Why Free Trade May Hurt Developing Countries
Michael S. Michael
University of Cyprus - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)
REVIEW OF INTERNATIONAL ECONOMICS
This paper builds a general equilibrium trade model where a country produces two traded goods and one non-traded public consumption good. The government finances the provision of the public good by taxing the incomes of factors of production, and or by imposing tariffs. Within this framework, the paper (i) shows that a small tariff or an income tax improves the country's welfare if there is an undersupply of public good, (ii) identifies the circumstances in which an improvement in the country's terms of trade may reduce its welfare, and free trade can be inferior to autarky.
JEL Classification: F11, H41
Date posted: May 7, 1998
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