Procompetitive Trade Policies

34 Pages Posted: 20 Nov 2001

See all articles by José L. Moraga-González

José L. Moraga-González

VU University Amsterdam; University of Groningen

Jean-Marie Viaene

Erasmus University

Date Written: October 2001

Abstract

We study the procompetitive effects of trade policies against a foreign oligopoly in a model of vertical product differentiation. We show that a uniform tariff policy like the Most Favored Nation (MFN) clause is always welfare superior to free trade because of a pure rent-extraction effect. However, a nonuniform tariff policy is, in addition, procompetitive and thus yields a higher level of social welfare. The first best policy typically consists of giving a subsidy to the country producing low quality and levying a tariff on the country producing high quality. Regional Trade Agreements (RTAs) are examples of nonuniform tariff policies. We show that these arrangements yield higher welfare than free trade and, moreover, that a RTA with a low-quality producing country yields larger gains than a RTA with a high-quality producing country.

Keywords: Endogenous Quality, Most Favored Nation (MFN) Clause, Procompetitive Policies, Regional Trade Agreements

JEL Classification: F12, F13, F15

Suggested Citation

Moraga-Gonzalez, Jose Luis and Viaene, Jean-Marie, Procompetitive Trade Policies (October 2001). Available at SSRN: https://ssrn.com/abstract=289082

Jose Luis Moraga-Gonzalez

VU University Amsterdam ( email )

De Boelelaan 1105
1081 HV Amsterdam
Netherlands

HOME PAGE: http://www.tinbergen.nl/~moraga/

University of Groningen

P.O. Box 800
9700 AV Groningen, Groningen 9700 AV
Netherlands

Jean-Marie Viaene (Contact Author)

Erasmus University ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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