its own standards helps to strength domestic firms'competitive advantage and to obtain dominance in the international standard and monopoly profits. In this case, the formation of technical trade measures is in itself a strategic trade policy. On the contrary, when the network externalities either are weak or lack a comparative advantage, firms tend to choose a strategy of compatibility. At this time, unless the compatible demand of manufactures fails to be achieved, the country's mandatory implementation of its own technical standards cannot improve domestic firms' competitive position in the international market. Instead, it will be against domestic firms'wishes of compatibility and reduce earnings, so it is not feasible. Therefore, technical trade measures under the condition of network externalities are in fact a direct expression of national standard strategy and such a mechanism does not exist in a non-network externalities condition. With the in-depth integration of intellectual property rights and technical standards, the implementation of intellectual property protection policy is largely determined by domestic firms'standard competitive strategy, leading to the protection being clearly strategic in both strength and time.From the above three levels of study, it can be seen that under the condition of network externalities, the state's trade will, strategic trade policy, as well as technical trade measures are essentially determined by the standard competitive strategy of domestic firms and then the government's. Among them, the most direct expression of national policy orientation is the technical standard policy or in other words technical standard barrier policy. It is not only in itself a strategic trade policy but also has a decisive impact on carrying other trade policies. In previous studies, however, it is mostly seen as a tool purely for implementing the policy of internal trade protection. This conclusion is of great help for us to better understand the frictions and disputes in the trade of products with network externalities and reveals why developed countries rather than the backward countries in the greatest need of protection often erect high technical barriers and why new trade frictions and disputes are even more difficult to coordinate。Finally, based on the above analyses, we put forward policy recommendations from the points of promoting the international coordination in trade policies of the network industries and encouraging the development of our network industries. This paper argues that, since the motivation of incompatibility is the root of protective trade policies, the key of international coordination under the condition of network externalities lies in the coordination of standard. Also, because firms'selection of incompatibility is derived from the monopoly expectations, the fundamental way to achieve the coordination of standard is to promote fair competition, eliminate monopoly expectations, and get the firms to be voluntarily compatible. Hence, the fulfillment of international coordination in standards should center around strengthening the international anti-monopoly regulation, perfecting the international protection rules of intellectual property, enhancing international cooperation in setting standards, promoting the equality of right between developing and developed countries, improving the rules of technical barriers to trade by WTO to give an overall impetus to the international coordination of competition policies, intellectual property rights and technical standards. As a developing country, China should appeal for and participate in the coordination under the multilateral framework in the WTO and advocate an open, compatible and non-exclusive international standard in the international community. In the meantime, it should lay more emphasis on an open technical standard in the process of developing its own standards and participating in the international standard competition.The main value of this study is that through innovations of research perspectives and framework, we systematically analyze the selection and working mechanisms as well as the influencing factors of national trade policies under the condition of network externalities and reinterpret the related economic phenomenon in the trade of products with network externalities, which to some extent enriches study of trade policies and related trade disputes and expands the research of standard competitions and public policies in the network economic theory. Such a study has a strong practical significance for the country to properly intervene in the international network industry, to take appropriate measures to support domestic network industries and to reasonably response to related trade disputes in the field.