Multilateral trade liberalization and public goods provision in a North-South trade model with nonhomothetic preferences

Abstract

Under nonhomothetic preferences developing countries are less likely to gain from multilateral trade liberalization than developed countries. This paper shows that this relative disadvantage for developing countries changes when the effects on public good provision are taken into account. The impact it has depends on the strength of their comparative advantage in export markets. We show that a strong (weak) comparative advantage in export markets mitigates (reinforces) the relative disadvantage of multilateral trade liberalization for developing countries. Moreover, in the presence of public goods provision, the relative disadvantage for developing countries with a strong comparative advantage is further mitigated when also income differences within countries are taken into account.