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Trade and Agglomeration: the Strategic use of Protection Revisited

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  • Thede, Susanna

    ()
    (Department of Economics, Lund University)

Abstract

The purpose of this paper is to examine whether the strategic motive for protection present in trade and agglomeration models, in the so-called new economic geography framework, is sensitive to the standard assumption that there is a sole agglomeration industry. We first investigate unilateral trade policy effects on the international production and trade pattern and the resulting national welfare levels in a new economic geography model including several agglomeration industries. The strategic use of trade policy is then examined by identifying optimal policy positions as well as equilibrium policy strategies in a Nash policy game between the trade partners. Our results show that the strategic use of protection and the resulting "tariff war" outcome prevalent in standard trade and agglomeration models is sensitive to the inclusion of several agglomeration industries. Specifically, trade liberalising policies are optimal and free trade equilibria result from the Nash game unless there is a too wide industry gap in agglomeration economies. Our results show that the case for free trade can be directly attributed to either a relatively strong direct policy impact on national real income (working through raised import prices and reduced import volumes) or similar agglomeration economies in the two industries. The results of this paper jointly suggest that the stark argument for the strategic use of protection present in standard new economic geography models can be attributed to overemphasised gains from agglomeration and/or the lack of industries with similar agglomeration economies.

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Bibliographic Info

Paper provided by Lund University, Department of Economics in its series Working Papers with number 2007:7.

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Length: 24 pages
Date of creation: 04 Apr 2007
Date of revision:
Handle: RePEc:hhs:lunewp:2007_007

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Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden
Phone: +46 +46 222 0000
Fax: +46 +46 2224613
Web page: http://www.nek.lu.se/en
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Keywords: New economic geography; input-output linkages; strategic trade policy; Nash policy game.;

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  1. J.Peter Neary, 2001. "Of Hype and Hyperbolas: Introducing the New Economic Geography," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 536-561, June.
  2. Donald R. Davis & David E. Weinstein, 1998. "Market Access, Economic Geography, and Comparative Advantage: An Empirical Assessment," NBER Working Papers 6787, National Bureau of Economic Research, Inc.
  3. Venables, Anthony J, 1987. "Trade and Trade Policy with Differentiated Products: A Chamberlinian-Ricardian Model," Economic Journal, Royal Economic Society, vol. 97(387), pages 700-717, September.
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  8. Flam, Harry & Helpman, Elhanan, 1987. "Industrial policy under monopolistic competition," Journal of International Economics, Elsevier, vol. 22(1-2), pages 79-102, February.
  9. Neary, J.P. & Leahy, D., 1998. "Strategic Trade and Industrial Policy Towards Dynamic Oligopolies," Papers 98/14, College Dublin, Department of Political Economy-.
  10. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  11. Krugman, Paul & Venables, Anthony J., 1996. "Integration, specialization, and adjustment," European Economic Review, Elsevier, vol. 40(3-5), pages 959-967, April.
  12. James A. Brander, 1995. "Strategic Trade Policy," NBER Working Papers 5020, National Bureau of Economic Research, Inc.
  13. Masahisa Fujita & Paul Krugman & Anthony J. Venables, 2001. "The Spatial Economy: Cities, Regions, and International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262561476, December.
  14. Paul Krugman, 1982. "Trade in Differentiated Products and the Political Economy of Trade Liberalization," NBER Chapters, in: Import Competition and Response, pages 197-222 National Bureau of Economic Research, Inc.
  15. Richard E. Baldwin & Frederic Robert-Nicoud, 2000. "Free trade agreements without delocation," Canadian Journal of Economics, Canadian Economics Association, vol. 33(3), pages 766-786, August.
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