A Ricardian Model with Endogenous Comparative Advantage and Endogenous Trade Policy Regimes
View/ Open
Author
Cheng, Wen Li
Liu, Meng-chun
Yang, Xiaokai
Published Version
https://www.hks.harvard.edu/centers/cid/publicationsMetadata
Show full item recordCitation
Cheng, Wen Li, Meng-chun Liu, and Xiaokai Yang. “A Ricardian Model with Endogenous Comparative Advantage and Endogenous Trade Policy Regimes.” CID Working Paper Series 1999.12, Harvard University, Cambridge, MA, April 1999.Abstract
This paper develops a general equilibrium model with transaction costs and endogenous and exogenous comparative advantages. In the model, the governments are allowed to choose between tariff war, tariff negotiation, and laissez faire regimes. The model shows that the level of division of labor and the volume of trade increase as transaction conditions improve. In the process of moving to a high level of division of labour, a country may receive more gains from trade even if its terms of trade deteriorate. This is because an expansion of the network size of division of labour can generate productivity gains that outweigh the adverse effect of the terms of trade deterioration. When a high level of division of labor occurs in general equilibrium, if both countries play a Nash tariff game, a tariff war may break out, which can dissipate all the gains from trade. Facing this risk, all governments would prefer trade negotiations to a trade war. A Nash tariff negotiation would result in zero tariff rates. If a medium level of division of labor occurs in general equilibrium, then unilateral tariff protection and unilateral laissez faire policies would coexist. The result provides a plausible story about the evolution of trade policy regimes, and highlights the importance of trade negotiations in achieving trade liberalization.Terms of Use
This article is made available under the terms and conditions applicable to Other Posted Material, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#LAACitable link to this page
http://nrs.harvard.edu/urn-3:HUL.InstRepos:39331091
Collections
Contact administrator regarding this item (to report mistakes or request changes)