Initiatives such as the Belt and Road initiative reduce China’s trade costs, increase China’s export firms' profits and stimulate their activities in R&D contests. Konrad analyses and evaluates the strategic-trade policy equilibria when both the US and China can choose such initiatives. As it turns out, both the US and China may use such measures in a strategic trade equilibrium, but they will do this to different amounts. One country will earn leadership in the markets for exports to the rest of the world. Factors that are conducive for a country to gain this role of major innovator and exporter nation are: (1) whether a nation follows a 'national champions' policy compared to a rigorous national anti-trust policy, (2) whether a nation has a large pre-existing export sector, (3) whether the government places a high welfare weight on the profits of the firms in its country, and (4) whether the government has low opportunity costs of such investment policies. Piecemeal evidence suggests that, compared to the US, China has the advantages in all these four dimensions.

Open Access: DOI 10.1016/j.econmod.2024.106781

Published:   Economic Modelling, 139, 106781.