We consider strategic trade and privatization policies in international bilateral
mixed markets where a domestic state-owned enterprise competes with both domestic
and foreign private enterprises in each country. We examine the strategic interaction of
two countries’ optimal choices of privatization and trade policies with different
combinations of production subsidy and import tariff, and find some interesting policy
implications. First, a higher social welfare can be achieved with the appropriate degree
of privatization when both governments adopt a production subsidy only. Second, FTA
can work as a coordination device to solve the prisoner’s dilemma problem. Third, the
maximum-revenue privatization, combined with zero subsidy and higher tariff, is higher
than optimum-welfare privatization. Finally, the international bilateral equilibrium needs
less degree of privatization and lower subsidy rate, even though it is jointly suboptimal
from the viewpoint of global welfare.
Keywords: Strategic privatization, International bilateral mixed market, Industrial
policy, Optimal tariff.