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Working Paper No. 08-08

Welfare Effect of Exporting the High-tech Intermediate Products for a Newly Industrialized Country
Henry Y.-H. Chen
October 2008


One of the main concerns for the newly industrialized countries toward trade liberalization is that technology spillover from exporting the high-tech intermediate goods will benefit the final goods production in other developing countries. Furthermore, those developing countries will then compete with the newly industrialized countries in exporting the final goods to other countries. This paper builds a three-country theoretical model that has considered those “side effects” to simulate the effects of trade liberalization on a newly industrialized country, which has the comparative advantage in producing high-tech intermediate goods.

The model shows that when the newly industrialized country liberalizes the export of the high-tech intermediate goods to the developing country, the latter’s export of the final good to the third country becomes more competitive and the global welfare level goes up. However, the welfare level for the former might go down since its export of the final good is hampered. To partially internalize the benefit from specialization, the newly industrialized country can liberalize the import of the final good from the developing country in the meantime.

The model also shows that when both countries play a simultaneous move game on their respective trade policies, there are many possible policy combinations that are welfare-improving for both countries compared to the Nash equilibrium outcome. This suggests that instead of letting both countries interact strategically without negotiation, the role of some trade agreements would be crucial.

Keywords: Trade; Technology spillover; General equilibrium model