An Analysis of Import Protection as Export Promotion

Abstract

This paper examines Krugman's (1984a) argument that under increasing returns to scale import protection may act as a form of export promotion. We formally prove Krugman's result by explicitly using stability conditions for a multimarket Nash equilibrium. However, if marginal costs were increasing, import protection might discourage exports. We also develop the welfare economics of the export promotion argument. Here protection allows profits to be shifted to the domestic firms not only in home markets but also in export markets. Although protection could be worthwhile if carried out unilaterally, trade warfare would leave all countries worse off than if they adopted free-trade policies. Furthermore, other instruments, such as subsidies, might be a better policy than import restrictions.

JEL Classification: F13