Scandinavian Working Papers in Economics
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FIEF - Trade Union Institute for Economic Research Working Paper Series, FIEF - Trade Union Institute for Economic Research

No 145:
National Product Preferences and International Trade

Geoffrey Reed and Johan Torstensson

Abstract: We show that when two countries are the same size then the country with stronger preferences in favour of domestic varieties of differentiated goods produced under increasing returns (IRS) will be the net exporter of that good. It is also shown that strong preferences for domestic varieties reduce welfare in the other country and that unilateral trade barriers will necessarily improve welfare there. Moreover, the country with the weaker preferences for domestic varieties may benefit from trade restrictions even when this leads to a trade war. We also show that such preferences may explain low import penetration in IRS-goods. Finally, we discuss the policy implications of such preferences. It is argued that this model can be used to for example capture aspects of US-Japan trade in high-tech goods.

Keywords: national preferences; trade war; Japan; (follow links to similar papers)

JEL-Codes: F12; F13; (follow links to similar papers)

22 pages, August 21, 1997

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