DOMESTIC DISTORTIONS AND TRADE POLICY

Sven W. Arndt

Chapter 5 in Evolving Patterns in Global Trade and Finance, 2014, pp 71-80 from World Scientific Publishing Co. Pte. Ltd.

Abstract: WHEN a country possesses monopoly power in the international markets in which it trades, a competitive free trade situation will be characterized by a disparity between the domestic and foreign rates of transformation. Achievement of an optimal solution requires that this disparity be eliminated in a manner which does not simultaneously destroy the equality between the domestic rate of substitution and the domestic rate of transformation. To this end, the theory of optimum tariffs provides a criterion for appropriate intervention in foreign trade by means of duties and subsidies on trade. A tax-cum-subsidy policy of intervention in domestic production, on the other hand, is not appropriate, because in removing the existing distortion it creates a new inequality between the domestic rate of substitution in consumption and the domestic rate of transformation. Consequently, a tax-cum-subsidy policy of intervention is necessarily inferior to an optimum tariff…

Keywords: Preferential Trade Areas; Fragmentation; Cross-Border Production Networks; Off-Shoring; Currency Areas and Monetary Union; Single vs. Dual-Exchange Rate Regimes; Stabilization Policy in Open Economies; International Monetary Relations (search for similar items in EconPapers)
Date: 2014
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