Endogenous Trade Policies, WTO Rules and International Capital Movement

This paper views the modern world economy to be constructed with democratic countries that implement trade policies as an income distribution policy, World Trade Organization that intends to improve world welfare by prohibiting export subsidies but allowing import and export tariffs, and international capital movement. Based on this view, it explores the effects of these WTO rules on the volume of international trade in goods, the direction and volume of international capital movement and world welfare in a two-country, two-good, two-factor model with capital specific to the production of one good and internationally different production technologies. It shows that if the export subsidies and import tariffs prevail as the Nash equilibrium trade-policy measures in the era before the WTO is established, the enforcement of those WTO rules reduces the volume of trade in goods, expands international capital movement the direction of which is the same as international trade in the capital-intensive good but shrinks international capital movement the direction of which is opposite to it, and the expansion in international capital movement cannot necessarily compensate the loss of world welfare caused by the reduction in international trade in goods and the failure in achieving the Pareto optimum in the domestic political equilibrium as a result of the prohibition of export subsidies.