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An Example of Procompetitive Trade Policies

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  • Jose Luis Moraga-Gonzalez

    (Erasmus University, Tinbergen Institute and CESifo)

  • Jean-Marie Viaene

    (Erasmus University, Tinbergen Institute and CESifo)

Abstract

The procompetitive effects of trade policies are analyzed in a foreign duopoly model of vertical product differentiation. A uniform tariff policy complying with the Most Favored Nation (MFN) clause is welfare superior to free trade because of a pure rent-extracting effect. A nonuniform tariff policy yields an even higher level of social welfare because of procompetitive effects. The optimalpolicyissensitivetofirms’ cost asymmetries: if these are high, imports of low quality are subsidized and imports of high quality face a tariff; otherwise, both imports face a tariff. Regional Trade Agreements (RTAs) are examples of such nonuniform tariff policies. They yield higher welfare than free trade because they are procompetitive; moreover, a RTA with a lowquality producing country yields larger gains than a RTA with a high-quality producing country because the former enables the importer to extract foreign rents.

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Bibliographic Info

Paper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 504.

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Length: 29 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:mie:wpaper:504

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Postal: ANN ARBOR MICHIGAN 48109
Web page: http://www.fordschool.umich.edu/rsie/
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Related research

Keywords: endogenous quality; hedonic prices; procompetitive policies; regional trade agreements;

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References

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