sophisticated targeting of industrial policy. But, perhaps more importantly, there is an indication
that R&D subsidies may be most effective precisely when they are in fact the least strategic: by
promoting general research in universities where the benefits of generated knowledge are
practically open to everyone, domestically and internationally.
In addition to these potential pitfalls of employing industrial policy as strategic trade
policy, intense rivalry between countries to promote the interests of national champions can
negate the potential benefits of subsidization. Busch has created a model which shows how this
may occur, but it reflects his optimism that all-out trade war can be avoided. The central
argument is that governments will fight for domestic firms in industries exhibiting external
benefits and fight harder when these benefits are internalized nationally, but then seek to ease
tensions when both sides are made worse-off.23 In order to justify this conclusion, Busch
simplifies the strategic calculus of the state by creating two binary independent variables: the
first describes whether or not the economy is capable of utilizing the externalities, while the
second indicates whether or not these externalities are contained strictly within national
boundaries. This, of course, is a vast oversimplification, but it allows Busch to model the
qualitative differences in the strategic trade policies between states for three separate case
studies: the US-Europe civil aircraft rivalry, the US-Japan semiconductor rivalry, and the US-
Japan HDTV rivalry.
For the purposes of our analysis, the first case is the most significant because it suggests
the optimistic scenario in which both sides reach the brink of a trade war, but still find a way to
reach a mutually beneficial compromise that limits subsidization. According to Busch’s
argument, the civil aircraft industry exhibits externalities which are internalized within national