Crisis of Free Trade Regime and New Trade Rule

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This project consists of three parts : 1. International Trade in an Oligopolistic Open Economy (with S. Lahiri), 2. International Strategic Policy Interdependence in the Context of the GATT Regime (with J. Eaton), and 3. International Spill-Over Effects of Various Policies in a Dynamic Optimization Framework (with S. Ikeda, A. Shibata, etc.).1. A two-country model with one competitive and one Cournot-oligopolistic sector is examined. If free entry is allowed in the oligopoly sector, both factor price equalization and the standard result on comparative advantage hold. Furthermore, in addition to the standard gains from trade, opening trade benefits a country through a reduction in the degree of monopoly. Next, using an oligopoly model with endogenous R&D investment and a marginal-cost differential between oligopolists, the effect of eliminating a firm on the world welfare is examined. Surprisingly, monopoly results in a higher world welfare than Cournot duopoly.2. The threat of the exporting country's retaliation approved by GATT makes it advantageous for both the exporting and importing countries to establish an OMA. By designing an OMA under which its deadweight loss is appropriately distributed to them, they avoid the retaliation approved by GATT which causes an additional deadweight loss.3. By applying dynamic optimization behavior to a two-country economy, the effects of various policies (e.g. fiscal spending, an asset-holding tax, a corporate tax, etc.) and supply-side shocks on the paths of consumption, foreign asset position and each country's welfare are explored. The welfare effect consists of the intratemporal terms-of trade (the relative price) effect and the intertemporal terms-of-trade (the interest rate) effect. Thus, even if a country's policy promotes import and improves a foreign country's terms of trade, the foreign country may be worse off depending on its foreign asset position.