Technical Papers (17)

Bhagwati and Ramaswami: Why it is a Classic?

Read paper (Unpublished) A recurring theme in trade theory until as late as 1950s is that domestic market failure can serve as a powerful basis for protection. This is illustrated by the key contributions by G. Haberler (EJ 1950) who demonstrates that the Sanuelson gains from trade theorem breaks down in the presence of inter-sectoral differences in factor returns and Hagen (QJE 1958) who concludes that inter-sectoral wage differential provides a legitimate reason for trade interventions. It is not until Bhagwati and Ramaswami (1963)--and well after the publication of James Meade's Trade and Welfare--that the case for free trade in the presence of domestic distortions is restored to its rightful position. These authors show that once the domestic distortion is corrected at source, free trade remains the right policy for a small country. In the specific case of inter-sectoral wage differential, they show that this prescription translates into an appropriate wage subsidy to the sector with higher wage. For this and many other reasons discussed in the paper and consistent with Johnson's (1965) but contrary to Corden (1996), the Bhagwati…

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Politics of Free Trade Areas: Tariffs versus Quotas

Read paper (JIE 58(2), December 2002, 413-427) (with Rupa Duttagupta) In this paper we compare and contrast the political viability of bilateral Free Trade Area (FTA) Agreements in the presence of tariffs and quotas. Assuming that the government maximizes a weighted sum of welfare and producer profits, we show that whereas an FTA is unambiguously rejected by one of the countries under a tariff it may be endorsed by both trading partners under a voluntary export quota or import quota that provides the same level of protection as the tariff.

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Preferential Trade Liberalization: The Traditional Theory and New Developments 

Read paper (Published: JEL 38, June 2000, 287-331). This paper begins by systematically developing the “static” theory of preferential trade areas (PTAs) and showing that neither a large volume of initial intra-union trade nor geographical proximity can serve as a guide to welfare enhancing PTAs. The paper then discusses the modern literature addressing the welfare effects of a simultaneous division of the world into many PTAs, the impact of a PTA on external tariffs and the “dynamic” time-path question of whether PTAs are building blocks or stumbling blocks towards multilateral freeing of trade. A final substantive section discusses some key theoretical considerations in the empirical evaluation of PTAs.

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Preferential Trading and Welfare: The Small-union Case Revisited

Read paper The welfare analyses of preferential trading arrangements have been characterized by generally inconclusive and messy results. In this paper, I attempt to give order to the analysis of one important case: a union between two small countries. The analysis has two key advantages over the existing literature. First, the model employed is fully general in that it allows for goods that are exported and imported by both partners as well as those that are exported by one and imported by the other partner. Second, the results are derived for finite changes in tariff rates rather than being limited to infinitesimally small changes. The main results of the paper can be summarized as follows. First, assuming all goods to be normal in consumption, if two small countries form a free trade area or exchange some tariff preferences, their joint welfare falls or rises as their joint output, valued at world prices, rises or falls. Second, if, in addition, the numeraire good uses only labor and all other goods use labor and a sector-specific factor, the exchange of preferences or…

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