Discussion Paper Details

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Title: Free Trade Vs. Strategic Trade: A Peek into Pandora's Box

Author(s): Gene M. Grossman and Giovanni Maggi

Publication Date: January 1998

Keyword(s): Export Promotion, Export Subsidies, policy commitment, Rules Versus Discretion and Strategic Trade Policy

Programme Area(s): International Trade and Regional Economics

Abstract: We investigate whether a welfare-maximizing government ought to pursue a programme of strategic trade intervention or instead commit itself to free trade when, in the former case, domestic firms will have an opportunity to manipulate the government?s choice of the level of intervention. Domestic firms may over-invest in physical and knowledge capital in a regime of strategic intervention in order to influence the government?s choice of subsidy. In the event, a commitment to free trade may be desirable even in settings where profit-shifting would be possible. We analyse the desirability of such a commitment when the government is well informed about firms? types and actions, and when it suffers from an informational disadvantage.

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Bibliographic Reference

Grossman, G and Maggi, G. 1998. 'Free Trade Vs. Strategic Trade: A Peek into Pandora's Box'. London, Centre for Economic Policy Research.