TY - JOUR
T1 - Trade policy: Home market effect versus terms-of-trade externality
AU - Fadinger, Harald
AU - Campolmi, Alessia
AU - Forlati, Chiara
N1 - Funding Information:
We would especially like to thank Miklós Koren for the helpful suggestions. We also thank Marius Brülhart, Gino Gancia, Jordi Galí, Luisa Lambertini, Giovanni Maggi and Ralph Ossa as well as the seminar participants at the University of Lausanne, University of Nottingham, University of Vienna, Central European University, Magyar Nemzeti Bank and participants at the 2009 SSES meeting, the 2009 SED meeting, the 2009 ETSG conference, the 2009 FIW conference and the 2010 ITSG conference for the helpful discussions. Chiara Forlati gratefully acknowledges financial support from the Swiss National Science Foundation [ CRSI11-133058 ]. The views expressed here are solely our own and do not necessarily reflect those of the Hungarian National Bank.
PY - 2014/5
Y1 - 2014/5
N2 - 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.
AB - 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.
KW - Home market effect
KW - Tariffs and subsidies
KW - Terms of trade
UR - https://www.scopus.com/pages/publications/84900804224
U2 - 10.1016/j.jinteco.2013.12.010
DO - 10.1016/j.jinteco.2013.12.010
M3 - Article
SN - 0022-1996
VL - 93
SP - 92
EP - 107
JO - Journal of International Economics
JF - Journal of International Economics
IS - 1
ER -