Delocation and Trade Agreements in Imperfectly Competitive Markets (with Robert Staiger)
Publication Type:Working Paper
We consider the purpose and design of trade agreements in imperfectly competitive environments featuring firm-delocation effects. In both the segmented-market Cournot and the
integrated-market monopolistic competition settings where these effects have been identified,
we show that the only rationale for a trade agreement is to remedy the inefficiency attributable
to the terms-of-trade externality, the same rationale that arises in perfectly competitive markets.
Furthermore, and again as in the perfectly competitive benchmark case, we show that the
principle of reciprocity is efficiency enhancing, as it serves to "undo" the terms-of-trade driven
inefficiency that occurs when governments pursue unilateral trade policies. Our results therefore
indicate that the terms-of-trade theory of trade agreements applies to a broader set of market
structures than previously thought.