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A Theory of Unilateral Trade Policy


  • Liansheng Wang

    (University of Copenhagen)


We integrate strategic-trade and political-economy considerations in a unified framework to analyse unilateral trade policy. Foreign firms compete on Home's market through export or foreign direct investment (FDI). They also lobby Home's government which sets trade (tariff) and industrial (tax) policies to maximize a weighted sum of domestic welfare and lobby contributions. We show that protection by a low-cost Home may improve global welfare by inducing a more cost-efficient global production pattern. The strategic-trade motive for unilateral intervention to increase domestic welfare may prevail even without domestic firms, and may be enhanced by the presence of FDI firms. The political motive to induce lobby contributions may mitigate or even reverse strategic-trade motivated policy deviations, and trade policy deviation need not benefit special interests to be politically optimal. If the government cares more about lobby contributions than about domestic welfare, it is more likely to adopt a liberal rather than a protectionist trade policy, regardless of its impact on lobbies.

Suggested Citation

  • Liansheng Wang, 2000. "A Theory of Unilateral Trade Policy," CIE Discussion Papers 2000-08, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
  • Handle: RePEc:kud:kuieci:2000-08

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    References listed on IDEAS

    1. Dierker, E. & Dierker, H. & Grobal, B., 1999. "Incomplete Markets and the Firm," Papers 99-03, Carleton - School of Public Administration.
    2. Kenneth J. Arrow, 1950. "A Difficulty in the Concept of Social Welfare," Journal of Political Economy, University of Chicago Press, vol. 58, pages 328-328.
    3. Guesnerie, Roger, 1975. "Pareto Optimality in Non-Convex Economies," Econometrica, Econometric Society, vol. 43(1), pages 1-29, January.
    4. Geanakoplos, J. & Magill, M. & Quinzii, M. & Dreze, J., 1990. "Generic inefficiency of stock market equilibrium when markets are incomplete," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 113-151.
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    More about this item


    trade policy; political economy; strategic trade policy; FFI;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements


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