Abstract
This paper, using a three-sector full-employment general equilibrium model with segmented domestic factor markets, explains how and under what conditions a policy of import restriction using tariffs can be beneficial for a small, open economy compared to the import liberalisation policy, contrary to the conventional results. Also, inflows of foreign-owned capital to an export sector within the economy’s export processing zone coupled with labour-augmenting type technology transfer, with protected import-competing sector, can improve national income, even without any distortion in the formal sector labour market. This simple application of competitive trade models establishes the fact that trade restrictions can promote growth and attract FDI for the developing countries, even when foreign capital enters one specific export sector of the economy.
Highlights
The World Trade Organization (WTO) promotes and supports multilateral trade liberalization, many developing countries continue to maintain relatively high tariffs despite committing to tariff reductions
This paper, using a three-sector full-employment general equilibrium model with segmented domestic factor markets, explains how and under what conditions a policy of import restriction using tariffs can be beneficial for a small, open economy compared to the import liberalisation policy, contrary to the conventional results
This paper incorporates distortions in both factor markets in a 3 × 3 general equilibrium model of production and trade to explore the welfare implications of a protectionist policy characterized by increase in tariff rate on the protected domestic import-competing sector and a tariff reform in the import-competing sector, when foreign capital is specific only to the export sector within the export processing zones (EPZ hereafter) of the economy
Summary
The World Trade Organization (WTO) promotes and supports multilateral trade liberalization, many developing countries continue to maintain relatively high tariffs despite committing to tariff reductions. This paper incorporates distortions in both factor markets in a 3 × 3 general equilibrium model of production and trade to explore the welfare implications of a protectionist policy characterized by increase in tariff rate on the protected domestic import-competing sector and a tariff reform in the import-competing sector, when foreign capital is specific only to the export sector within the export processing zones (EPZ hereafter) of the economy. On the top of that, I have considered segmented domestic capital market This analysis reveals that contrary to the existing theoretical results, if FDI to the EPZ is accompanied by labor-augmenting technology transfer in this small open developing economy with segmented domestic factor markets, welfare can improve foreign capital does not enter the tariff protected import-competing sector. The section describes the structure of our general equilibrium model and implications of these policies on the national income of a small, open economy while the last section briefly describes the concluding remarks and the policy implications of the derived results
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