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The Non-Optimality of Optimal Trade Policy: The U.S. Automobile Indust ry Revisited, 1979-1985

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  • Kala Krishna
  • Kathleen Hogan
  • Phillip Swagel

Abstract

We examine the sensitivity of simple calibration models of trade in imperfectly competitive industries to changes in model specification, as well as to changes in the calibration parameters. We find that not just the magnitude, but also the sign of the optimal trade policies is very sensitive to the change in model specification. Indeed, use of policies derived from the 'wrong' model can reduce welfare from the status quo. However, the welfare gains to be obtained from application of the 'correct' model remain limited. Calibration models nonetheless provide useful estimates of firm and market behavior over time, as well as disaggregated elasticities of demand. We conclude that careful empirical work is necessary to guide model selection. For the present, the case for activist trade policy on the basis of calibration models should not be made.

Suggested Citation

  • Kala Krishna & Kathleen Hogan & Phillip Swagel, 1989. "The Non-Optimality of Optimal Trade Policy: The U.S. Automobile Indust ry Revisited, 1979-1985," NBER Working Papers 3118, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3118
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    1. Jaime de Melo & David Tarr, 2015. "Welfare Costs Of U.S. Quotas In Textiles, Steel And Autos," World Scientific Book Chapters,in: Modeling Developing Countries' Policies in General Equilibrium, chapter 21, pages 451-459 World Scientific Publishing Co. Pte. Ltd..
    2. Feenstra, R.C. & Levinsohn, J.A., 1989. "Distance, Demand, And Oligopoly Pricing," Papers 89-19, Michigan - Center for Research on Economic & Social Theory.
    3. Lawrence F. Katz & Lawrence H. Summers, 1989. "Can Interindustry Wage Differentials Justify Strategic Trade Policy?," NBER Chapters,in: Trade Policies for International Competitiveness, pages 85-124 National Bureau of Economic Research, Inc.
    4. Robert C. Feenstra, 1988. "Quality Change Under Trade Restraints in Japanese Autos," The Quarterly Journal of Economics, Oxford University Press, vol. 103(1), pages 131-146.
    5. Richard E. Baldwin & Paul Krugman, 1986. "Market Access and International Competition: A Simulation Study of 16K Random Access Memories," NBER Working Papers 1936, National Bureau of Economic Research, Inc.
    6. Jonathan Eaton & Gene M. Grossman, 1986. "Optimal Trade and Industrial Policy Under Oligopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 101(2), pages 383-406.
    7. Krishna, Kala, 1989. "Trade restrictions as facilitating practices," Journal of International Economics, Elsevier, vol. 26(3-4), pages 251-270, May.
    8. J. David Richardson, 1988. "Empirical Research on Trade Liberalisation with Imperfect Competition: A Survey," OECD Economics Department Working Papers 58, OECD Publishing.
    9. Krishna, Kala & Thursby, Marie, 1991. "Optimal policies with strategic distortions," Journal of International Economics, Elsevier, vol. 31(3-4), pages 291-308, November.
    10. James Levinsohn, 1988. "Empirics of Taxes on Differentiated Products: The Case of Tariffs in the U.S. Automobile Industry," NBER Chapters,in: Trade Policy Issues and Empirical Analysis, pages 9-44 National Bureau of Economic Research, Inc.
    11. Kala Krishna & Motoshige Itoh, 1988. "Content Protection and Oligopolistic Interactions," Review of Economic Studies, Oxford University Press, vol. 55(1), pages 107-125.
    12. Robert Driskill & Stephen McCafferty, 1989. "Dynamic Duopoly with Output Adjustment Costs in International Markets: Taking the Conjecture out of Conjectural Variations," NBER Chapters,in: Trade Policies for International Competitiveness, pages 125-144 National Bureau of Economic Research, Inc.
    13. repec:fth:michin:245 is not listed on IDEAS
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    Cited by:

    1. Stiegert, Kyle W. & Wang, Shinn-Shyr, 2003. "Imperfect Competition And Strategic Trade Theory: What Have We Learned," Working Papers 14589, International Agricultural Trade Research Consortium.
    2. Swagel, Phillip, 2000. "Union behavior, industry rents, and optimal policies," International Journal of Industrial Organization, Elsevier, vol. 18(6), pages 925-947, August.
    3. Pavel Trunin & Sergey Narkevich, 2013. "Prospects for the Russian Ruble to Become Regional Reserve Currency," Working Papers 118, Gaidar Institute for Economic Policy, revised 2015.
    4. Krishna, Kala & Erzan, Refik & Tan, Ling Hui, 1994. "Rent Sharing in the Multi-fibre Arrangement: Theory and Evidence from U.S. Apparel Imports from Hong Kong," Review of International Economics, Wiley Blackwell, vol. 2(1), pages 62-73, February.
    5. Narkevich, Siarhei & Trunin, Pavel, 2013. "Prospects for the Russian Ruble as a Regional Reserve Currency," Published Papers dok2, Russian Presidential Academy of National Economy and Public Administration.
    6. Sergey Narkevich & Pavel Trunin, 2012. "Reserve Currencies: Factors of Evolution and their Role in the World Economy," Research Paper Series, Gaidar Institute for Economic Policy, issue 162P.
    7. repec:dau:papers:123456789/6629 is not listed on IDEAS

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