Nuclear bombs and economic sanctions

We examine the efficacy of trade sanctions when a target's action causes an irrevocable change in the status quo; for example, sanctions to stop a target's nuclear weapons development program. We find that when a sanctioning country cannot precommit to maintain sanctions long after a target becomes a nuclear power, sanctions are not only inefficacious but they backfire, spurring a target to intensify its effort to complete the nuclear program. If the nuclear program has several stages to complete, gradually increasing sanctions as the nuclear threat becomes more imminent may also backfire even though the program is potentially stoppable when sufficient pressure is applied earlier on. We also discuss the policy implications of our analysis.     

Credibility of Protection and Incentives to Innovate

In recent trade policy debates it is often argued that temporary protection stimulates innovation. This paper shows that the validity of the argument depends on the perceived credibility of protection policy. If it is suspected that temporary protection will be removed early should innovation occur before its terminal date, the protected firm invests less in R&D than it does under free trade. If it is expected that protection will be extended should no innovation have occurred by its terminal date, investment falls below the free-trade level, and eventually to zero, as the terminal date is approached.     

Planting Disinformation through Voluntary Export Restraints

Voluntary export restraints typically are determined in bilateral negotiations between an importing country and a major exporting country, and have the appearance of forcibly limiting exports from the latter while leaving minor exporters unrestrained. However, during the negotiation process the major exporter can acquire insight into the nature of the importing country government. This private information may actually motivate the major exporter to restrain exports voluntarily.     

Comment on “The endogenous aggregate elasticity of substitution for a small open economy”

This note applies the approach of Miyagiwa and Papageorgiou [Miyagiwa, K. and Papageorgiou, C., 2007. Endogenous aggregate elasticity of substitution. Journal of Economic Dynamics and Control 31, 2899–2919] to provide simple frameworks for endogenizing the aggregate elasticity of substitution between capital and labor for a growing small open economy.     

Accounting for Stylised Facts about Recent Anti‐dumping: Retaliation and Innovation

Recent work has found certain stylised facts about anti‐dumping (AD) actions. (i) AD actions are mostly between industrial and developing countries; (ii) developing countries use AD to retaliate against industrial countries; and (iii) AD is concentrated in R&D‐intensive industries. This study develops an analytical framework that can account for these empirical findings. The model suggests that market expansions and/or improvement in R&D capability in the South are essential in avoiding AD wars with the North. Interestingly, stricter enforcement of intellectual property rights in the South has little effect on stopping AD wars between the North and the South.     

Dumping as a signal of innovation

In the R&D-intensive industries, where technologies change rapidly, an innovative foreign firm may need to export greater than normal quantities to signal the level of the new technology it possesses. We find that such actions lead to sales below cost if the foreign firm has a relatively poor reputation for innovation, has a sufficiently high discount factor or possesses a new technology that significantly cuts its cost. We also show that antidumping reduces the costs of signaling, benefits the home firm, and may raise the profit to the foreign firm in the pre-duty period.     

Elasticity of substitution and growth: normalized CES in the Diamond model

Summary. It is often asserted that the more substitutable capital and labor are in the aggregate production the more rapidly an economy grows. Recently this has been formally confirmed within the Solow model by Klump and de La Grandville (2000). This paper demonstrates that there exists no such monotonic relationship between factor substitutability and growth in the Diamond overlapping-generations model. In particular, we prove that, if capital and labor are relatively substitutable, a country with a greater elasticity of substitution exhibits lower per capita output growth in transit and in steady state. Received: October 27, 2001; revised version: February 25, 2002     

Information and disclosure in strategic trade policy

We relax the standard assumption in the strategic trade policy literature that governments possess complete information about the economy. Assuming instead that governments must obtain information from firms, we examine firms' incentive to disclose information to the governments in the Brander–Spencer setting. With quantity competition, we find firms disclosing both demand and cost information, thereby justifying the literature's omniscient-government assumption. With price competition, however, firms have no incentives to disclose demand or cost information, so governments remain uninformed. Further, with quantity competition and unknown demand, governments are caught in an informational prisoner's dilemma.     

Price undertakings, VERs, and foreign direct investment: the case of foreign rivalry

Abstract.  Antidumping (AD) petitions are often withdrawn in favour of voluntary export restraints (VERs) and price undertakings. This paper compares these policy options in the presence of protection-jumping foreign direct investment (FDI), with special emphasis on rivalry between foreign firms. We show that a VER is less likely to induce FDI than a price undertaking or AD. As a result, by settling AD cases with VER agreements, the importing country can pursue a more protectionist policy without triggering FDI. In this sense the GATT ban on VERs following the proliferation of AD uses was a sensible decision.     

Quota-Induced Cycles

We present a new framework to compare the dynamic effect of tariffs and quotas in the presence of oligopoly. Suppose that the domestic and the foreign firm play a quantity-setting game over time in a perfectly stationary economy. A Markov-perfect equilibrium has the foreign firm exporting at the constant rate under a tariff. In contrast, under the quota the rate of exports changes monotonically over the course of each year, causing seasonal fluctuations in domestic production. Quota-induced cycles can make dynamic market segmentation possible and raise profits for both the firms above what they earn under the equal-import tariff.