The Welfare Effects of Imperfect Harmonization of Trade and Industrial Policy

Partial cooperation in setting trade policy may be worse than no cooperation for countries who form a customs union. The paper investigates three situations where this is likely to occur. First, if the countries forming the union comprise too small a percentage of the non-competitive sector of the industry, their cooperation may be disadvantageous for essentially the same reason that a merger may be disadvantageous in oligopolistic industries. Second, even if the countries forming the union comprise the entire non-competitive sector of industry, cooperation on trade policy may be disadvantageous if industrial policy (e.g. investment subsidies) are chosen non-cooperatively. The reason is that cooperation in trade policy may exacerbate the inefficiencies created by non-cooperation at an earlier stage. Third, cooperation in choosing trade policies may encourage excessive investment by competitive importers and thus reduce the demand faced by the oligopolists.


Issue Date:
1989
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/51256
Total Pages:
52
Series Statement:
Working Paper
89-5




 Record created 2017-04-01, last modified 2017-08-25

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