Strategic Trade and Transport Policies with Congestible Facilities

Abstract

This paper investigates strategic trade and transport policies in situations where transportation of traded goods involves congestible facilities (here, roads) of both the importing and exporting countries. It is found that the presence of road congestion can have an important effect on strategic trade policies of both countries. In particular, with perfectly competitive exporting firms and hence an absence of the rent-extraction incentive, the importing country may still impose a positive tariff. Furthermore, when regional free trade blocs remove trade barriers, whether the countries can impose discriminatory road tolls between the local users and the traded-good traffic can affect: With uniform tolls, road tolls, while being regarded as a domestic (internal) policy, may serve partially as strategic trade policies. In this case, local highway users tend to be worse off than in the absence of trade liberalization. This analysis also provides a potential explanation for the “border effect.”