Scandinavian Working Papers in Economics

Working Paper Series,
Trade Union Institute for Economic Research

No 145: National Product Preferences and International Trade

Geoffrey Reed and Johan Torstensson
Additional contact information
Geoffrey Reed: CREDIT, Postal: University of Nottingham, University Park, Nottingham NG7 2RD, United Kingdom
Johan Torstensson: Department of Economics, Lund University and FIEF, Postal: FIEF, Wallingatan 38, SE-111 24 Stockholm, Sweden

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

JEL-codes: F12; F13

22 pages, August 21, 1997

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