Strategic Trade Policy in General Oligopolistic Equilibrium

Abstract

In a two-country general oligopolistic equilibrium model, I study how crosssector strategic trade policy affects wages, countrywide profits, and welfare. Firms face resource constraints and wages are simultaneously determined. Relative to free trade, cross-sector protectionism generates a reduction in the foreign wage without affecting the domestic wage. Domestic countrywide profits benefit from small import tariffs, whereas the foreign counterpart is hit, but when sectors share the same technology. Domestic welfare is unambiguously penalized. Hence, the general-equilibrium cross-sector perspective goes against the textbook version theory of the optimal tariff in partial equilibrium. Rationalization of these effects suggests a politicaleconomy view on tariff formation in general equilibrium. JEL:D43 AbstractIn a two-country general oligopolistic equilibrium model, I study how cross-sector strategic trade policy affects wages, countrywide profits, and welfare. Firms face resource constraints and wages are simultaneously determined. Relative to free trade, cross-sector protectionism generates a reduction in the foreign wage without affecting the domestic wage. Domestic countrywide profits benefit from small import tariffs, whereas the foreign counterpart is hit, but when sectors share the same technology. Domestic welfare is unambiguously penalized. Hence, the general-equilibrium cross-sector perspective goes against the textbook version theory of the optimal tariff in partial equilibrium. Rationalization of these effects suggests a political-economy view on tariff formation in general equilibrium.

How unilateral tariffs harm workers under oligopoly

“…Most of the existing literature on tariffs in GOLE focuses on symmetric tariffs, which does not allow to study the strategic dimension of unilateral trade policy and the effects of asymmetric tariff rates, which would require to allow the countries' marginal utilities of income to differ. Colacicco (2012) analyzes strategic trade policy in a GOLE‐style framework but only models the demand side of one country, such that a cross‐country demand channel is ruled out by definition. A notable exception is an unpublished manuscript by Ervik and Soegaard (2015), who show the optimal unilateral tariff in a general oligopolistic equilibrium model and predict that a trade war would eliminate trade.…”

How Protectionism Harms Workers Under Oligopoly

“…3 See, for example, Brander and Spencer (1984). The approach to transfer it to general oligopolistic equilibrium by Colacicco (2012) is discussed later on in this chapter.…”

Ten Years of General Oligopolistic Equilibrium: A Survey

“…()'s Heckscher–Ohlin trade model to investigate the existence of factor prize equalization, for sufficiently similar countries. See also Colacicco () on strategic trade policy in a GOLE context. There, in a home‐market framework, I examine how cross‐sector (uniform) protectionism affects wages, countrywide aggregate profits, and welfare.…”