Trade Liberalization and Imperfect Competition: A Welfare Analysis

This paper identifies sufficient conditions for an increase/decrease in a country's welfare due to partial trade liberalization where the domestic industry is characterized by a monopoly or Cournot oligopoly. Different trade restrictions are considered. Those are quotas imposed by the foreign country (VERs), quotas imposed by domestic country and tariffs. In the case of VERs, welfare unambiguously decreases when the first unit of trade is introduced into the economy. It is shown that the decrease in welfare due to additional import under VERs may take place for a substantial range. On the other hand, as we leave free trade position to restrict the last unit of trade, under VER, welfare unambiguously decreases even in the large country case. In the case of quotas, if the domestic marginal cost is greater or equal than the foreign price cum transportation cost, then importing country's welfare rises due to additional import. When he marginal cost is lower than the foreign price cum transportation cost, and export is not possible, then welfare may decrease with additional import. Thus, in general, there is no monotonic relationship between the reduction in the degree of quota (both export and import quota) and importing country's welfare. In the case of tariffs, as the tariff is reduced from the prohibitive rate, welfare rfses.