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Endogenous Structure of the Division of Labor, Endogenous Trade Policy Regime, and a Dual Structure in Economic Development

  • Xiaokai Yang

    (Department of Economics, Monash University)

  • Dingsheng Zhang

    (Institute for Advanced Study, Wuhan University)

This paper develops a general equilibrium model with transaction costs and endogenous and exogenous comparative advantages. The governments are allowed to choose between tariff war, tariff negotiation, and a {\it laissez faire} regime. It shows that the level of the division of labor and trade increases as transaction conditions improve. When a high level of the division of labor occurs in general equilibrium, all countries prefer Nash tariff bargaining game that would result in multilateral free trade. If a medium level of the division of labor occurs in general equilibrium, then unilateral protection tariff in a less developed country and unilateral {\it laissez faire} policies in a developed country would coexist. The results show that tariff negotiations are essential for achieving multilateral free trade. In addition, the model may explain the policy transition of some European governments from mercantilism to free-trade regime in the 18th and 19th century and policy changes in developing countries from protection tariff to tariff negotiation and trade liberalization.

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Paper provided by China Economics and Management Academy, Central University of Finance and Economics in its series CEMA Working Papers with number 11.

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Length: 20 pages
Date of creation: May 1999
Date of revision: Apr 2000
Publication status: Published in Annals of Economics and Finance, May 2000, pages 211-230
Handle: RePEc:cuf:wpaper:11
Contact details of provider: Web page: http://cema.cufe.edu.cn/

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  1. Wen-Li Chen & Xiaokai Yang & Jeffrey D. Sachs, 1999. "An Infra-marginal Analysis of the Ricardian Model," CID Working Papers 13, Center for International Development at Harvard University.
  2. Paul Krugman, 1986. "Strategic Trade Policy and the New International Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262610450, June.
  3. Grossman, Gene M. & Helpman, Elhanan, 1995. "Trade Wars and Trade Talks," Scholarly Articles 3450062, Harvard University Department of Economics.
  4. Pincus, J J, 1975. "Pressure Groups and the Pattern of Tariffs," Journal of Political Economy, University of Chicago Press, vol. 83(4), pages 757-78, August.
  5. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  6. Sun, Guang-Zhen & Yang, Xiaokai & Zhou, Lin, 2004. "General equilibria in large economies with endogenous structure of division of labor," Journal of Economic Behavior & Organization, Elsevier, vol. 55(2), pages 237-256, October.
  7. Cheng, Wen Li & Liu, Meng-Chun & Yang, Xiaokai, 2000. "A Ricardian Model with Endogenous Comparative Advantage and Endogenous Trade Policy Regimes," The Economic Record, The Economic Society of Australia, vol. 76(233), pages 172-82, June.
  8. Mayer, Wolfgang, 1981. "Theoretical Considerations on Negotiated Tariff Adjustments," Oxford Economic Papers, Oxford University Press, vol. 33(1), pages 135-53, March.
  9. Xiaokai Yang, 1994. "Endogenous vs. exogenous comparative advantage and economies of specialization vs. economies of scale," Journal of Economics, Springer, vol. 60(1), pages 29-54, February.
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