Race‐to‐the‐bottom Tariff Cutting

Unilateral tariff liberalization accounts for the lion's share of trade liberalization since the 1980s and has accompanied the most successful trade‐led development model of the past 50 years, “Factory Asia”. Understanding what drove this liberalization is therefore crucial to our grasp of the process of economic development. This paper provides empirical evidence for seven Asian emerging economies from 1988 to 2006 consistent with a tariff race to the bottom driven by a competition for foreign direct investment (FDI). The identification is two‐pronged. First, it is shown that tariffs on parts and components, intermediates and capital goods, crucial locational determinants for assembly firms, are correlated in competitive space, i.e. across countries at a similar level of development, but not across all countries. Second, it is shown that the tariff correlation in competitive space is significantly higher for inputs than consumer goods.     

Trade,foreign direct investment or acquisition: Optimal entry modes for multinationals

We examine multinationals' optimal entry modes into foreign markets as a function of market size, FDI fixed costs, tariffs and transport costs. Our results highlight why large countries are more likely to attract acquisition investment, while intermediate sized countries may be served predominantly through trade, even in the presence of high tariffs. Small countries are most likely to experience either FDI or no entry. We also show how these results vary with the competition intensity in the host country.FDI fixed costs, tariffs and transport costs are crucial not only in determining whether to engage in FDI or trade, but they are also shown to influence the acquisition choice as trade and FDI threats influence the acquisition price. Finally, we explore the welfare implications of tariff reductions for both the local firm and the multinational and investigate political motives to impose endogenous tariffs that influence not only the welfare of a local firm, but also the entry mode of the multinational.     

出口导向贸易政策与发展中国家间FDI竞争——基于寡占竞争模型的理论分析

文章建立了一个两国竞争模型,重点分析了进口关税与出口补贴等战略贸易政策对发展中国家吸引FDI竞争的影响。研究发现:(1)当两国都采取出口补贴的外资激励政策时,工资水平和进口关税对发展中国家间FDI竞争并没有直接影响;(2)对全要素生产率较高的国家来说,当两国的关税水平都较高时,出口补贴政策增加流向本国的FDI,而当两国关税水平大幅下降后,出口补贴政策反而不利于本国FDI竞争。文章的结论对当前我国战略引资和出口退税等政策的调整具有重大的指导意义。     

Trade costs and foreign direct investment

This paper focuses on an apparent conflict between the theory of foreign direct investment (FDI) and recent trends in the globalized world. The bulk of FDI is horizontal rather than vertical, and standard theory predicts that horizontal FDI is discouraged when trade costs fall. This seems to conflict with the experience of the 1990s, when trade liberalisation and technological change led to dramatic reductions in trade costs yet FDI grew much faster than trade. Two possible resolutions to this paradox are explored. First, horizontal FDI in trading blocs is encouraged by intra-bloc trade liberalisation, because foreign firms establish plants in one country as export platforms to serve the bloc as a whole. Second, cross-border mergers, quantitatively more important than greenfield FDI, are encouraged rather than discouraged by falling trade costs.     

Strategic tariffs, tariff jumping, and heterogeneous firms

The majority of research to date investigating strategic tariffs in the presence of multinationals finds a knife-edge result where, in equilibrium, all foreign firms are either multinationals or exporters. Utilizing a model of heterogeneous firms, we find equilibria in which both pure exporters and multinationals coexist. We utilize this model to study the case of endogenously chosen tariffs. As is standard, Nash equilibrium tariffs are higher than the socially optimal tariffs. Unlike existing models with homogeneous firms, we find that non-cooperative tariffs promote the existence of low-productivity firms relative to the socially optimal tariffs. This highlights a new source of inefficiency from tariff competition not found in models of homogeneous firms. In addition, we find that in many cases the Nash equilibrium tariff when FDI is a potential firm structure is lower than when it is not. As a result, FDI improves welfare by mitigating tariff competition.     

Commercial Policy and Foreign Ownership

Foreign multinationals often not only export but also control local firms through FDI. This paper examines the various effects of trade and industrial policies when exports and FDI coexist. We focus on the case in which a foreign firm has full control of a local firm through partial ownership. Cross‐border ownership on the basis of both financial interests and corporate control leads to horizontal market linkages through which tariffs and production subsidies may harm locally owned firms but benefit the foreign firm. Foreign ownership regulation benefits locally owned firms. These results could have strong policy implications for developing countries that attract an increasing share of world FDI.     

