Trade Policy: Home Market Effect versus Terms-of-Trade Externality (original) (raw)

Optimal Trade and Industrial Policy under Oligopoly

The Quarterly Journal of Economics, 1986

In this paper we provide an integrative treatment of the welfare effects of trade and industrial policy under oligopoly, and characterize qualitatively the form that optimal intervention takes under a variety of assumptions about the number of firms, their conjectures about the response of their rivals to their actions, the substitutability of their products and the markets in which they are sold. We find that when no domestic consumption occurs optimal policy under duopoly with a single home firm depends on the difference between firms' actual responses to their rivals and the response that their rivals' conjecture. If conjectures are consistent , free trade is optimal. A tax or subsidy is indicated depending on the sign of the difference between the conjectured and the actual reponse. With more than one home firm but still no domestic consumption, an export tax is indicated if conjectures are consistent. Production subsidies and export tax-cum-subsidjes can raise national welfare in the presence of domestic consumption, because these policies can mitigate the extent of the consumption distortion implicit in the deviation of price from marginal cost.

The Welfare Effects of Imperfect Harmonization of Trade and Industrial Policy

RePEc: Research Papers in Economics, 1989

Partial cooperation in setting trade policy may be worse than no cooperation for countries who form a customs union. The paper investigates three situations where this is likely to occur. First, if the countries forming the union comprise too small a percentage of the non-competitive sector of the industry, their cooperation may be disadvantageous for essentially the same reason that a merger may be disadvantageous in oligopolistic industries. Second, even if the countries forming the union comprise the entire non-competitive sector of industry, cooperation on trade" policy may be disadvantageous if industrial policy (e.g. investment subsidies) are chosen non-cooperatively. The reason is that cooperation in trade policy may exacerbate the inefficiencies created by non-cooperation aL an earlier stage. Third, cooperation in choosing trade policies may encourage excessive investment by competitive importers and thus reduce the demand faced by "the oligopolist.s.

Liberalizing Trade between Large and Small: The Welfare from Three Different Strategies

Asia-Pacific journal of accounting & economics, 2006

Much trade liberalization involves large and small countries. This paper presents a formal comparison of the economic welfare effects for the small and large country from unilateral free trade by the small country, from a free trade agreement, and from preferential access to the large country's market. I show that it matters for the welfare effects of these strategies whether the small country has an effect on the domestic price in its partner's domestic market or not. For example, if the small country is so small that it does not, then, paradoxically, a reduction of the small country's tariff reduces the large partner's welfare.

Bilateralism, pure multilateralism, and the quest for global free trade

2007

This paper develops an equilibrium theory of trade agreements and evaluates the relative merits of bilateralism and multilateralism. We derive coalition proof (stable) Nash equilibria of a three-country game in which each country is free to negotiate a trade agreement with only one of its trade partners, or both of them (i.e. practice free trade), or none of them (i.e. opt for the status quo). To determine whether and how bilateralism matters, we also analyze this game under the assumption that countries follow a purely multilateral approach to trade liberalization. Results show that: (1) under symmetry, global free trade is a stable equilibrium regardless of whether countries can pursue bilateral agreements or not; (2) when countries have asymmetric endowment levels, there exist circumstances under which free trade is a stable equilibrium only if countries are free to sign bilateral agreements; (3) welfare improving bilateral agreements can be stable when global free trade is not; ...

New Trade Models, New Welfare Implications

2013

We show that endogenous firm selection provides a new welfare margin for heterogeneous firm models of trade (relative to homogeneous firm models). Under some parameter restrictions, the trade elasticity is constant and is a sufficient statistic for welfare, along with the domestic trade share. However, even small deviations from these restrictions imply that trade elasticities are variable and differ across markets and levels of trade costs. In this more general setting, the domestic trade share and endogenous trade elasticity are no longer sufficient statistics for welfare. Additional empirically observable moments of the micro structure also matter for welfare.

Preferential Trade Liberalization with Endogenous Cartel Discipline: Implications for Welfare and Optimal Trade Policies

SSRN Electronic Journal, 2020

We consider an international cartel whose members interact repeatedly in their own as well as in third-country segmented markets. Cartel discipline-an inverse measure of the degree of competition between firms-is endogenously determined by the cartel's incentive compatibility constraint (ICC), which links strategically markets that are seemingly unrelated. Owing to this linkage, trade cost reductions induce cartel members to adjust their sales, not only due to direct effects, but also due to spillover effects related to cartel discipline. We apply these ideas to preferential trade agreements (PTAs) and show that the indirect effects can give rise to trade diversion. We also characterize the welfare effects of preferential tariff cuts for all countries under various circumstances regarding the determination of external PTA trade policy. A persistent finding is that, in the absence of appropriate regulation, preferential trade liberalization can be welfare-reducing even when external policy is jointly optimal.

Free Trade Agreements and External Tariffs

… Department of Economics Discussion Paper No. …, 2010

There has been a proliferation of preferential trade agreements within the last two decades. In this paper I analyze the effects of free trade agreements (FTAs) on external tariffs under a political economy setup. I extend the Grossman and Helpman (1995) model by determining tariff rates endogenously instead of assuming they are fixed during or after the formation of FTAs. I show that when an FTA is established, the tariff rates that apply to non-members essentially decline. More importantly, I investigate the interaction between endogenous tariff determination and the feasibility of an FTA. I find that the expectation of tariff reductions under endogenous tariffs makes an otherwise feasible FTA under fixed tariffs become infeasible. However, if domestic import-competing sectors are relatively smaller, an FTA with endogenous tariffs may be more likely to be feasible than an FTA with fixed tariffs.

Bilateral Trade Agreements and the Feasibility of Multilateral Free Trade

Review of International Economics, 2011

This paper compares stable Nash equilibria of two games of trade liberalization. In the FTA game, each country can form an FTA with either one of its trade partners, or both of them, or none of them. By contrast, in the No FTA game, each country must choose either no agreement or free trade. Under symmetry, free trade is uniquely stable under the No FTA game whereas the FTA game also admits a bilateral FTA as an equilibrium. However, there exist patterns of cost asymmetry for which the freedom to pursue bilateral FTAs is necessary for achieving global free trade.