Wasteful trade barriers in oligopoly

Abstract

ABSTRACT Non-Tariff Barriers (NTBs) are known to exist in various forms. In this study, we investigate the role of Red-Tape Barriers (RTBs), a type of NTBs resulting from wasteful bureaucratic procedures, in a bilateral trade model under international oligopolistic competition. We demonstrate that, under relatively weak conditions, RTBs can arise endogenously. Furthermore, we reveal that RTBs can exhibit reactions opposite to tariffs. Specifically, we show that an increase in tariffs can lead to a significant decrease in RTBs, causing total trade costs to decline, which we call ‘backlash’. Additionally, when the backlash occurs, an increase in tariffs can improve consumer surplus, government revenue and expenditure, and social surplus. This study implies that tariff elimination, with the presence of RTBs, may hinder trade liberalization and reduce social surplus, emphasizing the need to carefully consider RTBs’ effects in trade policy, especially for oligopolistic industries.