Effects of trade diversion and trade creation of MERCOSUR on US and world apple markets

Apples are the third most valuable fruit in the United States and account for 18% of US fruit exports. Chile is a major competitor to the United States in the MERCOSUR market, since it is one of the leading apple producing countries and enjoys the tariff reductions as a member of MERCOSUR. Consequently, Chilean exports displace US exports in MERCOSUR. In addition, other MERCOSUR members import more from lower-cost Chile, leading to a reduction in production and an increase in consumption in these countries. This study develops a theoretical and an empirical model of world apple market to quantify the trade diversion and trade creation effects of the MERCOSUR free trade agreement and to estimate the welfare impacts.     

The impacts of trade and self‐sufficiency policies on heterogeneous rice farms in Malaysia

This paper develops a farm household model of heterogeneous Malaysian rice farmers. The model determines the domestic price of milled rice in equilibrium. The model is simulated to analyze the effects of free trade, self‐sufficiency achieved through trade policy, and the impact of free trade and self‐sufficiency when rice productivity expands. The ex ante results for free trade predict that total rice supply rises as the increase in imports offsets the decrease in domestic production, causing the domestic price of milled rice to fall by 15.8 percent. While this price decrease generates negative income effects for rice farmers, it leads to an expansion of consumption of milled rice by both the farm and urban populations. The results for self‐sufficiency through heightened tariffs predict that production for domestic rice farmers increases. However, with fewer imports, total rice supply falls, causing the domestic price of rice to increase by 41.5 percent. Because free trade is politically unfeasible and trade‐driven self‐sufficiency policies contract total rice consumption, boosting rice production through research and development is an effective way for Malaysia to increase the total supply of rice while limiting its dependence on imports.     

The Nonequivalence of Import and Export Quotas in Strategic Equilibrium

The authors use a standard general‐equilibrium trade model to show that export and import policies are not symmetric in the equilibrium of a strategic game with quotas. It is assumed that N (identical) large countries, without cooperation, set their import (or export) quotas to maximize domestic welfare. It is shown that the equilibrium in which all countries use import quotas differs from, and is superior to, the equilibrium in which countries use export quotas. The difference arises because the elasticity of the residual foreign export supply schedule differs between the two equilibria. The authors also study the properties of the sequential equilibrium of the game. In a simultaneous‐move game, each country is indifferent as to whether it uses an import or export quota, given the policy of the other country. However, in a sequential‐move game, the first mover will prefer to use an import quota rather than an export quota.     

Dynamic Interactions in Trade Policy in a Differential Game Model of Tariff Protection

This paper develops a two‐country dynamic game model of tariff protection to reconsider optimal trade policies and their implications for welfare. The authors show that an import subsidy is optimal in the feedback Nash equilibria, which results in a curious possibility that the domestic market is monopolized by the foreign firrm. However, welfare comparisons among Nash equilibria, free trade, and autarky reveal that feedback Nash equilibria involve higher welfare than both autarky and free trade, i.e. dynamic noncooperative choices of policy serve as tacit policy coordination and ensure larger trade gains relative to free trade.     

Free Trade versus Autarky under Asymmetric Cournot Oligopoly

The paper compares free trade with autarky in an asymmetric multi‐country world under Cournot competition with constant returns to scale and linear demand. We derive respective conditions under which free trade will hurt a country's consumers, benefit its firms, induce it to export, increase its output and raise its welfare. We show that these conditions are linked in a clear order, with one implying the next. We further demonstrate that free trade can reduce world total output and total consumer surplus as well as world welfare. Along the way, we correct several oversights in the literature.     

Labour-supply impacts of effective welfare programme parameters: a reanalysis

We quantify the impact of effective welfare programme parameters on the labour supply of single female household heads – the primary group of welfare recipients in the USA. Our panel of data is derived from the US Census Bureau's Current Population Survey for the years 1979 to 1990 inclusive. Behavioural impacts from a range of economic variables are consistent in sign with predictions made by economic theory. We find that effective welfare gurantee levels and the effective tax rate on earned income both significantly decrease labour supply. The marginal effects of these welfare programme parameters are economically small: a US$1000 increase in the expected welfare guarantee level reduces annual labour supply by about 36 hours; a 10 percentage point increase in the effective tax rate on earned income reduces annual labour supply by about 7.5 hours.     

