Template-Type: ReDIF-Paper 1.0
Author-Name: Alessia Campolmi
Author-X-Name-First: Alessia
Author-X-Name-Last: Campolmi
Author-Name: Harald Fadinger
Author-X-Name-First: Harald
Author-X-Name-Last: Fadinger
Author-Name: Chiara Forlati 
Author-X-Name-First: Chiara
Author-X-Name-Last: Forlati
Author-Email: chiara.forlati@epfl.ch
Author-Workplace-Name: Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland
Title: Trade Policy: Home Market Effect vs Terms of Trade Externality
Abstract: We study trade policy in a two-sector Krugman type model of trade. We conduct a general analysis allowing for three different instruments: tariffs, export taxes and production subsidies. For each instrument we consider unilateral trade policy without retaliation. When carefully disentangling the different effects that determine policy makers' choices and modeling general equilibrium effects of taxes/tariffs, we find that production subsidies are always inefficiently low and driven by terms of trade effects. In the cases of tariffs and export taxes the home market effect prevails for some parameter combinations but mostly trade policy is determined by terms of trade effects and the desire to reduce distortions arising from monopolistic competition. Hence, our analysis sheds new light on trade policy in a model of intra-industry trade.
Length: 34 pages		
Creation-Date: 2009-02
Revision-Date: 2009-09
Publication-Status: 
File-URL: http://infoscience.epfl.ch/record/141375/files/CFP2009_02_1.pdf
Number:
Classification-JEL: F12, F13, F42
Keywords: Home Market Effect, Terms of Trade, Tariffs and Subsidies
Handle: RePEc:cif:wpaper:200902