Foreign Trade Review

This article revisits Kemp’s and Tran-Nam’s incorporation into trade theory the Gossenian theme that consumption takes time. We show how the substitutability between time-intensive household-produced consumption goods and time-saving commercially produced consumption goods (which save households’ consumption and production time) together with capital accumulation can lead to an increase in trash and international trade in trash. The applicability of the standard gains from trade theorems is shown to be compromised by the externalities associated with international trade in trash between North and South. Under some parameter values, South is better off under autarky than under free trade in trash and the gains from trade by North is not sufficient to compensate South’s loss from trade.

JEL Codes: D13, F18, F13

In this note I identify a simple Pareto-improving tariff reform for two countries in a free trade area, motivated by the approach in Kemp and Wan (1976), involving a move ‘towards’ a Kemp-Wan customs union.

JEL Codes: F02, F13, F15

The article attempts to consider the impact of a customs union formed between two small countries embedded in the global economy and trading in intermediates, in terms of a general equilibrium framework. It shows that with such a union both countries will gain, although there will be asymmetric effect on wage inequality. However, with higher capital stock the significance of the formation of customs union will be undermined. It also shows that perfect international capital mobility will lead to finite changes in the economy, shutting down the less capital intensive unskilled export sector in each country, which in turn makes the bilateral union irrelevant. Further tariff reduction will increase inequality in both countries. We have also considered the welfare effects of formation of customs union in the form of tariff cut and such a tariff reduction unequivocally improves welfare of the customs union irrespective of small country and large country assumptions, without any intra-union income transfer.

JEL Codes: F02, F11, F55, F68

In a simple two-country Ricardian economy with public infrastructures, we consider a simultaneous and non-cooperate game between governments with respect to public infrastructure supply. Then it is shown that a country with larger (smaller) factor endowment exports a good whose production is more (less) dependent on public infrastructures, and both countries will gain from trade as long as factor endowment differs between countries. However, the following special features appear. (i) Any incompletely specialising country produces two goods at an inner point of the production possibility set. (ii) If factor endowment is the same between countries, the trading equilibrium is attained by the pattern of specialisation such that each country specialises in one good different from each other and both countries become better off. Which country specialises in which good is indeterminate. The result shows a typical case of symmetric breaking.

JEL codes: F11, H41

This paper studies the effects of immigration policy on the immigration of foreign medical workers on the welfare and income distribution of home medical workers and labourers. We set up a simple small open economy with two traded goods and non-traded medical care services. In the economy, there exists a constant rate of labourers who get ill health and must leave their jobs and thereby lose part of their income. But they can reduce the loss of working time and income by consuming medical services. There are two channels that consumption of the medical service affects the welfare of consumers: (i) consumption of medical service raises the state of health and increases utility, and (ii) consumption of medical service reduces the leave period of labourers and raises their wage income (labour supply-enhancing effect). We see that the above second effect makes the effective price of the medical service for the consumer lower than its market price and causes consumption bias towards the consumption of medical services. To introduce the above properties of consumption of medical service, we define the effective expenditure function of the labourers and examine its properties and conduct comparative static analyses.

JEL codes: F13, F22

We construct and analyse a two-country general equilibrium model in which the home and foreign countries trade two final goods, and legal immigration is restricted. International trade is distorted via tariffs imposed by both countries. Foreign migrants attempt illegal entry to the home country but face a probability of detection and arrest by border patrol of the home country. We examine how stricter border patrol affects the level of illegal immigration, establish conditions under which stricter border patrol reduces successful illegal immigration and determine the welfare implications of this policy change. We also determine the effects on illegal immigration and the welfare of all agents when illegal immigrants increase remittances back to the source country.

JEL Codes: F13, F16, F22.

This study examines the macroeconomic effects of foreign aid and fiscal policy by employing a multi-sector growth model. Foreign aid may decrease the recipient country’s market activities by lowering its capital accumulation and shifting market labour and capital to the non-market sector. This market activity shifting can improve the recipient country’s foreign asset/debt position where real exchange rate plays a role. We examine fiscal policies’ long- and short-run impacts and the recipient country’s administration efficiency in handling aid. Efficiency improvements in the recipient country’s governance of foreign aid can lower its real exchange rate, thereby contribute to improving foreign asset/debt holdings. Although administration costs in foreign aid may cause losses, by raising both market and non-market goods consumption, foreign aid improves the welfare of the recipient country. Our numerical analysis demonstrates the comparative statics and comparative dynamics impacts of several fiscal policy experiments. We illustrate that capital and labour income’s taxation effects can be very different.

This study showcases the specific inspiration from Professor Kemp by focusing on one particular firm—ASML, a Dutch lithography company. It has become the only producer to launch a group of products, the extreme ultraviolet (EUV) systems for advanced integrated circuits (ICs). Such success is relatively new and is due to a single, unprecedented multi-year programme, Customer Co-investment Program CCIP), since 2012. This programme accelerated ASML’s development of EUV, which has marginalised the other two rivals and former market leaders, Nikon and Canon, that they can only compete in the less advanced DUV and i-line systems. The article explores a number of interrelated aspects about the selected case. It discusses how economic theories offer tools into the crux of the matter. It then reviews technical and historical facts to facilitate further understanding. Next, the article considers two main issues: Is the ASML’s claim that CCIP is necessary based on the financing requirement linked to the new technology true? And is the outcome good? The first question is analysed by four inter-related levels of information asymmetry, and the second is discussed at a broader level. Finally, the article explains how Kemp and Shimomura inspires the analysis here of the illustrative case of ASML.

JEL Codes: D22, D23, D82, L22, L63