Trade liberalization and welfare: Differentiated-good versus homogeneous-good markets

• Published in: Journal of the Japanese and international economies 2012-09, Vol.26 (3), p.308-325
• Main Authors: Takatsuka, Hajime, Zeng, Dao-Zhi
• Format: Article
• Language: English
• Subjects: Economic geography; Firm location; Home market effect; Liberalization; Location of industry; Market; Studies; Trade costs; Trade liberalization; Trade theory; Welfare
• ISSN: 0889-1583; 1095-8681
• DOI: 10.1016/j.jjie.2012.05.003

► We examine the effects of liberalization on industrial location and national welfare. ► We incorporate trade costs in both differentiated-good and homogeneous-good sectors. ► The impacts of liberalization in these sectors on welfare are different from each other. ► If an industry is liberalized while the other is protected, a conflict might occur. ► Appropriate liberalization in both sectors is effective to alleviate such a conflict. In this paper, we examine the effects of liberalization on industrial location and national welfare in a framework of new economic geography. Specifically, we explicitly incorporate arbitrary trade costs in both differentiated-good and homogeneous-good sectors into a two-country model, and clarify the effects of trade-barrier reduction in each sector. We show that their impacts on welfare levels in the two countries are different, and, if an industry is liberalized while the other is protected, a conflict between the countries might occur. Therefore, appropriate liberalization in both sectors is effective to alleviate such a conflict.