Tariff wars in the Ricardian Model with a continuum of goods

This paper describes strategic tariff choices within the Ricardian framework of Dornbusch, Fischer, and Samuelson (1977) using CES preferences. The optimum tariff schedule is uniform across goods and inversely related to the import demand elasticity of the other country. In the Nash equilibrium of tariffs, larger economies apply higher tariff rates. Productivity adjusted relative size (≈ GDP ratio) is a sufficient statistic for absolute productivity advantage and the size of the labor force. Both countries apply higher tariff rates if specialization gains from comparative advantage are high and transportation cost is low. A sufficiently large economy prefers the inefficient Nash equilibrium in tariffs over free trade due to its quasi-monopolistic power on world markets. The required threshold size is increasing in comparative advantage and decreasing in transportation cost. I discuss the implications of the static Nash-equilibrium analysis for the sustainability and structure of trade agreements.     

Friends like this: The impact of the US–China trade war on global value chains

This paper considers the indirect impact the recent tariff increases between the United States and China can have on third countries through links in global supply chains. We combine data from input–output relationships, imports and tariffs, to calculate the impact of the tariff increases by both the United States and China on cumulative tariffs paid by third countries. We show that the tariff hikes increase cumulative tariffs for other countries and thus hurt trade partners further downstream in global supply chains. We also show that this is particularly important for tariff increases on Chinese imports in the United States. These are likely to be used as intermediates in production in the United States, which are then re-exported to third countries. The most heavily hit third countries are the closest trade partners, namely the EU, Canada and Mexico. We estimate that the tariffs impose an additional burden of around 500 million to 1 billion US dollars on these countries. China's tariffs on US imports have less of an effect.     

美国反倾销贸易效应的实证分析

基于美国1998—2007年对外反倾销案的动态面板数据,应用一阶差分广义矩估计方法(SYS-GMM)考察其关税和反倾销对被诉国出口贸易和贸易份额的影响,结果表明:美国关税和反倾销措施在被诉国和被诉行业中都存在贸易破坏效应和贸易转移效应,其中,对中国反倾销的贸易效应最大;比较关税与反倾销措施对被诉国出口的影响,发现美国实施反倾销措施的贸易破坏效应和贸易转移效应远大于关税,表明反倾销措施已经成为美国取代传统关税控制进口的重要贸易政策。     

On the Incidence of US Tariffs

This paper provides evidence on the incidence of tariffs on products of export interest to developing countries by investigating the relationship between per capita incomes of US trading partners and tariff rates. It constitutes the first attempt to assess the incidence of tariffs imposed by the US on countries that span the entire range of per capita incomes. Average tariff rates are lower for the poorest and richest countries and higher for countries in the middle of the income distribution. This finding is not consistent with the widely held view that tariffs used by industrial nations bear more heavily on products of export interest to poorer developing countries than on imports from industrial nations. It is consistent with the tariff escalation pattern reported in earlier studies if advanced countries account for most products at the high end of the fabrication scale. Results show that poorest countries will find it difficult to escape tariffs by attaining higher levels of economic development.     

Simulated Negotiations in the Hiring of a Salesforce Manager: Tests of Two-Person Bargaining Solutions

This paper examines the ability to predict bargaining outcomes consistent with Nash, Kalai-Smorodinsky, and Gupta-Livne bargaining models as well as two heuristic solutions based on interpersonal (cardinal) comparisons of utility. Equal earning and equal loss solutions are developed from bargainers' multi-attribute utility functions. An experimental test of these bargaining solutions is conducted for simulated negotiations between a representative of sales force management and a representative of sales force employees over the hire of a regional sales manager. Results show that proportional (Kalai-Smorodinsky) solutions are generally more likely when bargaining is conducted in attribute space, and equal loss solutions are more likely in utility space.     

Policy choice: Theory and evidence from commitment via international trade agreements

Why do governments employ inefficient policies when more efficient ones are available for the same purpose? We address this puzzle in the context of redistribution toward special interest groups (SIGs) by focusing on a set of important policies: tariffs and non-tariff barriers (NTBs). In our policy choice model a government can gain by committing to constrain tariffs through international agreements even if this leads to the use of less efficient NTBs; commitment has political value because it improves the bargaining position of a government that is weak relative to domestic SIGs. Using detailed data we find support for several of the model's predictions including: (i) tariff commitments in trade agreements increase the likelihood and restrictiveness of NTBs but not enough to offset the original tariff reductions; (ii) tariff commitments are more likely to be adopted and more stringent when the government is weaker relative to a SIG. Thus, the results can explain the use of inefficient policies for redistribution and suggest that the bargaining motive is an important source of the political value of commitment in international agreements.     

