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Trade Policy of Transition Economics

Author

Listed:
  • Jose Luis Moraga

    (Groningen University)

  • Jean-Marie Viaene

    (Erasmus University Rotterdam)

Abstract

This paper focuses on ignored issues regarding the impact of trade reforms in transition economies. These economies are primarily characterized by a low quality of their products, large depreciations of their currencies, and a high degree of government intervention in economic activity. These elements are embedded in a duopoly model of vertical product differentiation and international trade. First, we show that trade liberalization in transition economies reduces the output of local firms. Second, neither free trade nor zero subsidy is optimal. There exists a rationale for infant-industry protection in that a commitment by the government to use a socially optimal trade and industrial policy can release the domestic firm from low-quality production. Since greater profits are derived from high-quality products, this enables local firms to finance productivity and technology improvements. Third, in terms of social welfare, no equivalence result between the effects of exchange rate changes and the optimal trade policy can be obtained.

Suggested Citation

  • Jose Luis Moraga & Jean-Marie Viaene, 2000. "Trade Policy of Transition Economics," Tinbergen Institute Discussion Papers 00-110/2, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20000110
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    File URL: https://papers.tinbergen.nl/00110.pdf
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    More about this item

    Keywords

    Exchange Rates; Hedonic Prices; Leapfrogging; Optimal Trade Policy; Product Quality; Trade Liberalization;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • P31 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions

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