Import Quotas, Export Promotion and Intra-Industry Trade

Most existing models of protection-induced exports, as well as models of intra-industry trade (IIT), are based on imperfect competition in both the home and foreign countries, usually with increasing returns to scale. This paper shows how import quotas can induce exports and IIT in identical or vertically differentiated products, in a model where an oligopolistic domestic industry with increasing costs faces a competitive world market. It also derives welfare results that go beyond the earlier literature, and shows that relaxation of a voluntary export restraint (VER) can reduce welfare relative to autarky over a wide range, with or without IIT.