How to Use Industrial Policy to Sustain Trade Agreements
AbstractWith 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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Bibliographic InfoPaper provided by Swiss National Bank in its series Working Papers with number 2008-12.
Length: 39 pages
Date of creation: 2008
Date of revision:
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Trade Agreement; Self-enforceability; Industrial Policy;
Find related papers by JEL classification:
- F10 - International Economics - - Trade - - - General
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
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