Trade policy with asset markets: The role of financial structure for time consistency

The present study uses a two-country, two-good, stochastic general equilibrium trade model to analyze the implications of optimal trade policy under uncertainty in the presence of financial markets. Using such a framework, I demonstrate that the policy-active home government, acting to maximize domestic welfare, will always have incentive to revise the previously announced import tariff policy once an asset position is taken by the representative agent in each country engaged in trade. The resulting time-consistent solution will be sensitive to the composition of asset income. Since the fiancial contracts can be combined in an infinite number of ways to yield the same optimal level of asset income, there will exist multiple time-consistent solutions, one for each financial structure. Using a specific log utility function, I also show that for certain financial structures, precommitment solutions will be replicated by time-consistent solutions, a result which marks a significant departure from the standard deterministic framework.     

出口导向贸易政策与发展中国家间FDI竞争——基于寡占竞争模型的理论分析

文章建立了一个两国竞争模型,重点分析了进口关税与出口补贴等战略贸易政策对发展中国家吸引FDI竞争的影响。研究发现:(1)当两国都采取出口补贴的外资激励政策时,工资水平和进口关税对发展中国家间FDI竞争并没有直接影响;(2)对全要素生产率较高的国家来说,当两国的关税水平都较高时,出口补贴政策增加流向本国的FDI,而当两国关税水平大幅下降后,出口补贴政策反而不利于本国FDI竞争。文章的结论对当前我国战略引资和出口退税等政策的调整具有重大的指导意义。     

Border tax adjustments and tariff‐tax reforms with consumption pollution

We develop a model of a small open economy, where pollution per unit of consumption between domestically produced and imported quantities of the same good differs. We show that the first‐best policy combination calls for consumption taxes on all polluting goods, and border tax adjustment (BTA) measures, that is, tariffs or import subsidies. We identify conditions under which well‐known tariff‐tax reform policies for developing economies, such as a consumer‐price‐neutral piecemeal reform of trade and a consumption tax, and a consumer‐price‐neutral reform of all trade and consumption taxes improve welfare. We also evaluate whether reforms of trade taxes alone are superior to consumer‐price‐neutral reforms of trade and consumption taxes.     

Estimating the Impact of WTO and Domestic Reforms on the Indian Cotton and Textile Sectors: a General-Equilibrium Approach

The agreement to abolish the quotas on textiles and clothing introduced under the Multi‐fiber Arrangement (MFA) will create a new and much more competitive world market for India's exports of textiles and clothing. India's inefficient and costly policies, such as cotton export quotas, the hank yarn obligation, and the restrictive policies on foreign investment that have held back productivity in the Indian apparel sector, will impose serious costs. The authors consider the implications of reforming these policies in an open trading environment using a multiregion, applied general‐equilibrium model. They find that the costs of these policies to India increase substantially following abolition of the MFA; the benefits to India from domestic reforms are considerably enhanced when there is global free trade in textiles and apparel.     

US Ethanol Trade Policy: Pollution Reduction or Domestic Protection

To mitigate dependence on fossil fuel and reduce pollution, the US government has undertaken several policies—an import tariff, tax credit, and mandate—to augment domestic ethanol production and increase ethanol in the fuel supply. This study uses a general equilibrium model to analyze the effects of the US ethanol import tariff on welfare by internalizing the externality and incorporating US fuel and ethanol policies and to determine the optimal tariff. The results show that because of the environmental benefits of imported ethanol, the adverse effects of domestic ethanol on the environment, the need for the imported ethanol to boost the blended gasoline production, and the economy‐wide interactions of various markets, the optimal trade policy may call for subsidizing rather than taxing ethanol imports.     

A Study on Market Potentialities of Major Apple Import Countries

Import potentialities of world apple markets consist of the quantitative size and price level, and to some extent, will determine where the exported apples will be shipped to and how large the amount exported to each destination will be. Results indicate that apple import potentialities of European markets are the largest among world major apple trading blocks. Apple import potentialities of Asian Markets around China are not as large as Europe, but these markets are easier for China apple exports to enter. China has obvious comparative advantages in many aspects of apple production and apple marketing. In order to enhance her high-quality apple exports effective measures must be taken.     

Market entry and trade weighted import costs

Trade weighting is a common method of aggregating trade frictions. It will understate changes in these costs when there are non‐ad valorem trade costs and quality differences. Newly traded goods enter at higher trade costs than previously traded ones. Lower import costs shift trade to low‐quality goods with higher measured trade costs. These effects are quantitatively important. U.S. import costs fall more than twice as fast as trade weighted measures from 1974 to 2004 after the impact of shifting quality and newly traded goods is accounted for. Empirical estimates that use trade weighting will underestimate the welfare impact of trade costs.     

