Strategic Environmental Policy under Free Entry of Firms

With direct trade barriers banned, governments may be tempted to use indirect policy tools to interfere with trade, such as environmental taxes. The author uses a model of an endogenous market structure, where the number of firms is determined by a zero-profit condition in one country but is exogenously given in the other country, to show that a government harboring a fixed number of firms fails to affect aggregate supply, and therefore has little scope for improving domestic environmental quality (if pollution is transboundary). Moreover, owing to the absence of a terms-of-trade effect, it diverts from the classical strategic tax rule. The author argues that both governments arguably fix their equilibrium emission taxes "too low," meaning that tax competition plausibly leads to "ecological dumping."     

Trade Gains and Public Goods

This paper proves that in a multicountry general‐equilibrium model of international trade with local public goods, free trade is beneficial if the governments in the trading world behave strategically with respect to the provision of public goods.     

Spillovers from Foreign Exporters

We develop a general equilibrium model of international trade with heterogeneous firms that accounts for productivity spillovers transmitted by foreign exporters. Everything else equal, stronger spillovers increase welfare. We embed the model framework into a trade policy scenario where countries strategically set inter‐country variable trade costs for the trading partner. In the strategic Nash‐equilibrium policy, governments trade‐off welfare gains from protectionism and those that are due to spillovers from foreign exporters. The equilibrium degree of protectionism is decreasing in the strength of the spillover. Policy coordination induces welfare gains but these gains can be hump‐shaped in the spillover strength.     

Equilibrium Tariff Schedules In Commercial Policy Games Under Uncertainty

Abstract A partial two country equilibrium model is built in which two different exogenous random shocks may occur. the governments simultaneously choose tariff functions relating their specific tariff to the level of an observable variable (volume of trade or international price). In the case of a “volume of trade shock” the Nash equilibria of this game are more protectionist the larger the possible trade swings and autarky is always an equilibrium outcome. In the case of a “terms of trade shock”, constant tariffs, at their Nash equilibrium in specific tariff levels are the only sensible equilibrium outcome.     

THE COMMON EXTERNAL TARIFF IN A CUSTOMS UNION: VOTING, LOGROLLING, AND NATIONAL GOVERNMENT INTERESTS

Missing from the analysis of customs unions has been a consideration of collective decision-making by countries regarding the union's common trade policy. In the case of the common European external tariff, how governments voted was not public information. This paper uses a unique dataset to derive member states' tariff preferences, which are then used to establish the decision rule before 1987, when individual governments had veto power. Results indicate a principle of unanimity, as well as the presence of logrolling. The political equilibrium for the common external tariff is also illustrated to have shifted as a result of union enlargements.     

Free Entry, Quasi-Free Trade, and Strategic Export Policy

This paper analyzes governments' choices between strategic export subsidies and free trade as a commitment when firms are free to enter or exit in response to these choices. Entry and exit is treated as a discrete process. Within the context of a four-stage game, two types of equilibria emerge: a quasi-free-trade equilibrium in which one of the two governments commits to free trade, while the other has a Nash equilibrium subsidy that is zero and bilateral export subsidies. Concerning welfare effects, if fixed costs are large enough, both countries achieve a welfare gain relative to free trade.     

Privatization and the Political Economy of Strategic Trade Policy

This article considers the interdependence between international financial markets, privatization, and strategic trade policies. We describe an economy where portfolio allocations are chosen by risk-averse agents who rationally forecast future trade policies. Assuming a government responsive to the policy preferences of voters, we show that ownership structure affects trade policy through the incentives for lobbying by private agents. Portfolios and trade policy are thus jointly determined in political-economic equilibrium. Privatization of state-owned industry exerts an important influence over the trade policies chosen by domestic and foreign governments by expanding the scope for individual diversification.     

Time-Consistent Public Policy

In this paper we study how a benevolent government that cannot commit to future policy should trade off the costs and benefits of public expenditure. We characterize and solve for Markov-perfect equilibria of the dynamic game between successive governments. The characterization consists of an inter-temporal first-order condition (a "generalized Euler equation") for the government, and we use it both to gain insight into the nature of the equilibrium and as a basis for computations. For a calibrated economy, we find that when the only tax base available to the government is capital income—an inelastic source of funds at any point in time—the government still refrains from taxing at confiscatory rates. We also find that when the only tax base is labour income the Markov equilibrium features less public expenditure and lower tax rates than the Ramsey equilibrium.     

