Foreign Subsidies, Dumping and Optimal Trade Policies: The Case of the UK Fertiliser Market

Recently the EC Commission has imposed trade restrictions on imports of fertilisers into the Community. Under competitive conditions there is no basis for such a policy. However, developments in international trade theory indicate that when markets are characterised by imperfect competition, there may be a case for intervention. Using a theoretical model originally suggested by Dixit (1988) and applying a simulation technique also developed by Dixit (1987), this paper derives optimal tariffs and subsidies for the fertiliser industry, with the UK market taken as an example. The optimal adjustment of these policies in the face of foreign export subsidies and dumping is also considered. The theoretical and simulation results show the following: first, there is a normative case for government to use tariffs and domestic production subsidies in the fertiliser industry, and whilst the welfare-enhancing effects of these policies are low, the distributional effects are substantial. Second, in the case where only a tariff or a subsidy is used, the welfare-maximising policy would be one where the government counters the competitive distortion in the domestic fertiliser industry by using a subsidy on fertiliser production. Third, in face of foreign dumping, protection of the fertiliser industry should be reduced rather than increased.