Strategic Trade Policy and Integration

Wilhelm Kohler

No 93-08, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics

Abstract: Will the incentives to pursue strategically motivated trade or industrial policies rise of rall if countries integrate? Economists have emphasized that one of the principal channels for welfare gains of Europe 1992 is a reduction of intra-European real trade coosts. This paper identifies the spillover effects that such trade cost reductions might have on industrial policies aimed at strategic distortions in oligopolistic industries. We use a three country, conjectural variations oligopoly model covering three countries, whose government choose a general production subsidy/tax to target international strategic distortions. Integration is modeled as a reduction of trade costs for two of these countries, and we analyse how this affects the policy outcome in a non-cooperative policy game.

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