The trade paradox persists under excise taxes

Brander and Krugman (1983) and Sertel (1988) followed by Krugman (1989), showed two sides of a ‘trade paradox’: The paradox in competition, viz. that opening trade (or increasing competition) may cause welfare to decline, and the paradox in efficiency, viz. that an increase in unit transport cost may increase welfare. In this paper, we consider the situation in an environment where interventionist trade policies are not permitted but each country is sovereign to impose an excise tax (or subsidy). The paradoxes persist under equilibrium excise taxes, reckoned both at the non-cooperative (Nash or dominant strategy) equilibrium and at the cooperative solution among tax-imposing authorities maximizing welfare. We also see that the paradoxes persist in a taxless environment where market equilibrium is Stackelberg rather than Cournot.     

Trade Liberalization and Environmental Regulation on International Transportation

Incorporating pollution emissions from international transportation into a model of strategic trade and environmental policies, we investigate the effect of trade liberalization and environmental regulation on national welfare and the environment. Our model includes imperfectly competitive markets for international transportation and final products. We find that trade liberalization may reduce each country's welfare unless some level of environmental regulation on international transportation is in place. When international trade is liberalized initially, a mutual increase in the common emission tax rates may improve each country's welfare. However, when international trade is highly protected initially, imposing an emission tax may reduce 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.     

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.     

Parallel trade,product quality,and welfare

We study the welfare effects of parallel trade (PT) considering investment in quality. We thus revisit the case for PT in research-intensive industries. We find that PT may raise quality, depending on how preferences for quality differ across countries. Conditional on quality, consumer surplus may rise (fall) in the PT-source (PT-recipient) country. While PT reduces ex post welfare, improving quality is a necessary condition for PT to increase welfare ex ante.     

TOURISM,DUTCH DISEASE AND WELFARE IN AN OPEN DYNAMIC ECONOMY*

This paper examines the effects of an expansion in tourism on capital accumulation, sectoral output and resident welfare in an open economy with an externality in the traded good sector. An expansion of tourism increases the relative price of the nontraded good, improves the tertiary terms of trade and hence yields a gain in revenue. However, this increase in the relative price of nontraded goods results in a lowering of the demand for capital used in the traded sector. The subsequent de‐industrialization in the traded good sector may lower resident welfare. This result is supported by numerical simulations.     

Export,FDI and the welfare gains from trade liberalization

This paper extends Melitz and Redding (2015) to analyze the welfare gains from trade liberalization by adding foreign direct investment(FDI). Our model predicts that with FDI activities, welfare gains from trade liberalization will be strictly lower than those in a model without FDI, but only takes exports into account. In addition, the calibrated model indicates that with FDI activities, aggregate welfare reaches its maximum when the fixed export costs are positive rather than 0. Furthermore, we decompose the welfare gains induced by trade liberalization from continuing exporters, and switchers. The results show that in any case, with or without FDI, continuing exporters contribute a larger share to welfare gains than status switching firms.     

POLITICAL ECONOMY OF STRATEGIC EXPORT POLICY IN A DIFFERENTIATED DUOPOLY*

This paper investigates the effect of a home firm's lobbying on a strategic export policy in a third market with a differentiated duopoly. We focus on its effect on domestic welfare under Bertrand and Cournot competition. Regardless of the mode of competition, the strategic export policy cannot improve domestic welfare in the presence of lobbying if the degree of product differentiation is high or the government is overly concerned with political contribution relative to domestic welfare. Moreover, for the same degree of product differentiation, the lobbying‐induced export policy is more likely to deteriorate domestic welfare relative to free trade under Cournot competition.     

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?     

Additive versus multiplicative trade costs and the gains from trade liberalizations

This paper addresses welfare effects from trade liberalization in a Melitz ( 2003 ) heterogeneous‐firms trade model including the empirically important per‐unit (i.e., additive) trade costs in addition to the conventional iceberg (i.e., multiplicative) and fixed trade costs. The novel contribution of the paper is the result that the welfare gain for a given increase in trade openness is higher for reductions in per‐unit (additive) trade costs than for reductions in iceberg (multiplicative) trade costs. The ranking derives from differences in intra‐industry reallocations and, in particular, from dissimilar impacts on the number of exporters (i.e., the extensive margin of trade).     

