Because of the continuing integration of the world's economy, the role of trade policy is very important and likely to increase in importance in the future. Pressures in the international market lead to institutionalized trade barriers, such as the Multifiber Agreement restricting trade in textiles, and voluntary export agreements on steel and automobiles. An understanding of the effects of tax/subsidy policies as well as non-tariff trade barriers like quotas is fundamental to the formulation of effective trade policy. This project has two themes. The first is a study of the information contained in partial equilibrium models as a guide to formulating trade policy in oligopolistic markets. Game theoretic models are employed to examine qualitative, quantitative, and distributive effects of trade policies in these markets. In such markets direct trade intervention by the government can have unexpected effects as the firms react to the trade policies. These interaction effects can change the nature of the game, and alter the equilibrium outcome. The second aspect of the project concerns the negotiation of agreements under the principle of most-favored nation clauses. When might such negotiations have favorable implications for the outcome of trade policy? The most-favored nation policy is typically considered to be a trade liberalizing mechanism rather than a trade restricting one. Working against this notion is the fact that such agreements create a free-ride problem in that countries can receive the benefits of most-favored nation policies without making the argeement themselves. This is done simply by trading with countries which have the most-favored nation status. This project uses a game theoretic framework to develop both cooperative and non-cooperative models of international trade incorporating aspects of the most-favored nation trading envrionment. The theoretical results of these studies are applied to many international trading situations including direct policies and regime changes, auction quotas, trigger prices, and tax and subsidy policies. %%% A very important aspect of U.S. foreign trade is the trade policy set by the government. Because of the continuing integration of the world economy, this aspect is likely to increase in importance in the future. Pressures in the international economy, like voluntary exports on steel and automobiles, have tended to cartelize rather than liberalize international trade. For this reason, a better understanding of the implications of various governmental policies like taxes and subsidies, as well as non-tariff trade barriers like quotas is fundamental to formulating effective trade agreements. Using a game theoretic framework, this project analyzes the effects deriving from government trade policies such as most-favored nation agreements, quotas and other non-tariff trade barriers, and import taxes and subsidies.
