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Trade warfare revisited: Trade and industrial policies when exporting and non-exporting firms co-exist

Author

Listed:
  • Kazuhiro Takauchi

    (Faculty of Business and Commerce, Kansai University Graduate School of Economics, Kobe University)

  • Hajime Sugeta

    (Faculty of Economics, Kansai University Graduate School of Economics, Kobe University)

  • Tomomichi Mizuno

    (Graduate School of Economics, Kobe University)

Abstract

This paper establishes a two-country, oligopoly trade model in which exporting firms and less-efficient non-exporting firms exist in each country, and firms have quadratic costs. Governments in the two countries conduct policy games involving various combinations of policy tools, including tariffs, production subsidies and export tax/subsidies. We show that the optimal policies have single-peaked relationships with the productivity differences between non-exporting and exporting firms. For example, because tariff can have either a U-shaped or an inverted U-shaped relationship with the productivity difference between firms depending upon other policy instruments available to the governments, improving the efficiency of the non-exporting firm can inhibit trade liberalisation. We also show that if each country can choose a discriminatory production subsidy policy, no trade occurs. Thus, combined trade and industrial policies may induce the decoupling of economies.

Suggested Citation

  • Kazuhiro Takauchi & Hajime Sugeta & Tomomichi Mizuno, 2024. "Trade warfare revisited: Trade and industrial policies when exporting and non-exporting firms co-exist," Discussion Papers 2404, Graduate School of Economics, Kobe University.
    • Handle: RePEc:koe:wpaper:2404
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