Nontariff protection without an outside good

Hajime Takatsuka and Dao-Zhi Zeng (dao-zhi.zeng.d7@tohoku.ac.jp)

International Review of Economics & Finance, 2016, vol. 41, issue C, 65-78

Abstract: Assuming an outside good, the existing intra-industry trade models show that the domestic price index is lowered and the welfare is improved by unilateral nontariff protection against foreign products. Removing the outside good, we reexamine this issue incorporating the factor-price changes to capture the terms-of-trade effect. In the case of one production factor (immobile labor), we find that unilateral protection is neither price-index lowering nor welfare improving. In the case of two production factors (immobile labor and mobile capital), the same result holds if the elasticity of substitution between varieties is as large as that observed in empirical studies. Therefore, the outside-good assumption is not harmless to evaluate trade policies.

Keywords: Nontariff protection; Outside good; Terms of trade; Mobile capital; Welfare (search for similar items in EconPapers)
JEL-codes: F12 F13 F20 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:41:y:2016:i:c:p:65-78

DOI: 10.1016/j.iref.2015.09.005

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