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International Trade - Commercial Policy

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  • J Peter Neary

    (University College Dublin)

Abstract

Following a brief historical introduction and a discussion of different types of commercial policy, this paper reviews the arguments for and against trade protection. In the bench-mark case of a competitive, small, open economy, free trade maximizes aggregate national welfare, although some individual groups will lose unless compensation is actually paid. Guidelines for policy include the uniform reduction and "concertina" rules for tariff cuts, and the principle of targeting - corrective measures should be applied as close to the source of the "distortion" as possible. Relaxing the bench-mark assumptions allows exceptions to the case for free trade - "optimal" tariffs to manipulate world prices; "strategic" tariffs or export subsidies when home firms engage in oligopolistic competition with foreign rivals; and infant industry protection to allow home firms benefit from learning by doing. Protection can also raise the growth rate, though it is less likely to raise welfare in a growing economy. Overall, with due allowance for some ambiguity, both theoretical arguments and empirical evidence suggest a pragmatic case for free trade. Finally, the paper notes the political pressures for and against protection, and the role of international institutions such as the GATT in underpinning moves towards freer trade.

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File URL: http://www.ucd.ie/economics/research/papers/2001/WP01.23.pdf
File Function: First version, 2001
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Bibliographic Info

Paper provided by School Of Economics, University College Dublin in its series Working Papers with number 200123.

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Length: 21 pages
Date of creation: 13 Oct 2001
Date of revision:
Handle: RePEc:ucn:wpaper:200123

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  1. J. Neary, 2006. "International Trade and the Environment: Theoretical and Policy Linkages," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 33(1), pages 95-118, 01.
  2. D Leahy & J.P. Neary, 1998. "Strategic Trade and Industrial PolicyTowards Dynamic Oligopolies," CEP Discussion Papers dp0409, Centre for Economic Performance, LSE.
  3. J Anderson & J.P. Neary, 1993. "A New Approach to Evaluating Trade Policy," CEP Discussion Papers dp0173, Centre for Economic Performance, LSE.
  4. Robert W. Staiger & Kyle Bagwell, 1999. "An Economic Theory of GATT," American Economic Review, American Economic Association, vol. 89(1), pages 215-248, March.
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