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Optimal Trade Policy in Vertically Related Markets

Author

Listed:
  • Chen, Fang-yueh

    (National Chung-Cheng University)

Abstract

We examine home country tariff and subsidy policies when a domestic firm uses an imported key input to produce its low-quality exports, and foreign firms produce high-quality exports as well as the key input. We show that the deci - sions of foreign vertically integrated firms on strategy regarding input supply depend on the tarif f-inclusive and quality-adjusted comparative advantage between countries. We prove that the home country’s optimal policy is to tax either its goods exports or its key input imports. We also show that without ver - tical integration, if and only if goods are not very quality-differentiated, the home country should subsidize either its goods exports and/or its key input imports.

Suggested Citation

  • Chen, Fang-yueh, 1998. "Optimal Trade Policy in Vertically Related Markets," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 13, pages 199-215.
    • Handle: RePEc:ris:integr:0071
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    Cited by:

    1. Wang, Leonard F.S. & Lee, Jen-yao, 2014. "Ranking the optimum tariff and the maximum revenue tariff in vertically related markets," Research in Economics, Elsevier, vol. 68(3), pages 222-229.

    More about this item

    Keywords

    Optimal; Trade; Policy;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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