The Welfare Effect of International Cost Harmonization

Abstract

Cost harmonization is said to occur when foreign firms’ (marginal) costs are brought closer or equalized to those facing domestic rivals. Cost harmonization can occur for various reasons; for example, by falling transport costs, which brings the foreign firms’ cost down to the level facing the domestic firms. As another example, suppose that the foreign government dismantles its export subsidy programs. Then, the loss of subsidies raises the foreign firms’ costs, thereby closing the cost gap between the foreign and the home firms. In this case, the cost is closed by a rise in the foreign firms’ cost.

We benefited from comments by C. Davidson, S. Matusz, C.-H. Miao, J. Tirole, and seminar participants at the Michigan State University, University of South Carolina and at the 2009 EEA and the 2010 COE Hitotsubashi University Trade meetings. All errors are our own.