Strategic trade policy and union-firm bargaining agenda

In this paper, we revisit the issue of the scope of bargaining between duopolistic firms and unions in an open economy with strategic trade policy. It is shown that, in contrast with the case of the absence of export tax/subsidy, a right-to-manage (RTM) arrangement always emerges endogenously as a sub-game perfect Nash equilibrium in agreement between parties. Moreover, such an arrangement may be also Pareto-optimal in both exporting countries in the sense that profits, workers' welfare (provided that union's power is sufficiently high) and social welfare as a whole are higher than the efficient bargaining (EB) arrangement. Moreover, since the government of the country in which there is EB (while in the other country the alternative agenda RTM is used) levies a tax on export, then the conventional result that under quantity competition it is always optimal for exporting countries to subsidise exports may be reversed.     

Declining Protection in Developing Countries: Fact or Fiction?

This paper explores whether and to what extent evident trade reform, falling average tariffs and rising exports in recent decades overstate the extent to which protectionism has declined in developing countries, especially low‐income developing countries. It identifies remaining significant protection, especially of final manufactured goods; this being associated with the presence of peak tariffs, escalating tariff structures by stage of production and replacement of old forms of non‐tariff protection with new instruments of non‐tariff protection. It also identifies significant protection arising from high international trade costs induced by inefficiencies in transportation, ports and customs, and from the growth of exports to preference‐receiving, export markets.     

Third‐country Effects of Regional Trade Agreements

Does regionalism negatively impact non‐members? To answer this question, we examine the effect of regional trade agreements (RTAs) on imports from non‐members and the tariffs that they face. Using data from six RTAs in Latin America and Europe, we do not find evidence that implementation of the regional agreements is associated with trade diversion from third countries to regional members. Using detailed industry data on preference margins and most‐favoured nation (MFN) tariffs for three trade agreements in Latin America over 12 years, we find that greater preference margins do not significantly reduce imports from third countries. We also look at the effect of preferences on external tariffs. We find evidence that preferential tariff reduction tends to precede the reduction of external MFN tariffs in a given sector, offering evidence of tariff complementarity. Overall, the results suggest that regionalism does not significantly harm non‐members.     

Some concepts of distributive justice in bargaining problems

In this article we study the problems associated with distributive justice in an abstract framework originally conceived for the analysis of social choice and bargaining problems. Induced social choice correspondences are derived by considering alternatives which are invariant under permutations of the status quo point. We study in particular the fairness correspondence and a generalized Walrasian bargaining solution and establish links between the two concepts. The analysis in this article can be extended far beyond the point at which it ends.     

International trade agreements between countries of asymmetric size

This paper analyzes how changes in the structure and environment of trade agreements between a small and a large country affect the efficient frontier of those self-enforcing agreements and hence, negotiation outcomes. Using the autarky punishment instead of the interior Nash punishment may provide the small country with greater bargaining power. Negotiating direct transfers under free trade instead of reciprocal tariff reductions improves the worst possible negotiation outcome for the small country. The existence of irreversible investment may strengthen (weaken) the small country’s bargaining power under the interior Nash (autarky) punishment scheme.     

A South–South Survival Strategy: The Potential for Trade among Developing Countries

Trade between developing countries, or South–South trade, has been growing rapidly in recent years following reductions in tariff barriers. However, significant barriers remain, and there is currently reluctance in many developing countries to undertake further reductions, with a preference instead for focusing on opening up access to developed country markets, or maintaining the status quo given that multilateral liberalisation may result in the erosion of preferential access enjoyed by some developing countries. This emphasis on Northern markets represents a missed opportunity for developing countries. To assess this we compare the potential effects of the removal of barriers on South–South trade with the gains from developed country liberalisation and from regional free trade areas within Africa, Asia and Latin America. A general equilibrium model, the Global Trade Analysis Project (GTAP) model, containing information on preferential bilateral tariffs, is used to estimate the impacts. The results indicate that the opening up of Northern markets would provide annual welfare gains to developing countries of $22 billion. However, the removal of South–South barriers has the potential to generate gains 40 per cent larger. The results imply that giving greater emphasis to removing barriers between as well as within continents could prove a successful Southern survival strategy.     

A Cooperative Bargaining Approach to the Assignment Market

For each assignment market, an associated bargaining problem is defined and some bargaining solutions to this problem are analyzed. For a particular choice of the disagreement point, the Nash solution and the Kalai–Smorodinsky solution coincide and give the midpoint between the buyers-optimal core allocation and the sellers-optimal core allocation, and thus they belong to the core.     

