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Protection without Discrimination

Rebeyrol, Vincent (2020) Protection without Discrimination. TSE Working Paper, n. 20-1131, Toulouse

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This paper shows that domestic regulations may fully respect the non-discrimination
principle of the WTO and still act as a protectionist device. The core mechanism is a
profit shifting effect between firms within sectors. By increasing production costs of all
operating firms in a market, domestic regulations force the least efficient firms to exit,
increasing market shares of surviving firms. This generates protectionism in the aggregate
if it forces relatively more foreign firms to exit, or if domestic firms are relatively more
efficient. Introducing political economy motives in the model, this paper shows that trade
liberalization increases the use of domestic regulations in the non-cooperative equilibrium, because it improves their protectionist effect. Moreover, a trade agreement may be welfare reducing if governments only care about the most efficient firms. If thefirm productivity distribution differs across countries, the low productivity country cannot retaliate to a non-discriminatory protectionist policy from the high productivity country. In this context, a Pareto improving trade agreement requires an international income redistribution between countries, which is at odds with the principle of reciprocity in trade negotiations. These results may help explaining why recent trade negotiations are proven difficult and face increasing opposition.

Item Type: Monograph (Working Paper)
Language: English
Date: August 2020
Place of Publication: Toulouse
Uncontrolled Keywords: Trade protection, Non-discrimination, WTO, domestic regulations
JEL Classification: F02 - International Economic Order
F12 - Models of Trade with Imperfect Competition and Scale Economies
F13 - Commercial Policy; Protection; Promotion; Trade Negotiations; International Trade Organizations
Divisions: TSE-R (Toulouse)
Institution: Université Toulouse 1 Capitole
Site: UT1
Date Deposited: 27 Aug 2020 10:14
Last Modified: 27 Aug 2020 10:14
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