Port cross-ownership and privatization in international trade with tariff protection

In an international duopoly with two countries and two complementary ports, this paper examines how unilateral and passive port cross-ownership interacts with port privatization and tariff protection in shaping usage fees, trade flows, and welfare outcomes. Cross-ownership affects the fee-setting behavior of ports asymmetrically but consistently reduces their aggregate level. Under free trade, this stimulates international trade and intensifies product market competition, increasing consumer surplus while reducing firm profits. Domestic welfare rises only in the country whose port holds a stake in the foreign port. Under tariff protection, cross-ownership induces tariff differentiation: the country whose port has a foreign stake sets a lower tariff, while the other (foreign) country raises protection. As a consequence, firm profits increase in the foreign country, while its consumers are not excessively penalized due to lower port usage fees. Depending on the degree of privatization, cross-ownership may become mutually welfare-enhancing. Moreover, tariff protection may increase welfare, but only in the country hosting the participated port.