The strategic theory of international trade, developed in the 1980s by Barbara Spencer, James Brander, and Paul Krugman, offers a different perspective from the classical arguments of economists like David Ricardo, who supported free trade. This theory suggests that when companies have significant market power, free trade might not always be the best option. Instead, governments can sometimes enhance their own economic well-being by carefully choosing tariffs or offering subsidies to domestic industries. This idea has become more relevant today, as global markets have become more concentrated, and the risks of trade wars have decreased because countries can use other forms of pressure, such as geopolitical influence, instead of direct retaliation. Research conducted with co-authors shows that in markets dominated by a few large firms, it is always possible to introduce a tariff or subsidy that improves a country's well-being, and in some cases, even the global economy. This challenges the earlier belief that such situations were rare. However, the theory also warns about the dangers of trade wars, as retaliatory measures can lead to losses for all involved parties. The strategic theory helps explain the recent rise in tariffs and the use of export subsidies. For example, China has used large subsidies to support its companies in key industries such as electric vehicles and solar panels, helping them gain a strong global position. This has forced foreign competitors to reduce their investments and production capacities. Additionally, the threat of restricting access to strategic resources like rare earth metals has made retaliation more costly for countries affected by China's policies. The theory also explains the resurgence of tariffs through the lens of the classical idea of optimal tariffs. A large enough country can improve its trade terms by imposing tariffs, as foreign exporters may lower their prices to offset the additional cost. Brander and Spencer expanded this idea, showing that in markets dominated by a few large firms, tariffs can also help transfer some of the profits from foreign producers to the importing country. However, on a global scale, these tariffs often lead to a loss of overall wealth. The benefits gained by the country imposing the tariffs are usually outweighed by the losses suffered by producers and consumers in other countries. International agreements that limit tariffs generally promote overall economic growth, but they only work if countries can retaliate if others break the rules. Once retaliation becomes unlikely, the incentive to act unilaterally increases, especially when a major power can use geopolitical or military leverage to prevent retaliation. Stephen Miran, a key figure in the Trump administration's trade policy, outlined this strategy in an op-ed for the Wall Street Journal, warning U.S. allies that retaliating against American tariffs would make it harder to "maintain the American defense umbrella." This approach appears to have worked, as European countries, Japan, and South Korea have responded cautiously, while China has taken stronger countermeasures. This illustrates the geopolitical differences that underpin such trade strategies. The strategic theory of international trade is an important framework for understanding today’s trade conflicts and developing effective responses. As oligopolies—markets dominated by a few large firms—become a more permanent feature of the global economy, trade disputes are increasingly about how to share the profits from these dominant firms, rather than about efficiently allocating resources.