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Abstract:

Economics of Industry Paper
A General Framework for Analysing Endogenous Trade Divergences
Patrick Paul Walsh
November 1991
Paper No' EI 04:
Full Paper (pdf)

Tags: endogenous trade divergences; intervention; subsidy; profit shifting; terms of trade improvement; profitability; trade theory; export policy.

This paper gives a general framework for analysing a trade divergence that runs across both the New International trade theory and the traditional analysis of export policy. The source of the trade divergence, the motive for intervention and the analytical framework is shown to be the same in all models. The sign of the trade divergence and hence the policy recommendation is determined by the market structure chosen to endogenise the divergence. The magnitude of the subsidy in all models is determined by the maximum potential profitability of the home industry. It is argued that interpretations based on ?profit shifting? or on a ?terms of trade improvement? as a motive for trade intervention are misleading.