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The myth of profit-shifting trade policies

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  • Koska, Onur A.
  • Stähler, Frank

Abstract

Since Dixit (1984), it is well accepted that a home country’s best policy is to ban imports in an oligopolistic market if the resulting monopoly has a cost advantage over imports. This note (i) provides a formal proof and (ii) extends this result to symmetric firms. When domestic instruments are available, the optimal policy in a non-cooperative game is to subsidize local production such that it completely replaces imports. This policy is also globally first-best.

Suggested Citation

  • Koska, Onur A. & Stähler, Frank, 2016. "The myth of profit-shifting trade policies," Economics Letters, Elsevier, vol. 140(C), pages 39-41.
    • Handle: RePEc:eee:ecolet:v:140:y:2016:i:c:p:39-41
    DOI: 10.1016/j.econlet.2015.12.024
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    References listed on IDEAS

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    1. Maggi, Giovanni, 1999. "Strategic Trade Policy under Incomplete Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(3), pages 571-594, August.
    2. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
    3. Kyle Bagwell & Robert W. Staiger, 2012. "Profit Shifting And Trade Agreements In Imperfectly Competitive Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(4), pages 1067-1104, November.
    4. G. M. Grossman & K. Rogoff (ed.), 1995. "Handbook of International Economics," Handbook of International Economics, Elsevier, edition 1, volume 3, number 3.
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    6. Brander, James A., 1995. "Strategic trade policy," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 27, pages 1395-1455, Elsevier.
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    Cited by:

    1. Onur A. Koska & Frank Stähler & Onur Yeni, 2020. "Trade and commodity taxes as environmental instruments in an open economy," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 48(2), pages 333-353, June.

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    More about this item

    Keywords

    Import tariffs; Export subsidies; Profit shifting;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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