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The Non-Optimality of Optimal Trade Policy: The U.S. Automobile Indust ry Revisited, 1979-1985

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  • Kala Krishna
  • Kathleen Hogan
  • Phillip Swagel

Abstract

We examine the sensitivity of simple calibration models of trade in imperfectly competitive industries to changes in model specification, as well as to changes in the calibration parameters. We find that not just the magnitude, but also the sign of the optimal trade policies is very sensitive to the change in model specification. Indeed, use of policies derived from the 'wrong' model can reduce welfare from the status quo. However, the welfare gains to be obtained from application of the 'correct' model remain limited. Calibration models nonetheless provide useful estimates of firm and market behavior over time, as well as disaggregated elasticities of demand. We conclude that careful empirical work is necessary to guide model selection. For the present, the case for activist trade policy on the basis of calibration models should not be made.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3118.

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Date of creation: Sep 1989
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Publication status: published as Empirical Studies of Strategic Trade Policyedited by Paul Krugman and Alasdair Smith University of Chicago Press; 1994
Handle: RePEc:nbr:nberwo:3118

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References

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  1. de Melo, Jaime & Tarr, David, 1990. "Welfare Costs of US Quotas in Textiles, Steel and Autos," CEPR Discussion Papers 401, C.E.P.R. Discussion Papers.
  2. Kala Krishna, 1985. "Trade Restrictions as Facilitating Practices," NBER Working Papers 1546, National Bureau of Economic Research, Inc.
  3. Krishna, Kala & Thursby, Marie, 1991. "Optimal policies with strategic distortions," Journal of International Economics, Elsevier, vol. 31(3-4), pages 291-308, November.
  4. repec:fth:michin:245 is not listed on IDEAS
  5. Feenstra, R.C. & Levinsohn, J.A., 1989. "Distance, Demand And Oligopoly Pricing," Papers 342, California Davis - Institute of Governmental Affairs.
  6. J. David Richardson, 1988. "Empirical Research on Trade Liberalisation with Imperfect Competition: A Survey," OECD Economics Department Working Papers 58, OECD Publishing.
  7. Jonathan Eaton & Gene M. Grossman, 1983. "Optimal Trade and Industrial Policy Under Oligopoly," NBER Working Papers 1236, National Bureau of Economic Research, Inc.
  8. Robert Driskill & Stephen McCafferty, 1989. "Dynamic Duopoly with Output Adjustment Costs in International Markets: Taking the Conjecture out of Conjectural Variations," NBER Chapters, in: Trade Policies for International Competitiveness, pages 125-144 National Bureau of Economic Research, Inc.
  9. Feenstra, Robert C, 1988. "Quality Change under Trade Restraints in Japanese Autos," The Quarterly Journal of Economics, MIT Press, vol. 103(1), pages 131-46, February.
  10. Richard E. Baldwin & Paul Krugman, 1986. "Market Access and International Competition: A Simulation Study of 16K Random Access Memories," NBER Working Papers 1936, National Bureau of Economic Research, Inc.
  11. Krishna, Kala & Itoh, Motoshige, 1988. "Content Protection and Oligopolistic Interactions," Review of Economic Studies, Wiley Blackwell, vol. 55(1), pages 107-25, January.
  12. Lawrence F. Katz & Lawrence H. Summers, 1988. "Can Inter-Industry Wage Differentials Justify Strategic Trade Policy?," NBER Working Papers 2739, National Bureau of Economic Research, Inc.
  13. James Levinsohn, 1988. "Empirics of Taxes on Differentiated Products: The Case of Tariffs in the U.S. Automobile Industry," NBER Chapters, in: Trade Policy Issues and Empirical Analysis, pages 9-44 National Bureau of Economic Research, Inc.
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Cited by:
  1. Phillip Swagel, 1996. "Union Behavior, Industry Rents, and Optimal Policies," IMF Working Papers 96/143, International Monetary Fund.
  2. Kala Krishna & Refik Erzan & Ling Hui Tan, 1991. "Rent Sharing in the Multi-Fibre Arrangement: Theory and Evidence from US Apparel Imports from Hong Kong," NBER Working Papers 3673, National Bureau of Economic Research, Inc.
  3. Stiegert, Kyle W. & Wang, Shinn-Shyr, 2003. "Imperfect Competition And Strategic Trade Theory: What Have We Learned," Working Papers 14589, International Agricultural Trade Research Consortium.
  4. Siro├źn, Jean-Marc, . "Choix de la politique commerciale dans le cas de la concurrence imparfaite," Economics Papers from University Paris Dauphine 123456789/6629, Paris Dauphine University.

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