Port cross-ownership and privatization in international trade with tariff protection

In an international duopoly involving two countries (markets) and two ports, this paper examines how unilateral and passive port cross-ownership interacts with the degree of port privatization and the presence of tariff protection in shaping port performance and welfare outcomes. Port cross-ownership affects the usage fees set by ports in the two countries in different ways but consistently reduces their overall level. Under free trade, this fosters international trade and intensifies product market competition, thereby increasing consumer surplus while reducing firm profits. However, domestic welfare rises only in the country whose port holds a stake in the foreign port. Under tariff protection, by contrast, port cross-ownership induces countries to differentiate their tariff policies, with the country whose port holds a stake in the other setting a lower tariff. As a result, firm profits increase substantially in the other country, while consumers are not excessively disadvantaged. Depending on the degree of privatization, cross-ownership can enhance welfare in both countries, and, counterintuitively, tariff protection may improve welfare only for the country with a foreign port stake.