Trade policy and general equilibrium under different market regimes with numerical applications to Turkey

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Abstract

This dissertation investigates issues concerning export quotas and tariffs within a general equilibrium (GE) framework, under assumptions of both perfect and imperfect competitive markets, when trade is all intraindustry. The dissertation addresses important, though relatively neglected, contemporary trade policy issues in the developing world, such as Voluntary Export Restraints (VERs) and optimal export taxes. Given the complexity of the GE analysis with increasing returns to scale and imperfect competition, I also employ computational techniques in order to better understand the economic implications of trade policies, especially with regard to the impact on welfare, which is often analytically ambiguous. The empirical analysis has been applied to Turkey, being a middle-income developing country which still applies high tariffs and export quotas. However, the empirical findings have a wider application. Firstly, I provide a different rationale from the standard literature as to why VERs are accepted by exporting firms. The essence of the argument Is that a VER serves as an institution to prevent entry and, therefore, to protect the monopoly power of incumbent firms in both domestic and export markets. The impact on social welfare is indeterminate. However, numerical results for Turkey support the conjecture that with the elimination of a VER an exporting country is worse off, and that this welfare loss is larger, the smaller the country in question. Secondly, I argue that an export tax, considered to be optimal in a partial equilibrium (PE) framework, might be sub-optimal in a GE setting. In fact, all numerical simulations support the view that the PE export tax leads to a social welfare loss. I also demonstrate analytically that the PE formula is upwardly biased. Finally, a further issue has been analysed, which refers to the impact of regional agreements on income distribution and employment, which are two of the most contentious issues among economists and policy-makers, in the areas of tariffs and quotas. Given the complexity of the analysis in a multi-household and multi-factor framework, I apply a GE model with constant returns to scale and perfect competition to study the impact on welfare, income distribution and employment of the recent customs union (CU) agreement between Turkey and the European Union (EU) on the Turkish economy. The numerical results indicate that the CU is not trade diverting. Most importantly, this agreement might substantially raise income inequality between urban and rural household members, suggesting that analysis based only on assumptions, which characterise the Stolper-Samuelson theorem, might be misleading. In addition, the CU favour the creation of 148 thousands new jobs, mainly with basic skills. So, in conclusion, I argue that (i) VERs arc agreed to protect the monopoly power of incumbent firms and to enhance possibly the welfare of the exporting country; (ii) export taxes are upwardly biased and non-optimal; (iii) the regional agreement with the EU raises Turkish employment and might raise income inequality among household members.

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