Trade, Protection, and Optimal Trade Policy in a Vertically Related Market

Bok Yeun Han
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Bok Yeun Han: Korea Univeristy

Korean Economic Review, 1993, vol. 9, 43-66

Abstract: When the domestic production of a final product requires an intermediate good imported from a vertically integrated foreign firm, the foreign firm will not export the intermediate good but monopolize the domestic final product market unless the domestic country has a cost advantage in the primary input sector. Although the domestic country can always induce the foreign firm to export the intermediate good through either a tariff on imports of the final product or a subsidy on imports of the intermediate good, it is optimal to use a tariff on the final product, not a subsidy on the intermediate good. Whether or not the final product should be produced at home depends both on a degree of cost advantage in the primary input sector and on the foreign trade policy.

Date: 1993
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