Privatization and the political economy of strategic trade policy

This article considers the interdependence between international financial markets, privatization, and strategic trade policies. We describe an econom y where portfolio allocations are chosen by risk-averse agents who rational ly forecast future trade policies. Assuming a government responsive to the policy preferences of voters, we show that ownership structure affects trad e policy through the incentives for lobbying by private agents. Portfolios and trade polity are thus jointly determined in political-economic equilibr ium. Privatization of state-owned industry exerts an important influence ov er the trade policies chosen by domestic and foreign governments by expandi ng the scope for individual diversification.