Tariff protection and port privatization: An import-competing approach

Abstract

This paper presents a theoretical investigation on trade and port policies, at a substantial level of abstraction. Applying an import-competing trade model, we examine the effect of port ownership on port charges, firm profits, and social welfare. We show that, depending on transport costs, the home country has different preferences in choosing port ownership under free trade. However, the foreign country always prefers to privatize its port rather than keep it public under free trade. Moreover, under a trade tariff regime, we find that the home country chooses port privatization, regardless of transport costs, while the foreign country always prefers public ownership to port privatization. Thus, a comparison of free trade and the trade tariff regime reveals the following: (i) the welfare of the home country choosing port privatization is always greater under a trade tariff regime and (ii) the welfare of the foreign country may decrease or increase, depending on the transport costs and the degree of imperfect substitutability, which in turn depend on the ownership structure of ports. From the viewpoint of port’s profit, a privatized port is never allowed to run a deficit, whereas a public port is. This result shows that a privatized port focuses more on profit than on trade volume, while the opposite is true in the case of a public port. It is hoped that our line of thinking, admittedly abstract, or even bold if taken at face value, could provide some useful input to the complex decision-making processes involved in real life port policy formulation.