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A Ricardian Model with Endogenous Comparative Advantage and Endogenous Trade Policy Regimes

Author

Listed:
  • Wen Li Cheng
  • Meng-chun Liu
  • Xiaokai Yang
Abstract
This paper develops a general equilibrium model with transaction costs and endogenous and exogenous comparative advantages. In the model, the governments are allowed to choose between tariff war, tariff negotiation, and laissez faire regimes. The model shows that the level of division of labor and the volume of trade increase as transaction conditions improve. In the process of moving to a high level of division of labour, a country may receive more gains from trade even if its terms of trade deteriorate. This is because an expansion of the network size of division of labour can generate productivity gains that outweigh the adverse effect of the terms of trade deterioration. When a high level of division of labor occurs in general equilibrium, if both countries play a Nash tariff game, a tariff war may break out, which can dissipate all the gains from trade. Facing this risk, all governments would prefer trade negotiations to a trade war. A Nash tariff negotiation would result in zero tariff rates. If a medium level of division of labor occurs in general equilibrium, then unilateral tariff protection and unilateral laissez faire policies would coexist. The result provides a plausible story about the evolution of trade policy regimes, and highlights the importance of trade negotiations in achieving trade liberalization.

Suggested Citation

  • Wen Li Cheng & Meng-chun Liu & Xiaokai Yang, 1999. "A Ricardian Model with Endogenous Comparative Advantage and Endogenous Trade Policy Regimes," CID Working Papers 12A, Center for International Development at Harvard University.
    • Handle: RePEc:cid:wpfacu:12a
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    References listed on IDEAS

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    Cited by:

    1. Hazel Parcon, 2008. "Disaggregating PTAs at the Role of International Division of Labor on PTA Formation," Working Papers 200806, University of Hawaii at Manoa, Department of Economics.
    2. Cheng, Wenli & Yang, Xiaokai, 2004. "Inframarginal analysis of division of labor: A survey," Journal of Economic Behavior & Organization, Elsevier, vol. 55(2), pages 137-174, October.
    3. Xiaokai Yang & Dingsheng Zhang, 2005. "Endogenous Structure Of The Division Of Labor, Endogenous Trade Policy Regime, And A Dual Structure In Economic Development," World Scientific Book Chapters, in: An Inframarginal Approach To Trade Theory, chapter 17, pages 383-406, World Scientific Publishing Co. Pte. Ltd..
    4. Xueping Jiang & Jen-Mei Chang & Hui Sun, 2019. "Inframarginal Model Analysis of the Evolution of Agricultural Division of Labor," Mathematics, MDPI, vol. 7(12), pages 1-14, December.

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    More about this item

    Keywords

    inframarginal analysis of trade theory; Ricardo model; dual structure; underdevelopment;
    All these keywords.

    JEL classification:

    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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