Final answer:
Paul Krugman posits that strategic trade policy aimed at favoring domestic firms in the global market is likely to provoke retaliation from other countries.
Step-by-step explanation:
Paul Krugman believed that a country attempting to use strategic trade policy to establish a domestic firm as a leader in a global industry is most likely to provoke retaliation. Various countries have, at times, applied protectionist measures like the infant industry argument, which involves subsidizing or protecting new industries until they are established. However, these measures often end up supporting established industries facing decline rather than nurturing new ones. Such support, if intended, should be oriented towards temporary assistance to prepare industries for market competition, not towards sustaining them with continuous subsidies and protection.
It's also important to consider international capital flows and trade balances. A country with a trade deficit is borrowing from abroad in anticipation of turning the deficit into a surplus, while a country with a trade surplus is exporting more than it imports, which could result from a devalued currency making imports more expensive and exports more competitive. When a country adopts protectionist policies, such as tariffs, this can lead to higher prices domestically and may invite equivalent retaliation from trading partners, harming both nations' economies.