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Trading Blocs and Welfare-How Trading Bloc Members are Affected by New Entrants

Опубликовано на портале: 22-12-2003
IMF Working Paper Series. 1998.  No. 98/84.
Организация: International Monetary Fund (International Monetary Fund)
This paper uses a three-country duopoly model to examine the effects of lowered trade barriers when a new entrant wants to join a preferential trading bloc. There are two firms: a small-country firm and a large-country firm within the bloc; three markets: two within the bloc and one (the new entrant) outside the bloc.

The model analyzes the effects of reduced tariffs on the quantities produced and sold, the prices charged, and the profits earned by each firm. Under rising marginal costs the results are in line with the main results of Casella (1996). Like Casella's results, this paper's results also generally show greater gains for the firm in the small country than for the firm in the large country, although Casella uses a monopolistic competition model.

The main results of the paper (under increasing marginal cost) are as follows. First, the small-country firm will export more to the external country than the large-country firm, though each firm produces more for its own domestic market. Second, as a result of a reduction in tariffs, the export share of the large-country firm will increase relative to that of the small-country firm. Finally, profits will improve more for the small-country firm than for the large-country firm if tariffs decline in the external country.

An important implication can be derived from our results. Firms in small countries such as Austria, Portugal, and Sweden should not necessarily be alarmed when the Eastern European countries join the European Union. This is especially true if these firms have substantial market power in the output market relative to large-country firms. For instance, it is quite likely that Volvo and Saab from Sweden may enjoy greater increases in profits than their German counterparts, Volkswagen and Mercedes-Benz, owing to a reduction in import tariffs in Poland or Estonia.

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текст статьи в формате pdf на сайте Международного валютного фонда (IMF):
http://www.imf.org/external/pubs/ft/wp/1998/wp9884.pdf
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