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How to Use Industrial Policy to Sustain Trade Agreements


  • Philip Sauré


With the help of a simple Ricardian model, this paper explores the role of industrial policy in self-enforcing trade agreements. A first part shows that the optimal self-enforcing trade agreement includes subsidies to inefficient, import-competing sectors. Second, when by some exogenous or endogenous force the comparative advantage deepens, subsidies go to declining industries. Key assumptions driving these results are: essentiality of imported goods and a high flexibility of the countries' industrial structure. A final part relaxes the latter assumption and shows that under rigid industrial structures subsidies favoring import competing sectors actually destabilize trade agreements.

Suggested Citation

  • Philip Sauré, 2008. "How to Use Industrial Policy to Sustain Trade Agreements," Working Papers 2008-12, Swiss National Bank.
  • Handle: RePEc:snb:snbwpa:2008-12

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    Trade Agreement; Self-enforceability; Industrial Policy;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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