Unilateral Trade Policy Research Articles

Delocation and trade agreements in imperfectly competitive markets

We consider the purpose and design of trade agreements in imperfectly competitive environments featuring firm-delocation effects. In both the segmented-market Cournot and the integrated-market monopolistic competition settings where these effects have been identified, we show that the only rationale for a trade agreement is to remedy the inefficiency attributable to the terms-of-trade externality, the same rationale that arises in perfectly competitive markets. Furthermore, and again as in the perfectly competitive benchmark case, we show that the principle of reciprocity is efficiency enhancing, as it serves to “undo” the terms-of-trade driven inefficiency that occurs when governments pursue unilateral trade policies. Our results therefore indicate that the terms-of-trade theory of trade agreements applies to a broader set of market structures than previously thought.

Could the proposed WTO Special Safeguard Mechanism protect farmers from low international prices?

This paper offers an empirical analysis of the proposal by some developing countries for an agricultural Special Safeguard Mechanism (SSM) in the World Trade Organization. It draws on political economy and market theory to demonstrate that the loss-averting domestic producer benefits that proponents believe the SSM would offer agricultural-importing developing countries may be illusory, insofar as agricultural-exporting countries also seek to avert producer losses. By way of illustration, the paper then uses time series data to analyze past government responses to fluctuations in the world’s rice markets. The results suggest that the proposed SSM would deliver at most only a small fraction of the loss-averting benefits that have been advertised by the proponents of the SSM. Since the analysis applies to upward as well as downward spikes in international prices, it underscores the importance of strengthening multilateral disciplines on both import and export trade interventions to reduce beggar-thy-neighbor unilateral trade policy responses to food price fluctuations.

Optimal Trade Policy under Endogenous Foreign Entry

I characterise the optimal unilateral trade policy for domestic firms competing in domestic or integrated markets with endogenous entry of foreign firms. Under conditions satisfied in most trade models (as with quasi‐linear or CES preferences) the analysis is simplified by a Neutrality Theorem: any policy affecting the profitability of the domestic firm is not going to affect consumer surplus and the strategies of the foreign firms, but affects their entry decisions. In a domestic market, we fully characterise the optimal import tariff: this is positive in the classic linear Cournot case, but with a convex demand or product differentiation it is optimal to adopt an import subsidy. In an integrated market, the optimal subsidy to domestic production is always positive, independent from form of competition and size of the domestic market.

Can trade liberalisation in South Africa reduce poverty and inequality while boosting economic growth? Macro–micro reflections

South Africa is trapped in a cycle of modest growth, unacceptable poverty levels and record unemployment. This has led to renewed interest on the relationship between macro (growth) and micro (poverty and distribution) issues. This paper uses a macro–micro tool that couples a computable general equilibrium model with microsimulation models to examine the impact of further unilateral trade policy reforms on growth, poverty and welfare. Trade liberalisation alone has very minimal short-run macroeconomic consequences while its long-term impacts are positive and magnified by technical factor productivity (TFP) effects. Trade liberalisation has no appreciable impact on poverty in the short run even if we allow for trade-induced TFP increases. In the long run, however, poverty reduces even in the case when we do not allow for TFP increases. Trade liberalisation policy has been found to be progressive despite the low level of tariff protection remaining in South Africa.

Endogenous Market Structures and International Trade - II: Optimal Trade Policy

I characterize the optimal unilateral trade policy for domestic firms competing in domestic or integrated markets with endogenous entry of foreign firms. Under conditions satisfied in most trade models (as with quasi-linear or Dixit-Stiglitz preferences), the analysis is simplified by a Neutrality Theorem: any policy affecting the profitability of the domestic firm is not going to affect consumers surplus and the strategies of the foreign firms, but changes their number and the profits of the domestic firm. In a domestic market with quantity competition the optimal tariff is positive with linear demand but negative with highly convex demand or Dixit-Stiglitz preferences. In an integrated market the optimal subsidy to domestic production is always positive, independent from the relative size of the domestic market and inversely related to the elasticity of demand.

