Trade liberalisation and imperfect competition

Gasiorek, Michael Jan (1993) Trade liberalisation and imperfect competition. University of Southampton, Doctoral Thesis.

Abstract

This thesis is composed of two parts. Part I provides a theoretical examination of trade liberalisation using a general equilibrium model combining traditional and imperfectly competitive trade theory. It is shown that even where countries are identical there may be non-monotonic changes in factor prices and welfare. Where there is a size differential between countries there will also be market access induced changes in the sectoral composition of output. The extent of the changes depends on factor intensities in production and on the extent of externalities. Complete specialisation in the perfectly competitive sector in the small country can occur. It is also shown that the incentives for trade liberalisation are likely to be asymmetric across countries. With factor mobility the forces for the concentration of imperfectly competitive sector production and for regional divergence are much stronger. The presence of externalities introduces the possibility of multiple equilibria where either country may be completely specialised. It is then shown that government policy can be instrumental in determining which of the countries becomes completely specialised in the imperfectly competitive sector.

Part II of the thesis investigates the policy relevance of computable general equilibrium (CGE) modelling by applying a particular CGE model to an observed event - the accession of the UK to the EEC. The technique employed is to compare the simulations of the model with a counterfactual which describes the pattern of trade in the absence of UK accession. The results indicate that the model appears to perform reasonably well in aggregate - explaining between 70-80% of the observed changes in trade flows. On a more disaggregated level the model is seen to perform less well for certain industries.

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