How Can Mirror Strategy Resolve Trade Conflicts: A Political Economy Analysis
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| Title | How Can Mirror Strategy Resolve Trade Conflicts: A Political Economy Analysis
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| Author | Ju Jiandong, Ma Jie and Wei Dong |
| Organization | Shanghai University of Finance and Economics; The University of International Business and Economics; New York University |
| Email | ju.jiandong@gmail.com；pkujiema@gmail.com； |
| Key Words | Tariff; Trade Protectionism; Mirror Strategy; Lobbying |
| Abstract | “Mirror strategy” is a commitment made by a country to let its trade policy to be a function of the trade policy of another country. This paper studies the effectiveness of “mirror strategy” in inhibiting trade protectionism and its underlying mechanism. Motivated by China-EU trade dispute in photovoltaic industry, we introduce “mirror strategy” into Grossman and Helpman’s (1995) “trade war” model, and mainly focus on the type of “mirror strategy” that makes a country’s import tariff positively correlated with another country’s import tariff. We show that: i) under certain conditions, the use of “mirror strategy” by a country will reduce the equilibrium import tariff chosen by another country; ii) one important driving force of this reduction of trade restrictions is the induced domestic political competition between different interest groups; another driving force is the terms-of-trade effect caused by the use of this strategy; iii) “mirror strategy” will improve the social welfare of the country that uses it, and may also also enhance the welfare of the other country, resulting in Pareto improvement. |
| Serial Number | WP1061 |
| Time | 2017-02-28 |
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