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Domestic Policy Coordination in Imperfectly Competitive Markets

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  • David De Remer

Abstract

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).

Suggested Citation

  • David De Remer, 2013. "Domestic Policy Coordination in Imperfectly Competitive Markets," Working Papers ECARES ECARES 2013-46, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:eca:wpaper:2013/153042
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    Cited by:

    1. David De Remer, 2013. "The Evolution of International Subsidy Rules," Working Papers ECARES ECARES 2013-45, ULB -- Universite Libre de Bruxelles.
    2. Kyle Bagwell & Chad P. Bown & Robert W. Staiger, 2016. "Is the WTO Passé?," Journal of Economic Literature, American Economic Association, vol. 54(4), pages 1125-1231, December.
    3. Kyle Bagwell & Robert W. Staiger, 2016. "The Design of Trade Agreements," NBER Working Papers 22087, National Bureau of Economic Research, Inc.
    4. David R. DeRemer, 2016. "The Principle of Reciprocity in the 21st Century," IEHAS Discussion Papers 1613, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    5. Ederington,Josh & Ruta,Michele, 2016. "Non-tariff measures and the world trading system," Policy Research Working Paper Series 7661, The World Bank.

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