INCREASING RETURNS, URBAN UNEMPLOYMENT, AND INTERNATIONAL CAPITAL MOBILITY - A TRADE-POLICY ANALYSIS

This paper compares the effects of tariffs, quotas and VER, both with and without international capital mobility, for a small open economy f acing urban unemployment of unskilled labor and external increasing re turns in the manufacturing sector. Expressions for the shadow price of foreign exchange and capital are derived under each type of trade res triction. It is shown that international capital mobility in such an e conomy unambiguously lowers the welfare cost of all forms of trade res triction, in contrast to the existing literature on full employment CR S economy, where international capital mobility unambiguously raises t he welfare cost of tariff protection.