Investment in trade facilitating infrastructure: A political-economy analysis

This paper analyzes public investment in infrastructure that facilitates international trade. It considers a world consisting of small open economies that face transport costs for exporting or importing a particular good. Transport costs can be lowered by an improvement in transport infrastructure. National governments non-cooperatively decide about their respective country's investment level. Governments' preferences are assumed to be biased in favor of producers' interests with consequences for equilibrium investments: Exporting countries, whose producers benefit from a transport cost reduction, spend more for infrastructure than importing countries, whose producers are protected by transport costs from foreign competition. This outcome is inefficient, and governments have an incentive to cooperate internationally. The paper also incorporates bilateral trade with two goods that benefit from infrastructure improvements as well as trade that results from offshoring.     

International Cross-Ownership and Strategic Trade Policies

The paper analyzes a model of strategic trade policies in the presence of international cross-ownership of firms that are heterogenous both in terms of costs and in terms of extent of foreign ownership. The equilibrium pattern of taxes and subsidies is characterized for any arbitrary cross-ownership profile, and any number of heterogenous firms. The equilibrium subsidy (or tax) given to any firm is shown to depend, in a separable manner, on the firm's characteristics and on the covariance of the distribution of cost and foreign ownership across firms. A neutrality theorem is proved concerning the Nash equilibrium of the game between governments: in equilibrium, the pattern of trade, the value of each firm, and world welfare are independent of the ownership pattern.     

Environmental Quality and Industry Protection with Noncooperative Versus Cooperative Domestic and Trade Policies

This paper characterizes environmental quality and industry protection in a large-country Grossman–Helpman model when production or consumption externalities exist and governments decide noncooperatively or cooperatively on domestic and trade policies. Governments choose policies efficiently from among those available, but competitive lobbies may prefer less efficient regimes. Under restricted policy availability, political-support effects can offset terms-of-trade effects on equilibrium outcomes, and inefficient trade policies can lead to higher environmental quality than efficient domestic policies. If governments cooperate, they can satisfy particular organized industries at lower costs to other lobbies and total welfare. This may result in lower environmental quality than noncooperation.     

Does EC integration tame the domestic Leviathan?

In the run-up to the formation of the EC Single Market in 1992, all border controls for intra-EC trade will cease to exist. In this paper we are asking which of the discretionary-budget-maximizing governments will benefit or lose from this institutional change.The elimination of border controls leaves governments with four options of adjustment. Each of these alternatives is addressed, following the presentation of a very simple politico-economic general equilibrium model. As the main conclusion, it turns out that only the centralisation of taxing power on a supranational level can under certain conditions increase the discretionary benefit of governments.     

Optimal remedies in international trade agreements

This paper takes a mechanism-design approach to characterize a politically optimal trade agreement under the assumption that governments have private information about the fluctuating political pressure they face from domestic interest groups to restrict trade. The optimal mechanism under these changing circumstances involves a remedy system for breach of trade agreements that specifies less-than-proportional retaliations against deviating parties. This result is in contrast to the conventional wisdom in the literature regarding the efficiency of the Reciprocity Principle as a rule of renegotiation in trade agreements. I also consider an institutional structure in which only commensurate retaliations are practical but governments can employ a public randomizing device to authorize retaliations. I show that it is optimal to authorize retaliations only randomly. This suggests a role for the WTO dispute settlement process as a public randomizing device.     

Environmental and economic impacts of trade barriers: The example of China–US trade friction

The new age of trade wars could simultaneously affect the worldwide distribution pattern of the economy and environmental emissions. However, previous studies have focused on economic impacts, and on trade liberalization, while little is known about the equilibrium effects of trade barriers on the environment. Using a global computable general equilibrium model and taking the recent anti-trade policies of the Trump administration as an example, this study investigates the possible socio-economic and environmental effects of trade friction. Specifically, this study explores how the implemented six rounds of China–US trade friction and its different long-term development trends affect regional economic output, GHG and air pollutant emissions. Results show that trade barriers harm both countries’ economies and such losses have a certain permanence, while non-participants can benefit indirectly. Trade friction decreases participants’ GHG emissions, modifies global GHG emission distribution patterns, and leads to improved air quality in most countries. If governments continue to impose tariffs, global GHG emissions could counterfactually decrease by up to 5%. However, the change in trade patterns is not conducive to clean energy development in the less-developed regions, including the Middle East, Africa, and Latin America, and emission reductions from trade friction are insufficient to avoid catastrophic climate change.     