The Loss from Trade under International Cournot Oligopoly with Cost Asymmetry

This paper examines the efficiency and welfare effects of intra‐industry trade in the presence of imperfect competition and heterogeneous technologies. We show that when a Southern country has a relatively less concentrated industry and faces low demand, the output of the Northern country may contract after initiating trade. Production inefficiencies can outweigh the gain effected by trade‐induced competition and lower price in trade, resulting in a net loss in the global welfare. In some circumstances, voluntary technology transfer, managed trade through VERs, or the introduction of a tariff can improve both trading partners' welfare.     

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.     

STAY OR LEAVE? CHOICE OF PLANT LOCATION WITH COST HETEROGENEITY

Using a two-country model, we examine location choices by two domestic firms when they serve only the domestic market and their cost structures differ. The findings indicate that whether the firm that has a greater incentive for foreign direct investment is more or less efficient depends on the differences in domestic and foreign marginal costs, trade costs, and the presence of fixed costs. Plant locations may not be uniquely determined. In particular, a small change in trade costs may reverse plant location. Moreover, a decrease in transport costs in the presence of foreign direct investment may deteriorate domestic welfare.     

Exchange rate volatility and international trade: A general-equilibrium analysis

We analyze the relation between exchange-rate volatility and the volume of international trade, in a general-equilibrium stochastic-endowment economy with imperfect international commodity markets, and treating both variables as endogenous. Even in the simplest model, the sign of the relation depends on the source for the change in volatility. For instance, more volatility of the endowments and higher costs to international trade both boost exchange risk (and lower welfare); but the first increases the expected volume of trade, while the second decreases trade. Note that even the (inter-equilibria) relation between trade and welfare is ambiguous.     

Fixed export cost heterogeneity, trade and welfare

Recent literature on the workhorse model of intra-industry trade has explored heterogeneous cost structures at the firm level. These approaches have proven to add realism and predictive power. This paper presents a new and simple heterogeneous-firms specification. We develop a symmetric two-country intra-industry trade model where firms are of two different marginal cost types and where fixed export costs are heterogeneous across firms. This model traces many of the stylized facts of international trade. However, we find that with heterogeneous fixed export costs there exists a positive bilateral tariff that maximizes national and world welfare.     

International Trade, Technology Transfer, Growth, and Welfare in a Schumpeterian Model of Endogenous Growth

This paper provides a simple analysis of the role of international technology transfer in the determination of the long-run pattern of trade, growth, and welfare in a two-country world within an endogenous growth framework. It is shown how the possibility and form of technology transfer impinge upon the long-run pattern of trade and therefore long-run growth rates and welfare. The most interesting finding of this paper is that, under certain conditions, there is a case in which restricted trade is growth- and welfare-enhancing compared with free trade.     

Free trade and the burden of domestic policy

Abstract. Consider a small economy facing accession to a exogenously defined trade agreement. Before accession, the government controls trade and pollution policy. After accession, it retains control over pollution policy, but must allow free trade in all goods. This is a choice many governments face while joining trade agreements today. They decide whether greater market access to other members is more valuable than control over trade policy. I ask two questions. All else being equal what happens to environmental policy after accession? Second, what affects the choice of accession and how does this choice impact aggregate welfare? I show that a loss in control over trade policy alters the political incentives determining environmental policy. Before accession, producers can transfer a portion of their burden of environmental regulation to consumers through price increases. After accession the same regulation is borne entirely by producers. Owing to the change in burden, there exist plausible conditions under which the adoption of free trade can lead to more stringent environmental regulation, a reduction in the preferential treatment of special interest groups, and an increase in aggregate welfare.     

Trade, democracy, and the gravity equation

Does democracy affect trade? There are several channels by which democracy may affect trade, with differing implications. First, democratization in the exporting country can improve product quality and reduce trade costs, increasing bilateral trade. Second, democratization in the importing country may increase trade barriers and thus reduce imports. In this paper, I analyze the effect of democracy on trade by augmenting the gravity equation with democracy. Using a rich panel data set and controlling for the endogeneity of democracy, I find empirical evidence consistent with the hypothesis that democracy fosters trade. This finding is robust to various econometric methods and to the use of disaggregated specifications.     

Household inequality, social welfare, and trade

Working with Sen social welfare functions (meaning explicit separability between mean income and income dispersion), we develop a generalized dual approach to tracking household inequality aspects of social welfare in general equilibrium. We highlight how household equity can be examined analytically alongside production efficiency in duality-based models, using our dual framework to explore potential trade-offs between efficiency and equity effects of trade policy. Our results complement the set of standard inequality results in trade theory focused on functional rather than household inequality. We also find that the relative distributional impact of tariffs on welfare is conditional on the initial level of inequality.