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Strategic Trade Policy under Integrated Markets

Morten Hviid and David Collie

Journal of Economic Integration, 1999, vol. 14, 522-553

Abstract: A model of strategic trade policy under integrated markets is presented and optimal trade policies are derived under assumptions of both complete and incomplete information. With the assumption of complete information it is shown that the optimal policy is an import tariff (export subsidy) when a coun - try is a net importer (exporter). In the Nash equilibrium in trade policies the low cost country gives an export subsidy which is fully countervailed by the import tariff of the other country. The introduction of incomplete information about costs adds an incentive for both governments to use their trade policy as a signal of their firm’s costs. This signalling effect increases the export subsidy and decreases the import tariff. In the simultaneous signalling game, with symme - try, the expected welfare in the separating equilibrium is higher than under free trade for both countries.

Keywords: integrated markets; incomplete information; signalling; subsidies; tariffs (search for similar items in EconPapers)
JEL-codes: F12 F13 L13 (search for similar items in EconPapers)
Date: 1999
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Persistent link: https://EconPapers.repec.org/RePEc:ris:integr:0116

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