Comparison of deep integration in the Melitz,Krugman and Armington models: The case of The Philippines in RCEP

We estimate the welfare effects of a modern mega-preferential trade agreement--the Regional Comprehensive Economic Partnership--with three versions of market structure: (i) perfect competition, Armington style; (ii) monopolistic competition based on Krugman (1980); and (iii) monopolistic competition in the style of Melitz (2003). We develop a new numerical model of foreign direct investment (FDI) with heterogeneous firms and extension of the Krugman model that allows small countries to impact the number of varieties. We hold both the trade and FDI responses constant across the three market structures. We find that in all three market structures, there are substantial gains from deep integration, but virtually no gains from preferential tariff reduction. Both our Krugman and Melitz style models produce significantly larger welfare gains than the Armington structure, especially if third countries benefit at least partially from the deep integration reforms via either spillovers or wider liberalization.     

Time-consistent protection with learning by doing

Can a government induce efficiency gains in his domestic industry by protecting it against foreign competition? Would such trade protection be time consistent? The present paper builds a dynamic equilibrium model that accounts for learning-by-doing effects that link firms’ strategies over time. The model shows that the existence of dynamic economies of scale suffices to overcome the traditional government's lack of commitment of its tariff policy. This paper compares the infinite horizon Markov perfect equilibrium of this game with the dynamic equilibrium under commitment as well as the static Nash equilibrium. Equilibrium strategies are derived in closed form by solving a linear-quadratic differential game. Optimal trade policy involves higher tariff levels than in the static setup in order to account for future gains in efficiency. Under reasonable assumptions, the unique stable MPE is characterized by a domestic price and tariff that decrease as experience accumulates, thus supporting the future liberalization of trade as an equilibrium feature of this dynamic game.     

Trade policy and quality leadership in transition economies

Trade policy and quality leadership in transition economies are analyzed in a duopoly model of trade and vertical product differentiation. We first show that the incidence of trade liberalization is sensitive to whether firms in transition economies are producers of low or high quality. Second, we find that neither free trade nor the absence of a domestic subsidy are optimal: Both a tariff and a subsidy increase price competition and while the former extracts foreign rents the latter results in quality upgrading. Third, there exists a rationale for a government to commit to a socially optimal policy to induce quality leadership by the domestic firm when cost asymmetries are low. Finally, we establish an equivalence result between the effects of long-run exchange rate changes and those of trade policy on price competition (but not on social welfare).     

Trade liberalization,forward‐looking firms,and welfare

We set up an oligopolistic model with two exporting firms selling to a third market to investigate the welfare implications of trade liberalization when the exporting firms are forward‐looking. The results show that with cost asymmetry trade liberalization encourages the exporting firms to engage in tacit collusion, which may not only be detrimental to the domestic welfare, but also to the consumer surplus of the importing country. Moreover, we find that tacit collusion is less sustainable if the government of the importing country imposes a lower (higher) tariff on the more (less) efficient exporting firm. If a nonforward‐looking or a forward‐looking cost‐efficient domestic firm exists in the importing country, then trade liberalization also encourages tacit collusion.     

On the welfare effects of trade and investment liberalization

Using a three-factor knowledge- and physical capital model of trade and multinational activity, we consider a set of policy experiments to assess the welfare effects of trade and investment liberalization in general equilibrium. Specifically, we address the question of whether and under which circumstances a single versus a combined trade/investment liberalization strategy or a unilateral versus a bilateral policy change is preferable from a single country's and the world's point of view. The focus of this paper is to look at three relevant questions. First, when is investment liberalization beneficial and when is it harmful for a single economy or the whole world? Second, is pure investment liberalization a welfare maximizing strategy? Third, when is either kind of liberalization (trade, investment, or both) welfare improving and when neither of them?     

Regional versus Multilateral Trade Liberalization,Environmental Taxation,and Welfare

The paper considers trade between identical countries with imperfectly competitive markets, and compares the impacts of regional and multilateral tariff reduction on strategic environmental taxation and welfare. While both forms of trade liberalization increase production and consumption in tariff‐reducing countries, regionalism also reduces production in a non‐participating country and may decrease its consumption. Consequently, regionalism and multilateralism change pollution tax and welfare in the tariff‐reducing countries in similar ways when pollution is local, but in dissimilar ways for global pollution. When pollution is global, regionalism is likely to be preferred to multilateralism for the establishment of free trade among countries.     

WAGE SUBSIDY AND WELFARE IN DEVELOPING COUNTRIES

This paper seeks to answer if wage subsidy to workers displaced due to trade reform raises welfare in a developing country. We use a general equilibrium model with non‐specific factor inputs and trade liberalization as a policy variable. A combination of wage subsidy and tariff rate obtains the second‐best welfare level. The theoretical result is new, policy‐relevant and important in view of political‐economy aspects of free trade in developing and transition countries.     

