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Protectionism and Increasing Returns with Comparative-Cost Disadvantage

  • Roy J. Ruffin

    ()

    (Department of Economics, University of Houston)

  • Wilfred J. Ethier

    ()

    (Department of Economics, University of Pennsylvania)

We reconsider the economics of protection with an industry subject to increasing returns. Under strong comparative disadvantage in one country, any tariff-distorted equilibrium in which both countries produce the commodity must be unstable.In general, under strong comparative disadvantage, the case for free trade is greater than without increasing returns. Also, exceptionally high tariffs are required to protect a high cost increasing-returns industry. Beneficial tariffs or subsidies for the country with comparative disadvantage become prominent when the country with a comparative advantage faces a relevant capacity constraint.

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File URL: http://economics.sas.upenn.edu/system/files/11-027.pdf
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Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 11-027.

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Length: 30 pages
Date of creation: 01 Jul 2011
Date of revision:
Handle: RePEc:pen:papers:11-027
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  1. Paul Krugman, 2009. "The Increasing Returns Revolution in Trade and Geography," American Economic Review, American Economic Association, vol. 99(3), pages 561-71, June.
  2. Ethier, Wilfred, 1979. "Internationally decreasing costs and world trade," Journal of International Economics, Elsevier, vol. 9(1), pages 1-24, February.
  3. Werner Antweiler & Daniel Trefler, 2000. "Increasing Returns and All That: A View From Trade," NBER Working Papers 7941, National Bureau of Economic Research, Inc.
  4. Eaton, Jonathan & Grossman, Gene M, 1986. "Optimal Trade and Industrial Policy under Oligopoly," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 383-406, May.
  5. James R. Melvin, 1969. "Increasing Returns to Scale as a Determinant of Trade," Canadian Journal of Economics, Canadian Economics Association, vol. 2(3), pages 389-402, August.
  6. Ethier, Wilfred J, 1982. "Decreasing Costs in International Trade and Frank Graham's Argument for Protection," Econometrica, Econometric Society, vol. 50(5), pages 1243-68, September.
  7. Eaton, Jonathan & Panagariya, Arvind, 1979. "Gains from trade under variable returns to scale, commodity taxation, tariffs and factor market distortions," Journal of International Economics, Elsevier, vol. 9(4), pages 481-501, November.
  8. Cohen, Daniel, 1990. "'Internal versus external economies in European industry' by R.J. Caballero and R.K. Lyons," European Economic Review, Elsevier, vol. 34(4), pages 827-828, June.
  9. Caballero, Ricardo J. & Lyons, Richard K., 1990. "Internal versus external economies in European industry," European Economic Review, Elsevier, vol. 34(4), pages 805-826, June.
  10. James Tybout, 1999. "Manufacturing Firms in Developing Countries: How Well Do They Do, and Why?," Development and Comp Systems 9906001, EconWPA, revised 10 Jun 1999.
  11. Konig, Heinz, 1990. "'Internal versus external economies in European industry' by R.J. Caballero and R.K. Lyons," European Economic Review, Elsevier, vol. 34(4), pages 828-830, June.
  12. Kemp, Murray C & Schweinberger, Albert G, 1991. "Variable Returns to Scale, Non-uniqueness of Equilibrium and the Gains from International Trade," Review of Economic Studies, Wiley Blackwell, vol. 58(4), pages 807-16, July.
  13. Matsuyama, Kiminori, 1991. "Increasing Returns, Industrialization, and Indeterminacy of Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 617-50, May.
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