DP335 The Welfare Effects of Imperfect Harmonization of Trade and Industrial Policy

Author(s): Konstantine Gatsios, Larry Karp
Publication Date: October 1989
Keyword(s): Customs Union, Industrial Policy, Oligopoly, Trade Policy
JEL(s): 422, 423, 616
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=335

Partial cooperation in setting trade policy may be worse than no cooperation for countries who form a customs union. The paper investigates three situations where this is likely to occur. First, if the countries forming the union comprise too small a percentage of the non-competitive sector of the industry, their cooperation may be disadvantageous for essentially the same reason that a merger may be disadvantageous in oligopolistic industries. Second, even if the countries forming the union comprise the entire non-competitive sector of industry, cooperation on trade policy may be disadvantageous if industrial policy (e.g., investment subsidies) is chosen noncooperatively. Third, cooperation in choosing trade policies may encourage excessive investment by competitive importers and thus reduce the demand faced by the oligopolists.