Trade, climate change, and the political game theory of border carbon adjustments

The lack of real progress at the Durban climate change conference in 2011—postponing effective action until at least 2020—has many causes, one of which is the failure to address trade issues and, in particular, carbon leakage. This paper advances two arguments. First, it argues that the conventional view of Border Carbon Adjustments (BCAs) as a ‘dirty’ trade barrier should be turned on its head. Rather, the absence of a carbon price comprises an implicit subsidy to dirtier production in non-regulated markets. Second, BCAs could act as a game-changer when climate policy negotiations move at a glacial pace, if at all. Materially stronger progress could be achieved indirectly from the threat of unilateral trade policies. The paper shows how this could come about, using a simple political game theory model. The appropriate game form is one in which parties move unilaterally and sequentially, given the failure to agree on a common course of action, and are fully aware of the impacts of their actions. The paper shows that properly crafted BCAs could help reduce trade distortions, limit the competiveness effects, and help build a broader coalition of interests for more global actions.

Effects of Serbian accession to the European Union

In this article, the global simulation model (GSIM) of Joseph F. Francois and Keith H. Hall (2009) for analyzing global, regional, and unilateral trade policy changes was applied to Serbia. This was to measure the effects of full trade liberalization with the EU after Serbian accession to the EU. As anticipated, most of the changes in welfare after full liberalization of trade between Serbia and EU can be expected in sectors where Serbia has specialized; protection against imports from the EU is strong. However, losses could also occur in sectors that currently face strong protection against the rest of the world and this protection is lost after EU accession. Trade liberalization will lead to a substantial loss of tariff revenues. Reduced consumer prices might, on the one hand increase consumer surplus but on the other hand decrease producer surplus and output in certain industries.

CROSS-COUNTRY TECHNOLOGY TRANSFER AND POLITICALLY DRIVEN INTERNATIONAL AGREEMENTS FOR ENVIRONMENTAL STANDARDS

Grossman and Helpman highlighted a political framework to internalize inefficiency incurred due to unilateral trade policy implementation by sovereign countries. This paper extensively adopts their framework to explore the effects of special interest politics on governments under negotiation to forge international environmental standards to control global emission. Particular attention is given to a case in which negotiation is driven by transferring the abatement technology. Within a specific factor model of international trade, improving the abatement efficiency through technology transfer can give the most mutually beneficial outcome, achieving the lowest level of global pollution compared to other political benchmarks.

Trade Policy: Home Market Effect Vs. Terms of Trade Externality

We study trade policy in a two-sector Krugman-type trade model with home market effects. We allow for three different instruments: tariffs, export taxes and production subsidies. For each instrument, we consider unilateral trade policy without retaliation. We find - contrary to the results of previous studies - that production subsidies are always inefficiently low and driven by the incentives to improve the (welfare relevant) terms of trade. For tariffs and export taxes we show that results depend crucially on the (in)efficiency of the free trade allocation. When starting from an allocation that is distorted because of monopolistic competition, the home market effect (and in the case of export taxes also the desire to correct for the monopolistic inefficiency) induces policy makers to set a tariff (an export subsidy). However, when monopolistic distortions are corrected, terms of trade effects dominate the choice of trade policy and lead to an import subsidy (an export tax).

The impact of African growth and opportunity act (Agoa) on U.S. imports from Sub‐Saharan Africa (SSA)

AbstractWe evaluate the impact of the unilateral trade policy concession known as African Growth and Opportunity Act (AGOA) on U.S. imports from eligible Sub‐Saharan African (SSA) countries. Using U.S.–SSA countries' trade data that span the years 1991–2006, we find that AGOA has contributed to the initiation of new and the intensification of existing U.S. imports in both manufactured and non‐manufactured goods and several product categories. However, compared to its import initiation impact, the import intensification effect of the Act has been marginal. Our results have important policy implication for further intensification of African exports to the U.S. markets. Copyright © 2008 John Wiley & Sons, Ltd.

GSIM Measurement of the Effects of the EU accession of the Balkans and Turkey on Agricultural Trade

GSIM Measurement of the Effects of the EU accession of the Balkans and Turkey on Agricultural Trade In this paper, the global simulation model (GSIM) for the analysis of global, regional, and unilateral trade policy changes by Francois and Hall (2003) was applied to the agricultural trade between the EU, the Balkans and Turkey. This was done in order to measure the effects of an EU accession of the Balkans and Turkey. Most of the changes in welfare after a full liberalisation of agricultural trade between the Balkans and Turkey on the one hand and the EU on the other hand can be expected in the accession countries themselves. It is estimated that incumbent EU members will be affected only to a minor extent. It was also estimated that the exchange rate risk is not very high.

