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Optimal Trade Policy under Endogenous Foreign Entry

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  • Federico Etro

Abstract

type="main" xml:id="ecor12108-abs-0001"> I characterise the optimal unilateral trade policy for domestic firms competing in domestic or integrated markets with endogenous entry of foreign firms. Under conditions satisfied in most trade models (as with quasi-linear or CES preferences) the analysis is simplified by a Neutrality Theorem: any policy affecting the profitability of the domestic firm is not going to affect consumer surplus and the strategies of the foreign firms, but affects their entry decisions. In a domestic market, we fully characterise the optimal import tariff: this is positive in the classic linear Cournot case, but with a convex demand or product differentiation it is optimal to adopt an import subsidy. In an integrated market, the optimal subsidy to domestic production is always positive, independent from form of competition and size of the domestic market.

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  • Federico Etro, 2014. "Optimal Trade Policy under Endogenous Foreign Entry," The Economic Record, The Economic Society of Australia, vol. 90(290), pages 282-300, September.
    • Handle: RePEc:bla:ecorec:v:90:y:2014:i:290:p:282-300
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    File URL: http://hdl.handle.net/10.1111/ecor.2014.90.issue-290
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    Cited by:

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    2. Lahiri, Sajal & Ono, Yoshiyasu, 2015. "Pollution, foreign direct investment, and welfare," Research in Economics, Elsevier, vol. 69(2), pages 238-247.
    3. Hiroaki Ino & Akira Miyaoka, 2016. "Government-induced Production Commitment in the Open Economy," Discussion Paper Series 142, School of Economics, Kwansei Gakuin University, revised May 2016.
    4. Keisaku Higashida & Hiroaki Ino, 2019. "Strategic Production Subsidy/Tax under Mutual Endogenous Entry of Foreign Firms," Discussion Paper Series 201, School of Economics, Kwansei Gakuin University.
    5. Boone, Jan & Žigić, Krešimir, 2015. "Trade policy in markets with collusion: The case of North–South R&D spillovers," Research in Economics, Elsevier, vol. 69(2), pages 224-237.
    6. Wen-Jung Liang & Kuang Cheng Andy Wang & Ping-Yao Chou, 2018. "The superiority among specific, demand ad valorem and cost ad valorem subsidy regimes," Journal of Economics, Springer, vol. 123(1), pages 1-21, January.
    7. Susumu Cato, 2017. "The optimal tariff structure and foreign penetration," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 24(1-2), pages 83-94, April.

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