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Domestic Policy Coordination in Imperfectly Competitive Markets

Listed author(s):
  • David De Remer

Many international trade agreements regulate the use of domestic policies. Oneapproach is "deep" integration, in which governments contract directly over domesticpolicies. An appealing alternative is "shallow" integration, in which nations contractover market access and avoid negotiations over speci c policies. I generalize the shallowintegration approach to a two-country di¤erentiated-product setting. Governmentschoose trade policies and two domestic policies: a wage subsidy and a policy reducingthe capital requirement for rm entry. I show that the sole source of internationaline¢ ciency is terms-of-trade manipulation and that the appropriate terms-of-tradede nition here is a world price index. Shallow integration works because changesin domestic policies and trade policies that preserve market access also preserve theterms of trade. I discuss potential obstacles for shallow integration. Absent trade policycooperation, direct negotiations over the wage subsidy cannot bene t governments, butdirect negotiations over the entry policy provide a second-best bene t. The e¢ cientagreement in theory di¤ers signi cantly from the shallow integration approach of theGeneral Agreement on Tari¤s and Trade (GATT).

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Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers ECARES with number ECARES 2013-46.

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Length: 35 p.
Date of creation: Dec 2013
Publication status: Published by:
Handle: RePEc:eca:wpaper:2013/153042
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  1. Kyle Bagwell & Robert W. Staiger, 2001. "Domestic Policies, National Sovereignty, and International Economic Institutions," The Quarterly Journal of Economics, Oxford University Press, vol. 116(2), pages 519-562.
  2. Robert W. Staiger & Kyle Bagwell, 1999. "An Economic Theory of GATT," American Economic Review, American Economic Association, vol. 89(1), pages 215-248, March.
  3. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains From Variety," The Quarterly Journal of Economics, Oxford University Press, vol. 121(2), pages 541-585.
  4. Epifani, Paolo & Gancia, Gino, 2011. "Trade, markup heterogeneity and misallocations," Journal of International Economics, Elsevier, vol. 83(1), pages 1-13, January.
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  6. Henrik Horn & Giovanni Maggi & Robert W. Staiger, 2010. "Trade Agreements as Endogenously Incomplete Contracts," American Economic Review, American Economic Association, vol. 100(1), pages 394-419, March.
  7. Bagwell, Kyle & Staiger, Robert W., 2015. "Delocation and trade agreements in imperfectly competitive markets," Research in Economics, Elsevier, vol. 69(2), pages 132-156.
  8. Campolmi, Alessia & Fadinger, Harald & Forlati, Chiara, 2014. "Trade policy: Home market effect versus terms-of-trade externality," Journal of International Economics, Elsevier, vol. 93(1), pages 92-107.
  9. Brou Daniel & Ruta Michele, 2013. "A Commitment Theory of Subsidy Agreements," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 13(1), pages 239-270, May.
  10. Romer, Paul, 1994. "New goods, old theory, and the welfare costs of trade restrictions," Journal of Development Economics, Elsevier, vol. 43(1), pages 5-38, February.
  11. Venables, Anthony J., 1985. "Trade and trade policy with imperfect competition: The case of identical products and free entry," Journal of International Economics, Elsevier, vol. 19(1-2), pages 1-19, August.
  12. David De Remer, 2013. "The Evolution of International Subsidy Rules," Working Papers ECARES ECARES 2013-45, ULB -- Universite Libre de Bruxelles.
  13. Jennifer Abel-Koch, 2013. "Endogenous Trade Policy with Heterogeneous Firms," Working Papers 1306, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 01 Aug 2013.
  14. Ralph Ossa, 2011. "A "New Trade" Theory of GATT/WTO Negotiations," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 122-152.
  15. Dixit, Avinash, 1985. "Tax policy in open economies," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 6, pages 313-374 Elsevier.
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