Trade Policy and Poverty Reduction in Brazil

A multi-region computable general equilibrium model is used to evaluate the regional, multilateral, and unilateral trade policy options of Mercosur from the perspective of the welfare of all potential partners in several proposed agreements. The focus for Brazil is on poverty impacts. The results show that the poorest households in Brazil experience gains of 1.5-5.5 percent of their consumption, which are about three to four times the average gains for Brazil. Protection in Brazil favors capital-intensive manufacturing relative to unskilled labor-intensive agriculture and manufacturing. So trade liberalization raises the return to unskilled labor relative to capital and disproportionately helps the poor.

FTA, Customs Union or Unilateral Trade Policy? Final Status Options for "the West Bank and Gaza"

This paper considers regional and unilateral trade policy options for the West Bank and Gaza (WBG). It examines the welfare implications of a free trade agreement (FTA) with Israel, a customs union (CU) with Israel, and a nondiscriminatory trade policy (NDTP). The analysis captures the fact that the WBG is landlocked, that it has a large trade deficit with Israel, and that smuggling takes place between them. The paper concludes that i) a NDTP is unambiguously superior to a FTA with Israel; but ii) the WBG should only pursue a NDTP if the policy is open, transparent, and enforced by a credible lock-in mechanism; otherwise, a CU with Israel may be preferable, especially if trade and other taxes are shared more equitably.

Trade Policy and Poverty Reduction in Brazil

Using a multi-region CGE model, we evaluate the regional, multilateral and unilateral trade policy options of MERCOSUR from the perspective of the welfare of all potential partners. In Brazil, we focus on poverty impacts. We find that the poorest households in Brazil experience percentage gains of between 1.5 to 5.5 percent of their consumption, which is about three to four times the average for Brazil. Protection in Brazil favors capital intensive manufacturing relative to unskilled labor intensive agriculture and manufacturing. So trade liberalization raises the return to unskilled labor relative to capital, thereby helping the poor.

Tariffs, quotas and terms-of-trade: The case of New Zealand

This paper reports quantitative information on the effects of tariffs and quotas on prices of individual goods. The analyses uses the natural experiment provided by a comprehensive unilateral trade policy reform in New Zealand to examine the response of foreign exporters to an incident of liberalisation that is unique in the developed world. The price effects of tariffs and quotas are estimated using a multidestination 7-digit longitudinal product-level dataset on export values and quantities. The effects are found to be by no means equivalent: Whereas tariffs display no significant effect, the impact that quantitative restrictions have on the terms-of-trade of the country that imposes them are unequivocally detrimental and quantitatively important.

Linking Child Labour with International Trade: Recent Developments and their Implications

In recent years, child labour has become increasingly linked to important global economic forces such as international trade. In the context of unilateral, regional, and multilateral trade policies, there have been discussions about subjecting products made with child labour to trade penalties and sanctions. These proposals have generated much controversy and concern. This paper aims at providing a comprehensive understanding of recent developments in the trade and child labour linkage within the broader framework of the labour standards and trade debate. It also assesses the validity and effectiveness of using trade-related measures to address the problem of child labour by presenting the arguments for and against this linkage and by analyzing the available evidence in this regard.

Correcting Trade Distortions in a Small Open Economy

This paper considers the second‐best strategy of correcting a wide variety of trade distortions in a small open economy with perfect competition in all markets. Using the tools of duality, we obtain some general properties of the structure and the levels of the optimal taxlsubsidy rates. The paper also analyzes the welfare effects of unilateral piecemeal trade policy reforms when some of the quota distortions—imposed by the foreign countries—are unalterable. It is shown that the merits of unilateral trade policy reforms that are emphasized in the literature crucially depend on the absence of unalterable foreign imposed quotas.

