Trade policy: home market effect versus terms-of-trade externality
Trade policy: home market effect versus terms-of-trade externality
We study trade policy in a two-sector Krugman (1980) trade model, allowing for wage, import and export subsidies/taxes. We study non-cooperative trade policies, first for each individual instrument and then for the situation where all instruments can be set simultaneously, and contrast those with the efficient allocation. We show that in this general context there are four motives for non-cooperative trade policies: the correction of monopolistic distortions; the terms-of-trade manipulation; the delocation motive for protection (home market effect); the fiscal-burden-shifting motive. The Nash equilibrium when all instruments are available is characterized by first-best-level wage subsidies, and inefficient import subsidies and export taxes, which aim at relocating firms to the other economy and improving terms of trade. Thus, the dominating incentives for non-cooperative trade policies are the fiscal-burden-shifting motives and terms-of-trade effects.
home market effect, terms of trade, tariffs and subsidies
92-107
Campolmi, Alessia
26bf441d-b3a8-4899-967b-146be106ac0c
Fadinger, Harald
1e8f7a50-0743-442a-bd20-89db5d2357dd
Forlati, Chiara
7be0a723-e9b7-4247-8d6f-bfe224d61845
May 2014
Campolmi, Alessia
26bf441d-b3a8-4899-967b-146be106ac0c
Fadinger, Harald
1e8f7a50-0743-442a-bd20-89db5d2357dd
Forlati, Chiara
7be0a723-e9b7-4247-8d6f-bfe224d61845
Campolmi, Alessia, Fadinger, Harald and Forlati, Chiara
(2014)
Trade policy: home market effect versus terms-of-trade externality.
Journal of International Economics, 93 (1), .
(doi:10.1016/j.jinteco.2013.12.010).
Abstract
We study trade policy in a two-sector Krugman (1980) trade model, allowing for wage, import and export subsidies/taxes. We study non-cooperative trade policies, first for each individual instrument and then for the situation where all instruments can be set simultaneously, and contrast those with the efficient allocation. We show that in this general context there are four motives for non-cooperative trade policies: the correction of monopolistic distortions; the terms-of-trade manipulation; the delocation motive for protection (home market effect); the fiscal-burden-shifting motive. The Nash equilibrium when all instruments are available is characterized by first-best-level wage subsidies, and inefficient import subsidies and export taxes, which aim at relocating firms to the other economy and improving terms of trade. Thus, the dominating incentives for non-cooperative trade policies are the fiscal-burden-shifting motives and terms-of-trade effects.
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More information
Accepted/In Press date: January 2014
e-pub ahead of print date: 25 January 2014
Published date: May 2014
Keywords:
home market effect, terms of trade, tariffs and subsidies
Organisations:
Economics
Identifiers
Local EPrints ID: 370320
URI: http://eprints.soton.ac.uk/id/eprint/370320
ISSN: 0022-1996
PURE UUID: 79d79802-9d76-4d7b-acc6-1958867c8440
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Date deposited: 05 Oct 2015 08:08
Last modified: 15 Mar 2024 05:09
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Contributors
Author:
Alessia Campolmi
Author:
Harald Fadinger
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