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Procompetitive Trade Policies

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  • José Luis Moraga Gonzales
  • Jean-Marie Viaene

Abstract

We study the procompetitive effects of trade policies against a foreign oligopoly in a model of vertical product differentiation. We show that a uniform tariff policy like the Most Favored Nation (MFN) clause is always welfare superior to free trade because of a pure rent-extraction effect. However, a nonuniform tariff policy is, in addition, procompetitive and thus yields a higher level of social welfare. The first best policy typically consists of giving a subsidy to the country producing low quality and levying a tariff on the country producing high quality. Regional Trade Agreements (RTYs) are examples of nonuniform tariff policies. We show that these arrangements yield higher welfare than free trade and, moreover, that a RTA with a low-quality producing country yields larger gains than a RTA with a high-quality producing country.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 597.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_597

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Keywords: endogenous quality; most favored nation (MFN) clause; procompetitive policies; regional trade agreements;

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References

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  2. Analysis, A Welfare & Das, Satya P. & Donnenfeld, Shabtai, 1987. "Trade policy and its impact on quality of imports," Journal of International Economics, Elsevier, vol. 23(1-2), pages 77-95, August.
  3. José Luis Moraga Gonzales & Jean-Marie Viaene, 2001. "Trade and Industrial Policy of Transition Economies," CESifo Working Paper Series 446, CESifo Group Munich.
  4. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
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  25. Greenaway, David & Hine, Robert C & Milner, Chris, 1995. "Vertical and Horizontal Intra-industry Trade: A Cross Industry Analysis for the United Kingdom," Economic Journal, Royal Economic Society, vol. 105(433), pages 1505-18, November.
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Cited by:
  1. Moraga-Gonzalez, Jose Luis & Viaene, Jean-Marie, 2005. "Trade policy and quality leadership in transition economies," European Economic Review, Elsevier, vol. 49(2), pages 359-385, February.
  2. Roberto Hernan & Praveen Kujal, 2005. "Import Tariffs, Quality Investment And Welfare," Economics Working Papers we056116, Universidad Carlos III, Departamento de Economía.

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