Economic and environmental impacts of trade liberalization: The case of Indonesia

In recent years, there has been a growing interest in the environmental impacts of trade liberalization. This paper provides further discourse in this area with a study on Indonesia and its trade agreements with Japan (IJEPA) and ASEAN (AFTA). A static global CGE model, known as the Global Trade Analysis Project, was used to project the Indonesian economy to the year 2022, with and without tariff reforms agreed under the agreements. Environmental impacts are assessed using different pollution indicators—air, water and waste. The study suggests that Indonesia would grow rapidly over the period considered with a large deterioration in its environment. Following these, however, the agreements only have a marginal positive impact on Indonesia's output but with a noticeable increase in trade flows and signs of trade diversion. Overall AFTA has a greater impact on the Indonesian economy compared to IJEPA. Similarly, the impact of trade liberalization on the environment is marginal. On the whole, tariff reform is inducing air pollution and reducing water pollution. In conclusion, the study suggests that Indonesia's participation in the AFTA and IJEPA agreements is not likely to bring drastic changes to her economic and environmental performance.     

Privatization in a Small Open Economy with Imperfect Competition

We look at privatization in a general equilibrium model of a small, tariff‐distorted, open economy. There is a differentiated good produced by both private and public sector enterprises. A reduction in government production in order to cut losses from such production raises the returns to capital and increases the tariff revenue, which are welfare‐improving. However, privatization also leads to lower wages and possibly fewer private brands. This lowers workers’ welfare, which may make privatization politically infeasible. Privatization can improve workers’ welfare with complementary reforms, e.g., attracting foreign investment or trade liberalization.     

DOMESTIC COMPETITION POLICY AND TARIFF POLICY COMPARED*

M. Yano and F. Dei have demonstrated that, by controlling the degree of competition in a non‐tradables market (competition policy), a country can influence the terms of trade so as to increase its welfare, relative to free trade. Using their model, this study compares the extent of this effect with that of a tariff policy. It demonstrates that a competition policy can achieve a higher utility than a tariff policy if tariff rates are at levels currently tolerated in the real world. This demonstrates that domestic competition policy may play an important role as a substitute for tariff policy.     

On the emergence of an MFN club: equal treatment in an unequal world

Abstract .  Motivated by GATT, we endogenize the formation of a club whose members have to abide by the MFN principle of non-discrimination. The underlying model is that of oligopolistic intraindustry trade. While an MFN club does not alter average tariff levels across countries, it increases aggregate world welfare; makes non-members worse off; and can immiserize its high cost members. These results imply that (i) core WTO rules such as MFN are valuable even if multilateral negotiations deliver limited trade liberalization and (ii) the distributional effects of MFN maybe one reason why developing countries have been granted Special and Differential treatment at the WTO.     

Reducing Tariffs According to WTO Accession Rules: The Case of Vietnam

When Vietnam joined the World Trade Organization (WTO) in 2007 it was granted an accession period up to 2014. During this period tariffs would have to fall according to the accession agreement. This paper evaluates this 2007–2014 trade liberalization by building an applied general equilibrium model and calibrating it to the Vietnamese data. The model pays careful attention to the fact that Vietnam has many state‐owned enterprises. The model simulations show that the WTO tariff reductions will reduce overall welfare. Moreover, the biggest loss will take place among the poor rural households in Vietnam. This paper proposes other tariff reforms that will both raise overall welfare and reduce income inequality.     

A Welfare Ranking of Multilateral Reductions in Real and Tariff Trade Barriers when Firms are Heterogenous

Trade liberalization comes about through reductions in various types of trade barriers. This paper introduces, apart from the customary real trade costs (i.e. iceberg and fixed export costs), two revenue generating trade barriers (i.e. an ad valorem tariff and a trade license) into a standard heterogeneous‐firms‐trade model with Pareto distributed productivities. We derive analytical welfare rankings of all four liberalization channels for an equal effect on two openness measures, for any trade cost level and while all four barriers are simultaneously present, i.e. for any initial equilibrium. We show that when openness is measured at retail prices, not border prices, the welfare rankings are sensitive to the degree of efficiency in revenue redistribution, e.g. the share of tariff revenues wasted on rent‐seeking activities. As a result, multilateral tariff reductions can switch from the least to the most preferred mode of liberalization. Among the other three barriers we establish a universal welfare ranking for any strictly positive level of revenue redistribution and for either measure of openness.     

Revenue‐enhancing Trade Liberalization in a Differentiated Duopoly

Existing studies suggest that in developing countries, tax reforms that increase consumption taxes can compensate for shortfalls in revenue from a tariff reduction. However, these revenue‐enhancing tariff–tax reforms have a critical shortcoming—they generally reduce welfare under imperfect competition. This paper shows that tax reforms such as consumption tax reforms do not necessarily have to be implemented to make up for revenue shortfalls from tariff reductions under imperfect competition, because trade liberalization through tariff cuts leads to an increase in government revenue when domestic and imported goods have a high substitutability. This revenue‐enhancing effect of a tariff reduction occurs for a wider degree of product substitutability when initial tariff and consumption tax rates are high. More importantly, we show that even if initial tariff and consumption tax rates are sufficiently low, a tariff reduction still increases government revenue for a low degree of product differentiation under Bertrand competition.     

