Nontariff protection without an outside good

Hajime Takatsuka, Dao Zhi Zeng

Research output: Contribution to journalArticle

Abstract

Assuming an outside good, the existing intra-industry trade models show that the domestic price index is lowered and the welfare is improved by unilateral nontariff protection against foreign products. Removing the outside good, we reexamine this issue incorporating the factor-price changes to capture the terms-of-trade effect. In the case of one production factor (immobile labor), we find that unilateral protection is neither price-index lowering nor welfare improving. In the case of two production factors (immobile labor and mobile capital), the same result holds if the elasticity of substitution between varieties is as large as that observed in empirical studies. Therefore, the outside-good assumption is not harmless to evaluate trade policies.

Original languageEnglish
Pages (from-to)65-78
Number of pages14
JournalInternational Review of Economics and Finance
Volume41
DOIs
Publication statusPublished - 2016 Jan 1

Keywords

  • Mobile capital
  • Nontariff protection
  • Outside good
  • Terms of trade
  • Welfare

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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