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State Trading and Domestic Distortions in a Mixed World Economy

  • Political Science


State trading is defined as selling in competition with foreign producers at prices that are affected by government control. The paper applies the domestic distortions approach of international trade theory. At times of weak demand a country can increase national welfare by directing domestic producers to sell at short-run marginal social opportunity cost rather than competitive prices. State trading can achieve national welfare gains by import substitution and export promotion. Without international coordination, individual countries' actions may trigger protectionist responses that damage all participants in the long run.

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