Trade Policy Reform: How to win wide-ranging support?

Abstract

This article analyzes the effects of international trade policies on an imperfectly competitive domestic market, taking account of consumers, as well as upstream and downstream firms. We first study the impact of a classic import tax decrease and find that this policy harms upstream firms and may decrease domestic fiscal revenues. We then examine the effect of an increase in non-tariff barriers, which reduce the degree of substitutability between domestic and imported goods. This results in an improvement in each agent’s situation, as international competition becomes less fierce. Finally, we show that market conditions may exist such that a coupled policy (import tax decrease and non-tariff barrier increase) makes all agents better off. This can explain the proliferation of domestic standards at national level in order to counterbalance the effect of lower tariffs negotiated by governments.

Keywords

trade policy; non-tariff barriers; vertical structure;

JEL codes

F12: Models of Trade with Imperfect Competition and Scale Economies • Fragmentation
F13: Trade Policy • International Trade Organizations
L14: Transactional Relationships • Contracts and Reputation • Networks