The Effects of Trade Liberalisation in a Vertical Structure

Abstract

Despite the importance of international trade on intermediate goods, the literature did not pay much attention to this aspect in determining the effects of trade liberalisation in the presence of labour unions. We take up this issue here and show the effects of trade liberalisation on the final goods and/or the intermediate goods, where the domestic firm pays unionised wage and imports intermediate goods from another country. We show that trade liberalisation on the intermediate goods (final goods) increases (reduces) the unionised wage, labour union’s utility and the domestic profit. Trade liberalisation on both the final goods and intermediate goods may either increase or reduce the domestic unionised wage, labour union’s utility and the domestic profit depending on the input coefficients and the initial tariff levels. Our qualitative results are robust with respect to the intermediate goods market structure, the pricing strategy of the intermediate goods producer, the union’s objective function and input substitution, yet they affect the results quantitatively.