Commercial policy intervention in intra-industry trade: A dual approach to general equilibrium analysis
Lin, Hwan-Chyang
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https://hdl.handle.net/2142/21073
Description
Title
Commercial policy intervention in intra-industry trade: A dual approach to general equilibrium analysis
Author(s)
Lin, Hwan-Chyang
Issue Date
1990
Doctoral Committee Chair(s)
Grinols, Earl L.
Department of Study
Economics
Discipline
Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Theory
Language
eng
Abstract
The theoretical consensus supporting free trade has been challenged in the 1980s by new developments in trade theory stressing imperfect competition and/or increasing returns to scale (IRS). It has been found that the exercise of trade policy to protect an IRS industry may benefit an economy, even if this economy can not influence the prices of foreign goods. Recent work, however, mostly remains partial and model-specific.
In this thesis, a dual approach is developed to systematically address issues related to commercial policy for intra-industry trade in differentiated products manufactured by an IRS industry, where firms engage in Chamberlinian monopolistic competition with free entry. The modified expenditure function and the standard revenue function play two simplifying tools in characterizing general equilibrium of a small economy or world economy throughout this thesis.
The first topic of this thesis is to examine whether a small economy can be better off by supporting its IRS industry via an import tariff or an export subsidy, and to determine under what condition one of the two policy tools is preferable to the other. The second topic is to extend the first by introducing another IRS industry. This extension opens up the possibility that the policy-induced expansion in the protected IRS industry may be at the expense of the unprotected one. Such a possibility may weaken the argument for protectionism, and has not been dealt with yet in recent work.
Finally, in this thesis, the welfare effects of an import tariff is examined in a two-country world, where foreign retaliation is taken into account. In the presence of symmetric retaliation, both countries are found to be worse off compared with the free trade equilibrium. But in the presence of asymmetric retaliation, the scenario turns out to be much more complex. Numeric simulation, therefore, is undertaken. This study provides new information about whether universal free intra-industry trade is preferable to universal or unilateral restricted intra-industry trade from the perspective of global welfare.
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