Tariffs and privatization policy in a bilateral trade with corporate social responsibility

Corporate social responsibility (CSR) has become a global business strategy and thus it provides significant welfare implications for designing optimal policies. This paper investigates the impact of CSR on policy interaction between tariffs and privatization in an international bilateral trade model. We find that CSR is closely related to the government's policy decisions on tariffs. In particular, we find that the strategic tariff for increasing domestic welfare is always higher (lower) than the efficient tariff for improving global welfare when the degree of CSR is low (high). We also show that a privatization policy raises tariff and worsens (improves) domestic welfare when the degree of CSR is low (high). Finally, we demonstrate that both countries choose a nationalization policy even though the privatization policy is globally optimal when the degree of CSR is high.     

The welfare implications of trade liberalization between the Southern Mediterranean and the EU

The impact on the Southern Mediterranean Countries (SMC) of the current process of trade liberalization with the European Union is explored. The methodology is that of computable general equilibrium modelling under imperfect competition and the model includes ten countries and 11 sectors. This allows for both a cross-country and cross-sectoral analysis of the results. The experiments considered are the full liberalization of tariffs, as well as changes in market access and trade-induced changes in productivity. A key feature of the paper is that the phased introduction of tariff reductions is allowed for as explicitly envisaged in the Agreements. The results show that the process of liberalization may have a substantial, though non-monotonic, impact on the SMC economies in terms of both changes in production and through this on welfare. The welfare impact is potentially very high in particular for the high tariff economies. The sources of the welfare gain tend to derive from perfectly competitive explanations of trade for the high tariff economies, and from imperfectly competitive explanations of trade for the low tariff economies.     

The Effects of Trade Liberalization between Heterogeneous Countries on Endogenous Mergers

This paper examines the effects of trade liberalization on merger behavior. We endogenize merger choice among owners in an oligopolistic industry in asymmetric countries to analyze the consequences of trade cost reductions on competitiveness and welfare. In this context, the non‐cooperative game supports asymmetric market structures. We also find that trade liberalization is not necessarily pro‐competitive in countries with the competitive advantage, even if trade costs are completely abolished. Moreover, the tariff‐jumping explanation of international mergers does not necessarily apply. The welfare analysis shows that merger behavior can significantly alter any gains from liberalization. Countries should consider enforcing competition in regional agreements. Specifically, to avoid a reduction in domestic welfare following trade‐liberalizing reductions in trade costs, a high‐cost country's optimal policy may be to ban international mergers.     

Trade liberalization and institutional reforms1

The accession of Central and Eastern European (CEE) countries to the European Union (EU) is expected to lead to the new member countries becoming more like the older members, including in terms of trade. In this paper, we focus on two factors promoting CEE–EU trade integration: trade liberalization and institutional reforms. Measures of trade liberalization undertaken by both parties during the 1990s were very substantial, but did not always produce the expected upsurge of regional trade flows. Much less progress has been made in improving the functioning of CEE institutions (e.g., progress in the privatization process or in reducing corruption). Countries where most important changes at the institutional level occurred were also those that most increased their trade with the EU. Comparing the impact of these two factors, we find that improving institutions in CEE countries can generate as much trade as the removal of all tariff and non‐tariff barriers. The paper also addresses the issue of the presence of reversed causality between trade and institutions, and the pro‐trade effect of institutional similarity.     

Trade in goods and services: Two sides of the same coin?

This study analyzes the interrelationship between goods and services in production and trade using the most recent input–output tables for all OECD countries. It first describes the role of services in production and trade in goods. Next, it proposes two models for analyzing the impact of services trade liberalization on industrial structure. The first captures the role of trade in tasks when countries have different technology i) in production of services; and ii) in organizing production. The latter has to the author's knowledge not been analyzed in the trade literature before. Countries with superior organizational technology (e.g. Japan) will strengthen their comparative advantage in manufacturing following trade liberalization in services. The second model explores the interrelationship between intermediate goods and services i) when they are substitutes; and ii) when they are complements. In both models the gains from trade liberalization is non-linear in trade costs. Going the last mile of liberalization has a much larger impact than taking the first steps.     

The MFN clause,welfare, and multilateral cooperation between countries of unequal size

This paper analyzes MFN in a “competing exporters” model of trade between three countries with unequal endowments and shows that MFN yields higher aggregate welfare than tariff discrimination even as it makes low income countries worse off. Furthermore, in a repeated game of tariff cooperation, multilateral free trade is easier to sustain under MFN punishments relative to discriminatory ones. This conclusion holds even when tariff discrimination takes the form of bilateral trade agreements. Overall, the analysis shows that from the viewpoint of low income countries, MFN and multilateral tariff cooperation are complementary in nature.