Cooperative R&D and Strategic Trade Policy with Bertrand Competition

This paper uses a strategic trade policy model to analyze the welfare effects from allowing cooperation in R&D when firms compete in a price‐setting game in the product market. A policy game between two governments is analyzed, where each government chooses a particular cooperative R&D policy in order to maximize national welfare. At the Nash equilibrium to this game only one government allows cooperation in R&D. This equilibrium is both individually and jointly optimal. International cooperation in R&D is superior to no cooperation in R&D but is inferior to the Nash equilibrium of the government policy game.     

Fiscal Reliance on Tariff Revenues: In Search of a Political Economy Explanation?

One "stylized fact" about trade policy is that trade taxes as a proportion of total tax revenue are inversely related to a country's economic development, as in countries with poor administrative capabilities trade taxes represent the easiest way for governments to raise revenue (Administrative Capabilities Hypothesis). In this paper we develop an alternative explanation based on political economy considerations: using data from 64 developing countries from 1982 until 1997 we find that the Administrative Capabilities Hypothesis must be complemented with a political economy explanation in order to be able to provide a better account of the relevant empirical evidence.     

A model of trust in quality and North–South trade

Why do some countries produce higher quality goods than other countries? This paper suggests that one reason is self-perpetuating reputations, modelling the idea with a Klein–Leffler reputation model embedded in a general equilibrium model of trade. Reputation differences are particularly interesting because reputation is a form of “social capital”. Like product differentiation, it can explain why countries might trade even if their technologies and endowments are identical, why firms could profit from exports even if the foreign price is no higher than the domestic one, and why governments like to have “high-value” sectors. Ideally, a developing country would shift its own producers to a high-quality equilibrium; if that is not possible, the next best thing is to import experience goods and substitute to home production of goods for which reputation is not important.     

我国区际技术性贸易壁垒的成因与管治探讨

地方政府作为利益主体、经济主体、管理主体是我国区际贸易技术性壁垒产生的主要原因。产品市场准人机制的统一、市场质量监管的统一、技术服务网络的统一是克服区际贸易技术性壁垒,加速区域市场一体化,进而达到全国市场一体化的根本途径。     

Existence of equilibrium in the Helpman–Krugman model of international trade with imperfect competition

Helpman and Krugman (Market structure and foreign trade. Increasing returns, imperfect competition, and the international economy. MIT Press, Cambridge, 1985) provide a synthesis of the traditional factor proportions theory of international trade and the theory of international trade due to the exploitation of scale economies in imperfectly competitive markets. They derive illuminating results about trade patterns and gains from trade, among other things, leaving unanswered the question of existence of equilibrium, however. The central significance of their characterization of properties of free trade equilibria with inter-industry and intra-industry trade calls for an analysis of existence of equilibrium. This is the object of the present paper. We prove the existence of equilibrium for the integrated multi-sector multi-factor Helpman–Krugman economy without national borders. Well-known conditions ensure that the world economy under free trade reproduces this equilibrium and thus establishes existence of a free trade equilibrium. Since an equilibrium of the integrated economy is not necessarily unique, the same holds true for a free trade equilibrium.     

Environmental Policy in Open Economies and Monopolistic Competition

This paper analyses the implications of international trade for non-cooperative environmental policy in the case of local production externalities. A particular focus is on the potential effects of regulations on the variety of goods and the resulting international spillover caused by trade. A tougher domestic standard negatively affects the utility of the households abroad, since such a policy reduces their variety of imports (due to fewer domestic product inventions) or their consumption of each imported brand (due to higher import prices). Ignoring the negative spillover, non-cooperative governments implement inefficiently strict standards in equilibrium. In contrast to this clear-cut inefficiency result, the impact of international trade on the state of the environment is ambiguous.