Trade Policies for Intermediate Goods under International Interdependence

Abstract

This study investigates international trade policy with intermediate goods belonging to the international division of labor. The main conclusions are as follows. First, if the governments of two producing countries must choose whether to intervene with this trade, they can select trade policies and abandon final goods by adopting policies taxing intermediate goods. Second, the governments of the two producing countries can cooperate to increase welfare. This cooperation agreement views the sum of intermediate and final goods trade policies in the individual countries as a net subsidy. In this agreement, intermediate and final goods trade policies have displacement. Third, when the market structure of intermediate goods of a certain producing country is transformed from an initial monopoly to perfect competition, this country’s government uses taxation policies for trade in final goods. The government of the other country implements subsidization policies for trade in intermediate and final goods.