The Economic Effects of Trade Liberalization Under Oligopoly PDF Download

Author: Bong-jae Cho
Publisher:
ISBN:
Category : Automobile industry and trade
Languages : en
Pages : 80

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Book Description
In modern economies, national governments have a wide range of policies for restricting international trade and protecting domestic industries at their disposal. The most popular form of non-tariff trade policies is probably that of a direct quantitative restriction. This policy takes two principal forms: explicit import quotas and voluntary export restraints (VERs). A VER is a quota imposed by an exporting country upon exports to other countries in response to pressures exercised by the importing countries (i.e., in the form of threats of various types of import restrictions). When these two policies are partially liberalized, subject to a reasonable foreign share in the domestic market, product differentiation between imported goods and domestic goods within an imperfect market can serve to increase welfare levels within the domestic economy. In this situation, the foreign share will not be as high as it would be for the homogeneous assumption. Under a partial VER liberalization policy, if the degree of substitutability between domestic and imported goods is sufficiently small, then domestic welfare will improve as foreign imports are increased. That is, if domestic and imported goods are perfect substitutes, then the most favorable domestic policy will be to close domestic markets to the foreign country since no country can allow foreign market shares as high as 66 percent in the domestic market. In a simulation of U.S. automobile industrial production, when a partial quota liberalization is observed, welfare levels can be increased by reducing the Japanese import market share to a level below 10 percent, that is, to a level which is less than the actual current foreign market share. In real terms, this implies that U.S. auto industry must be further liberalized to acquire additional domestic benefits under a VER policy, whereas the U.S. should restrict foreign market share below 10 percent to maximize domestic welfare levels under a quota policy. This will occur if the net consumer surplus is in excess of producer net excess profits under an imperfect market structure.