Black market exchange rates in India: an empirical analysis

In this paper, we explore the determinants of black market (BM) exchange rates in India using annual data from 1955–1994 and integration and cointegration analysis. Two important factors, namely the import capacity of official foreign exchange reserves and restrictions on international trade, have largely been ignored as determinants of BM rates. We stress the importance of these two factors and incorporate them, with others more familiar in the literature, in our theoretical and empirical model for BM rates in India. Our empirical findings show that a low level of official foreign exchange reserves negatively and a high level of trade restrictions positively affect BM rates. We show that the flexible Bretton Woods exchange rate policies for India in 1973 have a negative impact on BM rates. The results also reveal that interest rate policies positively affect BM rates. Thus, our empirical model lends support to the trade and monetary approaches to BM rates and hence, trade restrictions with excess money supply should be removed to eliminate the BMs for forex in India. First Version Received: September 98/Final Version Received: January 2000     

Second-best trade policies in Cournot oligopoly

In this paper we study the optimal import policy in an oligopolistic market with a given number of quantity-setting firms. In the absence of fixed costs, we show that if the policy instrument is an import quota, the optimal policy is either free trade or autarky, while if the instrument is a tariff the optimal policy is neither free trade nor autarky. In the case of fixed costs, we show that contrary to the traditional protectionist argument, a restrictive import policy might increase domestic welfare by increasing domestic consumers' surplus, instead of increasing domestic profits.     

Environmental regulation and intra-industry trade

The paper analyses complex interactions between intra-industry trade (IIT) and environment by extending Krugman's model of monopolistic competition and trade. It is found that an increase in exogenous environmental tax by a country leads to a fall in its output (the scale effect) and aggregate pollution, and an increase in its number of varieties (the selection effect). With IIT, if Home is a net exporter, an increase in its environmental stringency leads to a negative scale effect, which reduces its export demand and raises its import demand. In contrast, a positive selection effect reduces its import demand. However, the first-order scale effect on exports dominates the second-order effect on imports, implying a rise in Home's share of IIT with Foreign. The opposite holds true when Home is a net importer. Furthermore, the impact of a rise in environmental tax on aggregate welfare comprises the following counteracting effects: a negative scale effect, a positive selection effect, a lower level of aggregate pollution and a higher environmental tax revenue in autarky, and two additional effects, namely, changes in the level of exports and imports, under free trade. The overall change in aggregate welfare, in both autarky and free trade, is in general ambiguous.     

Does Preferential Trade Benefit Poor Countries? A General Equilibrium Assessment with Nonhomothetic Preferences

We develop a Ricardian model of trade with nonhomothetic preferences to analyze preferential trade agreements (PTAs) among countries of different stages of economic development. The richer a country is, the more likely will PTAs improve its terms of trade, also when it is a non‐member. Rich non‐member countries are also less likely to incur welfare losses from PTAs. PTA membership only guarantees welfare gains for countries that are too poor to import the goods rich countries produce. For all other countries, the welfare effects of joining PTAs depend on the world income distribution and on the strength of comparative advantages.     

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.     

Why do rich countries prefer free trade over free migration? The role of the modern welfare state

"According to traditional trade theory (Heckscher-Ohlin), free trade and free migration are equivalent measures of economic integration leading both to an equalization of factor prices. This prediction is in sharp opposition to the observed preference of rich countries for free trade over free migration. We provide an explanation for this inconsistency: the redistribution policies in the countries. Social welfare in countries with a relatively small number of low-skilled native workers is higher with free trade than with free migration due to redistribution of income towards immigrating workers."     

Tariffs,R&D,and two merger policies

We compare welfare-increasing and consumer-surplus-increasing merger policies in an oligopoly when merging firms face endogenous trade policies, and engage in cost-reducing R&D activity. As R&D becomes less efficient, the equilibrium market structures (EMS) become less concentrated under both merger policies. When R&D is very efficient, monopoly becomes the EMS under the welfare-increasing merger policy. This occurs as the absence of tariff and efficient R&D under monopoly limit the price increase and the gain in profits outweighs the loss in consumer surplus and tariff revenue. The results suggest that trade policies should take into account merger policies and industries' R&D efficiency. The results also show that global welfare maximization requires global merger policy coordination.