Effective Protection Analysis and Optimal Trade Policy with Intra-Industry Specialisation and Imperfect Competition

Abstract

The effective tariff concept is well established in the theoretical literature in the analysis of inter-industry trade flows. This analysis is based upon assumptions such as product homogeneity, non-increasing returns, arms-length trade, and small open economy conditions. Relaxation of some or all of these assumptions has direct implications for effective protection analysis under any type of trade flows.¹ As is now widely recognised however, relaxation of these assumptions is also likely to be associated with intra-industry specialisation and exchange. There is a large literature on the effects of nominal tariffs in this context.² There is, by contrast, a paucity of studies on effective protection in the context of intra-industry trade.³ This chapter, therefore, seeks to redress this balance, and to employ effective protection analysis under conditions of ‘within-industry’ specialisation (horizontal and vertical) and of imperfect competition.

Acknowledgements: The authors are grateful to Professor Alan Winters (University College of North Wales), Professor John Black (University of Exeter) and Alan Webster (University of Reading) for very helpful comments. Remaining errors are solely the authors’ responsibility.