Strategic Trade Policies, Differentiated Duopoly and Intra-Industry Trade

Abstract

This paper examines the economic effects of various trade policies in a Brander-Krugman style model of intra-industry trade. The policies considered include tariffs, production subsidies, consumption taxes, countervailing duties, and anti-dumpting duties. In the analysis, the role of product differentiation and the relative competitive advantages of the firms are highlighted. Various trade policy formulas are also computed. Furthermore, it is shown that in such a model, free trade is not necessarily better than no trade. More product differentiation and lower transport costs will make free trade more desirable. [411]

^*Helpful comments, discussions and encouragement by Robert Baldwin, Rachel McCullouch, J. David Richardson, Leonard Cheng, Linda Lim, and Nancy Justin-Fung are appreciated. I am also grateful to the detailed suggestions of an anonymous referee and an editor. All errors are mine.

^*Helpful comments, discussions and encouragement by Robert Baldwin, Rachel McCullouch, J. David Richardson, Leonard Cheng, Linda Lim, and Nancy Justin-Fung are appreciated. I am also grateful to the detailed suggestions of an anonymous referee and an editor. All errors are mine.

Notes

^*Helpful comments, discussions and encouragement by Robert Baldwin, Rachel McCullouch, J. David Richardson, Leonard Cheng, Linda Lim, and Nancy Justin-Fung are appreciated. I am also grateful to the detailed suggestions of an anonymous referee and an editor. All errors are mine.