AN ANALYSIS OF IMPORT PROTECTION AS EXPORT PROMOTION UNDER ECONOMIES OF SCALE

This paper examines Krugman's (1984a) argument that under increasing r eturns to scale import protection may act as a form of export promotio n. We formally prove Krugman's result by explicitly using stability co nditions for a multimarket Nash equilibrium. We also develop the welfa re economics of the export promotion argument. Here protection allows profits to be shifted to the domestic firms, not only in home markets, but also in export markets. Although protection could be worthwhile i f carried out unilaterally, trade warfare would leave all countries wo rse off than if they adopted free-trade policies. Furthermore, other i nstruments, such as subsidies, might be a better policy than import re strictions. (C) 1998 Elsevier Science B.V.