Domestic Policy Coordination in Imperfectly Competitive Markets

Research output: Working paper

Abstract

Many international trade agreements regulate the use of domestic policies. Oneapproach is "deep" integration, in which governments contract directly over domestic policies. An appealing alternative is "shallow" integration, in which nations contractover market access and avoid negotiations over specific policies. I generalize the shallowintegration approach to a two-country differentiated-product setting. Governments choose trade policies and two domestic policies: a wage subsidy and a policy reducingthe capital requirement for firm entry. I show that the sole source of international inefficiency is terms-of-trade manipulation and that the appropriate terms-of-trade definition here is a world price index. Shallow integration works because changes in domestic policies and trade policies that preserve market access also preserve the terms of trade. I discuss potential obstacles for shallow integration. Absent trade policy cooperation, direct negotiations over the wage subsidy cannot benefit governments, but direct negotiations over the entry policy provide a second-best benefit. The efficient agreement in theory differs significantly from the shallow integration approach of the General Agreement on Tariffs and Trade (GATT).
Original languageEnglish
Publication statusPublished - Dec 2013

Publication series

NameECARES Working Paper
No.46
Volume2013

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