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Nontariff protection without an outside good

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  • Takatsuka, Hajime
  • Zeng, Dao-Zhi

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.

Suggested Citation

  • Takatsuka, Hajime & Zeng, Dao-Zhi, 2016. "Nontariff protection without an outside good," International Review of Economics & Finance, Elsevier, vol. 41(C), pages 65-78.
    • Handle: RePEc:eee:reveco:v:41:y:2016:i:c:p:65-78
    DOI: 10.1016/j.iref.2015.09.005
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    More about this item

    Keywords

    Nontariff protection; Outside good; Terms of trade; Mobile capital; Welfare;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F20 - International Economics - - International Factor Movements and International Business - - - General

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