Welfare–Balanced International Trade Agreements
-
Published:2022-12-22
Issue:1
Volume:11
Page:40
-
ISSN:2227-7390
-
Container-title:Mathematics
-
language:en
-
Short-container-title:Mathematics
Author:
Martins FilipeORCID,
Pinto Alberto A.ORCID,
Zubelli Jorge P.ORCID
Abstract
In this work, we consider a classic international trade model with two countries and one firm in each country. The game has two stages: in the first stage, the governments of each country use their welfare functions to choose their tariffs either: (a) competitively (Nash equilibrium) or (b) cooperatively (social optimum); in the second stage, firms competitively choose (Nash) their home and export quantities under Cournot-type competition conditions. In a previous publication we compared the competitive tariffs with the cooperative tariffs and we showed that the game is one of the two following types: (i) prisoner’s dilemma (when the competitive welfare outcome is dominated by the cooperative welfare outcome); or (ii) a lose–win dilemma (an asymmetric situation where only one of the countries is damaged in the cooperative welfare outcome, whereas the other is benefited). In both scenarios, their aggregate cooperative welfare is larger than the aggregate competitive welfare. The lack of coincidence of competitive and cooperative tariffs is one of the main difficulties in international trade calling for the establishment of trade agreements. In this work, we propose a welfare-balanced trade agreement where: (i) the countries implement their cooperative tariffs and so increase their aggregate welfare from the competitive to the cooperative outcome; (ii) they redistribute the aggregate cooperative welfare according to their relative competitive welfare shares. We analyse the impact of such trade agreement in the relative shares of relevant economic quantities such as the firm’s profits, consumer surplus, and custom revenue. This analysis allows the countries to add other conditions to the agreement to mitigate the effects of high changes in these relative shares. Finally, we introduce the trade agreement index measuring the gains in the aggregate welfare of the two countries. In general, we observe that when the gains are higher, the relative shares also exhibit higher changes. Hence, higher gains demand additional caution in the construction of the trade agreement to safeguard the interests of the countries.
Funder
FCT—Fundação para a Ciência e a Tecnologia
Fundação para a Ciência e Tecnologia
Fundação Carlos Chagas Filho de Amparo à Pesquisa do Estado do Rio de Janeiro
Conselho Nacional de Desenvolvimento Científico e Tecnológico
Khalifa University of Science and Technology
Subject
General Mathematics,Engineering (miscellaneous),Computer Science (miscellaneous)
Reference33 articles.
1. McMillan, J. (1986). Game Theory in International Economics, Harwood Academic Publishers.
2. von Haberler, G. (1937). The Theory of International Trade with Its Application to Commercial Policy, Macmillan. Available online: https://mises.org/library/international-trade.
3. Strategic trade policy;Brander;Handbook of International Economics,1995
4. Bewley, T. (1987). Advances in Economic Theory, Cambridge University Press. Chapter 9.
5. International R&D Rivalry and Industrial Strategy;Spencer;Rev. Econ. Stud.,1983
Cited by
1 articles.
订阅此论文施引文献
订阅此论文施引文献,注册后可以免费订阅5篇论文的施引文献,订阅后可以查看论文全部施引文献