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Free trade zones, tariffs and the real exchange rate

Author

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  • Bharat Hazari
  • Pasquale Sgro

Abstract

This article examines the consequences of changes in final and intermediate good tariffs on structural adjustment, urban unemployment, and the real exchange rate in the presence of a free trade zone (FTZ) and foreign capital in the host country. The location of the FTZ and the disaggregation of the economy allows us to examine the consequences of a tariff change on regional incomes. It is shown that as a consequence of a tariff change the urban and rural incomes need not necessarily move in the same direction (hence the potential for rural and urban conflict in policy making). It is also shown that an increase in the tariff on an immediate good may result in both export promotion and an increase in welfare. Such expansion is a nonconventional result, since raising barriers to trade normally leads to a contradiction in the volume of the trade. The interconnection between the real exchange rate and intermediate good tariff is also explored in this article. It is shown that a policy of imposing tariffs on these goods may result in the appreciation of the real exchange rate. Copyright Kluwer Academic Publishers 1996

Suggested Citation

  • Bharat Hazari & Pasquale Sgro, 1996. "Free trade zones, tariffs and the real exchange rate," Open Economies Review, Springer, vol. 7(3), pages 199-217, July.
    • Handle: RePEc:kap:openec:v:7:y:1996:i:3:p:199-217
    DOI: 10.1007/BF01886821
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    References listed on IDEAS

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    1. Raveendra N. Batra, 1973. "Studies in the Pure Theory of International Trade," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-349-01423-1.
    2. Hamid Beladi & Sugata Marjit, 1992. "Foreign Capital and Protectionism," Canadian Journal of Economics, Canadian Economics Association, vol. 25(1), pages 233-238, February.
    3. Rodriguez, Carlos Alfredo, 1976. "A note on the economics of the duty free zone," Journal of International Economics, Elsevier, vol. 6(4), pages 385-388, November.
    4. Hazari, Bharat R. & Sgro, Pasquale M., 1991. "Urban-rural structural adjustment, urban unemployment with traded and non-traded goods," Journal of Development Economics, Elsevier, vol. 35(1), pages 187-196, January.
    5. Hamada, Koichi, 1974. "An economic analysis of the duty-free zone," Journal of International Economics, Elsevier, vol. 4(3), pages 225-241, August.
    6. Brecher, Richard A & Bhagwati, Jagdish N, 1981. "Foreign Ownership and the Theory of Trade and Welfare," Journal of Political Economy, University of Chicago Press, vol. 89(3), pages 497-511, June.
    7. Feldman, David H., 1988. "Devaluation and non-traded goods in a labor migration model," Economics Letters, Elsevier, vol. 28(3), pages 277-280.
    8. Brecher, Richard A. & Diaz Alejandro, Carlos F., 1977. "Tariffs, foreign capital and immiserizing growth," Journal of International Economics, Elsevier, vol. 7(4), pages 317-322, November.
    9. Edwards, Sebastian & van Wijnbergen, Sweder, 1987. "Tariffs, The Real Exchange Rate and the Terms of Trade: On Two Popular Propositions in International Economics," Oxford Economic Papers, Oxford University Press, vol. 39(3), pages 458-464, September.
    10. Young, Leslie & Miyagiwa, Kaz F., 1987. "Unemployment and the formation of duty-free zones," Journal of Development Economics, Elsevier, vol. 26(2), pages 397-405, August.
    11. Miyagiwa, Kaz, 1993. "The locational choice for free-trade zones : Rural versus urban options," Journal of Development Economics, Elsevier, vol. 40(1), pages 187-203, February.
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    Cited by:

    1. Ragnar Torvik, 1997. "Real exchange rate dynamics and trade liberalization: the case of multiple tariffs and unemployment," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 6(3), pages 329-344.

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    More about this item

    Keywords

    free trade zone; regional income; tariffs; non-traded goods; real exchange rate; unemployment; F10; F21; O10;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General

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