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Abstract

We reconsider the economics of protection with an industry subject to increasing returns. Under strong comparative disadvantage in one country, any tariff-distorted equilibrium in which both countries produce the commodity must be unstable.In general, under strong comparative disadvantage, the case for free trade is greater than without increasing returns. Also, exceptionally high tariffs are required to protect a high cost increasing-returns industry. Beneficial tariffs or subsidies for the country with comparative disadvantage become prominent when the country with a comparative advantage faces a relevant capacity constraint.

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File URL: http://economics.sas.upenn.edu/system/files/11-027.pdf
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Bibliographic Info

Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 11-027.

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Length: 30 pages
Date of creation: 01 Jul 2011
Date of revision:
Handle: RePEc:pen:papers:11-027

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Related research

Keywords: increasing returns; protection; comparative-cost disadvantage; flexible capacity;

Find related papers by JEL classification:

• F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
• F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

This paper has been announced in the following NEP Reports:

• NEP-ALL-2011-09-16 (All new papers)
• NEP-INT-2011-09-16 (International Trade)

References

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1. James R. Tybout, 2000. "Manufacturing Firms in Developing Countries: How Well Do They Do, and Why?," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 11-44, March.
   
   • James Tybout, 1998. "Manufacturing Firms In Developing Countries: How Well Do They Do, And Why?," Development and Comp Systems 9805004, EconWPA.
   • Tybout, James, 1998. "Manufacuring firms in developing countries - how well do they do, and why?," Policy Research Working Paper Series 1965, The World Bank.
   • James Tybout, 1999. "Manufacturing Firms in Developing Countries: How Well Do They Do, and Why?," Development and Comp Systems 9906001, EconWPA, revised 10 Jun 1999.
2. Caballero, R.J. & Lyons, R.K., 1989. "Internal Versus External Economies In European Industry," Discussion Papers 1989_10, Columbia University, Department of Economics.
   
   • Caballero, Ricardo J. & Lyons, Richard K., 1990. "Internal versus external economies in European industry," European Economic Review, Elsevier, vol. 34(4), pages 805-826, June.
3. Werner Antweiler & Daniel Trefler, 2002. "Increasing Returns and All That: A View from Trade," American Economic Review, American Economic Association, vol. 92(1), pages 93-119, March.
   
   • Werner Antweiler & Daniel Trefler, 2000. "Increasing Returns and All That: A View From Trade," NBER Working Papers 7941, National Bureau of Economic Research, Inc.
4. Kiminori Matsuyama, 1990. "Increasing Returns, Industrialization and Indeterminacy of Equilibrium," Discussion Papers 878, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
   
   • Matsuyama, Kiminori, 1991. "Increasing Returns, Industrialization, and Indeterminacy of Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 617-50, May.
5. James R. Melvin, 1969. "Increasing Returns to Scale as a Determinant of Trade," Canadian Journal of Economics, Canadian Economics Association, vol. 2(3), pages 389-402, August.
6. Ethier, Wilfred, 1979. "Internationally decreasing costs and world trade," Journal of International Economics, Elsevier, vol. 9(1), pages 1-24, February.
7. Paul Krugman, 2009. "The Increasing Returns Revolution in Trade and Geography," American Economic Review, American Economic Association, vol. 99(3), pages 561-71, June.
8. Jonathan Eaton & Gene M. Grossman, 1986. "Optimal Trade and Industrial Policy Under Oligopoly," NBER Working Papers 1236, National Bureau of Economic Research, Inc.
   
   • Eaton, Jonathan & Grossman, Gene M, 1986. "Optimal Trade and Industrial Policy under Oligopoly," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 383-406, May.
9. Kemp, Murray C & Schweinberger, Albert G, 1991. "Variable Returns to Scale, Non-uniqueness of Equilibrium and the Gains from International Trade," Review of Economic Studies, Wiley Blackwell, vol. 58(4), pages 807-16, July.
10. Cohen, Daniel, 1990. "'Internal versus external economies in European industry' by R.J. Caballero and R.K. Lyons," European Economic Review, Elsevier, vol. 34(4), pages 827-828, June.
11. Konig, Heinz, 1990. "'Internal versus external economies in European industry' by R.J. Caballero and R.K. Lyons," European Economic Review, Elsevier, vol. 34(4), pages 828-830, June.
12. Eaton, Jonathan & Panagariya, Arvind, 1979. "Gains from trade under variable returns to scale, commodity taxation, tariffs and factor market distortions," Journal of International Economics, Elsevier, vol. 9(4), pages 481-501, November.

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