Trade Policy: Home Market Effect vs Terms of Trade Externality
AbstractWe study trade policy in a two-sector Krugman type model of trade. We conduct a general analysis allowing for three different instruments: tariffs, export taxes and production subsidies. For each instrument we consider unilateral trade policy without retaliation. When carefully disentangling the different effects that determine policy makers' choices and modeling general equilibrium effects of taxes/tariffs, we find that production subsidies are always inefficiently low and driven by terms of trade effects. In the cases of tariffs and export taxes the home market effect prevails for some parameter combinations but mostly trade policy is determined by terms of trade effects and the desire to reduce distortions arising from monopolistic competition. Hence, our analysis sheds new light on trade policy in a model of intra-industry trade.
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Bibliographic InfoPaper provided by Center for Fiscal Policy, Swiss Federal Institute of Technology Lausanne in its series Working Papers with number 200902.
Length: 34 pages
Date of creation: Feb 2009
Date of revision: Sep 2009
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Home Market Effect; Terms of Trade; Tariffs and Subsidies;
Other versions of this item:
- Alessia Campolmi & Harald Fadinger & Chiara Forlatiz, 2009. "Trade Policy: Home Market Effect vs Terms of Trade Externality," FIW Working Paper series 040, FIW.
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
- F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
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