On the Welfare Effects of a Customs Union Versus Unilateral Trade Policies Under Internal Scale Economies and Product Homogeneity

Notwithstanding some recent attempts at analyzing the impact of increasing internal returns to scale (IIRS) on CU theory, research on this issue is still at a highly rudimentary stage. The potentially important implications for CU theory of the introduction IIRS were in fact independently discussed in seminal, albeit relatively neglected papers by Max Corden [1972] and Donald Mead [1968]. This paper selectively surveys and applies the earlier papers to systematically establish conditions under which a CU could, from a single country's perspec tive, potentially pareto dominate unilateral trade policies. Relaxation of some restrictive assumptions maintained by Corden [1972] and Mead [1968] allow for the consideration of a wide-ranging and rich milieu of theoretical possibili ties of non-negligible practical significance. (JEL Classification: b02, tl2, tlo)

Aspects of Unilateral Trade Policy and Factor Adjustment Costs

OVER the past decade, the post-war United States position in favor of free trade has been strongly attacked by those who have invested in and are employed in industries facing significant competition from imports. Since factors of production are temporarily tied to a particular industry, all factors in contracting industries experience economic losses of a short-run nature. This paper considers to what extent these short-term losses alter the welfare evaluation of free trade policies. A second intent, based on the analytical framework developed to resolve the first point, is to determine when a tariff reduction may be preferable to tariff removal and how such tariff reductions may be effectively carried out over time. In the literature of trade policy, it has been shown that in a two-good general equilibrium model under the assumption that factors of production are immobile, the gains from free trade will be reduced but remain positive if no distortions exist (Haberler, 1950; Johnson, 1965). More recently, studies have focused on the short-run distributional effects of changing international prices. Capital has been postulated to be immobile between the two industries and relative factor prices perfectly flexible (Mayer, 1974; Mussa, 1974). In this paper the analysis is based upon the situation where factor-price rigidities exist in addition to factor immobility. Under these circumstances changes in international prices result in unemployment. The economy is moved inside its long-run production possibilities frontier, and any welfare assessment of a free trade policy must allow for the second-best effect of this factor-market distortion. Because the short-run effect may be negative, the question arises whether the long-run welfare gain for a small country offsets this loss.' This study treats imports and domestic competing goods as imperfect substitutes, and allows for the effects of short-run output price rigidities. Limitations of the analysis are that only unilateral tariff reductions are dealt with empirically, and terms-of-trade effects are ignored.2 The model is used to evaluate the welfare cost of current tariff barriers for five disaggregated industries: industrial chemicals, iron and steel, machine tools, electrical machinery, and motor vehicles. One issue that falls out of this approach is whether an intermediate position between free trade and the current level of restrictions is preferable, given the existence of factor-market distortions. It is shown empirically that complete tariff removal generally will not be optimal in terms of economic efficiency and that phased reductions of tariffs over time will be preferable to a single tariff cut. Section I is concerned with the determination of benefits and social costs from tariff removal. Since United States trade policy often is determined in the context of unilateral policy changes affecting a single disaggregated industry, the empirical calculations presented in

The Framework of Anglo-Soviet Commercial Relations: The British View

The conduct of Anglo-Soviet trade occurs within a legal framework composed of various factors, including treaties, trade agreements, unilateral trade policies and measures employed by both countries, and the substantive law of each state. Official agreements between the two states have typically been bilateral accords operating principally to establish a legal structure for trade between the two countries.1 The modest function of such instruments is to authorize the conduct of trade, leaving to the market mechanism or, as in the case of the Soviet Union, central planning, the actual content of the trade. In addition, each government promulgates trade measures independent of transnational trade agreements and these measures have potential effects upon Anglo-Soviet commercial relations. For example, Britain enforces a prohibition of certain strategic goods to the U.S.S.R. and employs an export licensing system which may affect commerce between the two states.2 Another component of the framework is the substantive law of both states. It is generally the case in English law that corporations which are agencies of a state under their respective charters or constitutions are accorded state immunity. The view that an enterprise can be so constituted as to enjoy the privilege of state immunity was articulated in the case of Krajina v. Tass Agency,3 which will be explored below. The historical foundation of English practice toward state trading enterprises can be traced to cases involving the East India Company.4 In early cases in which the company was sued, courts typically dismissed the actions on the ground of the sovereign status of the company, despite the fact that it was primarily engaged in commercial activities. Sovereign action, occurring subsequent to and resulting from certain commercial arrangements was found, for example, in Nabob of the Carnatic v. East India Co.5 In that case, the defendant-company had been assigned certain