Which of the following is a problem associated with pursuing a strategic trade policy?

• A. It can lead to international retaliation and trade wars.
• B. It eliminates all market failures related to externalities.
• C. It always results in higher consumer welfare.
• D. It guarantees efficient allocation of resources.

Answer: (A)

Verified step by step guidance

1. Understand what a strategic trade policy is: it involves government intervention to support domestic firms in international markets, often through subsidies or tariffs, aiming to improve the country's economic position.
2. Recognize the potential consequences of such policies, including how other countries might respond to protect their own industries.
3. Analyze why strategic trade policies can provoke international retaliation, leading to trade wars where countries impose tariffs or other barriers against each other.
4. Evaluate the incorrect options by considering economic theory: strategic trade policies do not necessarily eliminate market failures like externalities, nor do they always increase consumer welfare or guarantee efficient resource allocation.
5. Conclude that the main problem with pursuing a strategic trade policy is the risk of retaliation and trade wars, which can harm all parties involved.