Trade policy versus competition policy: Substitutes or complements?

This paper deals with the difference between trade policy and competition p olicy for domestic prices, wages, and employment when product and labour ma rkets are imperfectly competitive. We show that in the presence of country- specific institutions like trade unions, trade policy and competition polic y are no longer substitutes in disciplining product and labour market disto rtions. While both domestic entry and foreign imports affect domestic price -cost margins, they differ in their effectiveness and their impact on the d omestic labour market. The results in this paper suggest that enforcement o f competition policy without a sufficient degree of openness to imports is typically not a first-best outcome. While domestic entry increases union we lfare, foreign imports reduce it. Competition policy in the presence of lab our unions is insufficient to reduce labour market distortions, while inter national competition reduces both labour and product distortions.