Trade Policy: Home Market Effect versus Terms-of-Trade Externality
Harald Fadinger and
Chiara Forlati ()
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Chiara Forlati: Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland
Working Papers from Center for Fiscal Policy, Swiss Federal Institute of Technology Lausanne
We study trade policy in a two-sector Krugman (1980) trade model, allowing for production, import and export subsidies/taxes. We consider non-cooperative and cooperative trade policy, first for each individual instrument and then for the situation where all instruments can be set simultaneously, and contrast those with the efficient allocation. While previous studies have identified the home market externality, which gives incentives to agglomerate firms in the domestic economy, as the driving force behind non-cooperative trade policy in this model, we show that this, in fact, is not the case. Instead, the incentives for a non-cooperative trade policy arise from the desire to eliminate monopolistic distortions and to improve domestic terms of trade. As a consequence, terms-of-trade externalities remain the only motive for international trade agreements in the Krugman (1980) model once a complete set of instruments is available.
Keywords: Home Market Effect; Terms of Trade; Tariffs and Subsidies (search for similar items in EconPapers)
JEL-codes: F12 F13 F42 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2009-02, Revised 2012-12
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Journal Article: Trade policy: Home market effect versus terms-of-trade externality (2014)
Working Paper: Trade Policy: Home Market Effect versus Terms-of-Trade Externality (2011)
Working Paper: Trade policy: home market effect versus terms of trade externality (2010)
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