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How to Use Industrial Policy to Sustain Trade Agreements

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  • Philip Sauré

Abstract

With the help of a simple Ricardian model, this paper explores the role of industrial policy in self-enforcing trade agreements. A first part shows that the optimal self-enforcing trade agreement includes subsidies to inefficient, import-competing sectors. Second, when by some exogenous or endogenous force the comparative advantage deepens, subsidies go to declining industries. Key assumptions driving these results are: essentiality of imported goods and a high flexibility of the countries' industrial structure. A final part relaxes the latter assumption and shows that under rigid industrial structures subsidies favoring import competing sectors actually destabilize trade agreements.

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File URL: http://www.snb.ch/n/mmr/reference/working_paper_2008_12/source/working_paper_2008_12.n.pdf
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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2008-12.

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Length: 39 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:snb:snbwpa:2008-12

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Keywords: Trade Agreement; Self-enforceability; Industrial Policy;

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