According to Krugman, which of the following best indicates the dangers of a strategic trade policy?
A. Decrease in subsidies
B. Decrease in protectionism
C. Occurrence of a trade war
D. Huge financial debts for the countries involved
E. Occurrence of a global recession

C.Occurrence of a trade war

Explanation:

Strategic Trade Policy depicts policy adopted by certain countries to effect strategic interactions between firms in an international oligopoly. These include policy instruments (export subsidy, import tariff) by trying to shift profits from international to domestic firms.It is likely to develop their firms status in international markets & raise level of domestic welfare.

Many economists are skeptical about government's analytical capacity to determine optimal amount of intervention, as per theory application. If non optimal (over protection intervention) is used, it might lead to risk retaliation by other international firms & action reaction leads to occurrence of trade (commercial) war.

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