Preference Erosion,Government Revenues and Non‐tariff Trade Barriers

Developing countries benefiting from developed country unilateral trade preferences fear that Doha Round tariff cuts will erode the value of those preferences. That these programmes confer significant benefits, however, is not clear. Studies indicate that the impact of preference erosion would be minimal for most developing countries. But for a small subset of middle‐income and least‐developed countries, concern may be warranted. WTO members, should address affected countries’ concerns, perhaps by tailoring WTO tariff negotiations to lessen adjustment pressures and providing development assistance. Developing countries also are anxious that lower tariffs will reduce government revenues. Dependence on tariff revenue is diminishing and trade liberalisation need not result in lower total tax revenues or even lower customs revenues. Much depends on a country's current tariff and trade regime, its tax structure and its overall economic structure. At some point, a country does need to broaden its tax base and look to other revenue sources to offset declining tariff revenues. Tax reform, therefore, complements trade reform. A third area of developing country concern is non‐tariff barriers (NTBs), which may limit market access even after tariffs are reduced. Despite prior WTO work in this area, NTBs remain a thorny issue for all WTO members.     

The biggest losers (and winners) from US trade liberalization

Many development experts worry that continuing reductions of tariff levels in high-income countries will limit trade flows from developing countries that benefit from preferential trade programs because of ‘preference erosion.’ Using a panel of US import data between the years of 1997 and 2005, I find that reductions in preference margins will significantly diminish imports of some products, particularly from lower-middle and low income countries; for example, a 1% reduction in the US tariff on a product that is currently imported duty-free from developing countries will decrease imports of that product from lower-middle income countries by an average of 2.6%. However, many products produced by developing countries fail to qualify for preferential tariffs, thus a gradual reduction in all US tariff rates is expected to have only a modest impact on trade flows from developing countries.     

The effects of cross-regional free trade agreements under a vertical industry structure

This paper examines the effects of a cross-regional free trade agreement (FTA) on tariffs, welfare, and the incentives for multilateral free trade in a three-country model with a vertical industry structure. We show that the FTA induces member countries to reduce their tariffs on nonmember countries. On the other hand, a nonmember country lowers its tariff on final-good imports, but raises its tariff on intermediate-good imports. Also, the FTA makes member and nonmember countries better off. After the FTA is enacted, member and nonmember countries have an incentive to support multilateral free trade, so an FTA acts as a building block for multilateral trade liberalization.     

Do tariffs matter for the extensive margin of international trade? An empirical analysis

With disaggregate tariff data we study the impact of changing tariffs on the range of goods countries export to the United States. Our probits with country and good effects show tariffs tend to have a statistically significant but small impact: at best 5% of the increasing extensive margin for 1989-1999 and 12% for 1996-2006 is explained by tariff reductions. This suggests the extensive margin has not amplified the impact of tariffs on trade flows to such an extent that the relatively moderate tariff reductions since WW II can explain the strong growth of world trade.     

Does partnering with the World Bank shield investors from political risks in less developed countries?

This study explores whether partnering with the World Bank’s International Finance Corporation (IFC) protects foreign investors from aggressive actions by host countries’ governments. Building on the obsolescing bargaining model, we theorize that host states fear that hostile actions towards IFC-supported investments will damage their relationships with the World Bank. Within this context IFC support deters host government aggression towards investments. We assess our argument using country-level panel data as well as interviews with a sample of high-level managers. Findings suggest that IFC-support helps to reduce host state aggression against investing firms.     

Trade policy-making in a model of legislative bargaining

In democracies, trade policy is the result of interactions among many agents with different agendas. In accordance with this observation, we construct a dynamic model of legislative trade policy-making in the realm of distributive politics. An economy consists of different sectors, each of which is concentrated in one or more electoral districts. Each district is represented by a legislator in the Congress. Legislative process is modeled as a multilateral sequential bargaining game à la Baron and Ferejohn (1989). Some surprising results emerge: bargaining can be welfare-worsening for all participants; legislators may vote for bills that make their constituents worse off; identical industries will receive very different levels of tariff. The results pose a challenge to empirical work, since equilibrium trade policy is a function not only of economic fundamentals but also of political variables at the time of congressional negotiations — some of them random realizations of mixed bargaining strategies.     

Politics of free trade areas: tariffs versus quotas

In this paper we compare and contrast the political viability of bilateral Free Trade Area (FTA) Agreements in the presence of tariffs and quotas. Assuming that the government maximizes a weighted sum of welfare and producer profits, we show that the political viability of FTAs varies according to whether trade restrictions take the form of tariffs or quotas. A key result is that whereas an FTA is unambiguously rejected by one of the countries under a tariff, it may be endorsed by both trading partners under a voluntary export quota or import quota that provides equal protection as the tariff.