Trade policy: Home market effect versus terms-of-trade externality

Abstract

We study trade policy in a two-sector Krugman (1980) trade model, allowing for production, import and export subsidies/taxes. We consider non-cooperative and cooperative trade policy, first for each individual instrument and then for the situation where all instruments can be set simultaneously, and contrast those with the efficient allocation. While previous studies have identified the home market externality, which gives incentives to agglomerate firms in the domestic economy, as the driving force behind non-cooperative trade policy in this model, we show that this, in fact, is not the case. Instead, the incentives for a non-cooperative trade policy arise from the desire to eliminate monopolistic distortions and to improve domestic terms of trade. As a consequence, terms-of-trade externalities remain the only motive for international trade agreements in the Krugman (1980) model once a complete set of instruments is available.

Beyond Competitive Devaluations: The Monetary Dimensions of Comparative Advantage

“…4 This is the same definition used in Ossa (2011), though in our case it does not imply the terms of trade are constant at unity, because monetary policy does affect factory prices. See also Helpman and Krugman (1989), and Campolmi et al (2014). 5 Different from the trade literature, however, we do treat this sector as an integral part of the (general) equilibrium allocation, e.g., exports/imports of the homogeneous good sector enters the terms of trade of the country.…”

Macroeconomic Factors Influencing the Development of Ukraine’s Foreign Trade

“…The newly introduced emphasis of foreign trade effect as for measuring the variability of trade policy and production as well as marketing cooperation with other countries is presented in the worked-out issues on the impact of international competition upon the efficiency of national production and consumption conditions (Alessia Campolmi, Harald Fadinger, Chiara Forlati, 2014). At the same time, the authors of this article are convinced that this approach needs clarification, since the competitiveness of the state's foreign sector business integrated into the system of international cooperative relations is conditioned not only by trade regulations (Yanikkaya, 2003), but should cover over its issues on innovation strength and investment attractiveness.…”

Geography, Competition, and Optimal Multilateral Trade Policy

“…Choosing the traditional good as numeraire, perfect competition in its market together with free trade implies that both its price and the wage of workers equal one in all countries. 15 Quasi- 1 5 Unit wage allows us to interpret the parameters of input requirements as costs, which we will do henceforth. linearity of utility (1) then implies that workers decide how much to spend of their unit wage on the varieties of the modern good, leaving whatever residual budget to the consumption of the traditional good.…”

“…9 Flam and Helpman (1987), Gros (1987) and Venables (1987) all rely on variants of the CES two-country model by Krugman (1980). In a multi-country set-up involving the six major players in recent GATT/WTO negotiations (Brazil, China, the EU, India, Japan, and the US), Ossa (2011) shows that a calibrated version of that model predicts noncooperative tari¤s of the same order of magnitude as the tari¤s observed during the tari¤ war following Smoot-Hawley. à la Krugman (1980) the incentives for a non-cooperative trade policy arise from the desire to eliminate monopolistic distortions and to improve domestic terms of trade (Campolmi, Fadinger and Forlati, 2014). More recently, …rm heterogeneity has been introduced in models of monopolistic competition.…”