Optimum tariffs and patent length in a model of North–South technology transfer

We study a developing country's choice of optimum tariffs and patent length in a theoretical model of trade and technology transfer. A Northern firm chooses whether to export or produce a new good in a Southern country. In the absence of patent protection, a high tariff is required to induce FDI. This reduces Southern welfare when the good is imported. The Southern government can combine a positive patent length with tariffs to reduce this loss and induce FDI. Thus Southern countries may have an incentive to protect patents, although never to the same extent as Northern countries.     

Welfare Effects of Tariff Reduction Formulas

World Trade Organization (WTO) negotiations rely on tariff reduction formulas. Formula approaches are of increasing importance in trade talks, because of the large number of countries involved, the wider dispersion in initial tariffs (e.g. tariff peaks), and gaps between bound and applied tariff rates. This paper presents a two country intra‐industry trade model with heterogeneous firms subject to high and low tariffs. We examine the welfare effects of applying three different tariff reduction formulas discussed in the literature that were used and proposed in previous and current General Agreement on Tariffs and Trade (GATT)/WTO negotiations (1) a proportional cut, (2) the Swiss formula and (3) a tiered formula. No single formula dominates for all conditions. The ranking of the three tools depends on the degree of product differentiation in the industry and the achieved reduction in the average tariff.     

Reassessing the productivity gains from trade liberalization

This paper reassesses the impact of trade liberalization on productivity. We build a new, unique database of effective tariff rates at the country‐industry level for a broad range of countries over the past two decades. We then explore both the direct effect of liberalization in the sector considered, as well as its indirect impact in downstream industries via input linkages. Our findings point to a dominant role of the indirect input market channel in fostering productivity gains. A 1 percentage point decline in input tariffs is estimated to increase total factor productivity by about 2 percent in the sector considered. For advanced economies, the implied potential productivity gains from fully eliminating remaining tariffs are estimated at around 1 percent, on average, which do not factor in the presumably larger gains from removing existing non‐tariff barriers. Finally, we find suggestive evidence of complementarities between trade and FDI liberalization in boosting productivity. This calls for a broad liberalization agenda that cuts across different areas.     

Cost‐reducing R&D Investment,Labor Market and Trade

This paper constructs a two‐country model in which oligopolistic firms export goods and undertake cost‐reducing R&D investment. Each country imposes tariffs. A decrease in the tariff rates in both countries decreases cost‐reducing R&D investment.     

Comparison of deep integration in the Melitz,Krugman and Armington models: The case of The Philippines in RCEP

We estimate the welfare effects of a modern mega-preferential trade agreement--the Regional Comprehensive Economic Partnership--with three versions of market structure: (i) perfect competition, Armington style; (ii) monopolistic competition based on Krugman (1980); and (iii) monopolistic competition in the style of Melitz (2003). We develop a new numerical model of foreign direct investment (FDI) with heterogeneous firms and extension of the Krugman model that allows small countries to impact the number of varieties. We hold both the trade and FDI responses constant across the three market structures. We find that in all three market structures, there are substantial gains from deep integration, but virtually no gains from preferential tariff reduction. Both our Krugman and Melitz style models produce significantly larger welfare gains than the Armington structure, especially if third countries benefit at least partially from the deep integration reforms via either spillovers or wider liberalization.     

Developing-Country Benefits from MFN Relative to Regional/Bilateral Trade Arrangements

Using a general‐equilibrium model of world trade, this paper evaluates the benefits of most‐favored‐nation (MFN) treatment to developing countries in multilateral relative to bilateral or regional trade agreements, from three sources. First, developing countries may be able to free‐ride on bilateral tariff concessions exchanged between larger countries in MFN‐based GATT/WTO rounds. Second, MFN benefits developing countries by restricting discriminatory retaliatory actions by other countries, evaluated here by a non‐ cooperative Nash tariff game. Finally, MFN changes threat points in bargaining and hence affects the bargaining solution of multilateral MFN‐based trade negotiation compared to a bilateral/regional arrangement. The authors find that the benefits to developing countries are small in the first case as the tariff rates are already low, and the benefits are small in the second case as the optimal tariffs under unconstrained retaliation are not very asymmetric. Benefits from the third case are large as large countries can extract large side‐payments if they bargain bilaterally.     

Fortress Europe: Jericho or Château d’If?

Traditional analysis of customs union formation suggests that it leads to an increase in members' external tariffs. This paper stresses two aspects of European trade and trade policy—a large volume of intra-industry trade between similar countries and a political motivation for tariffs—and highlights a role for tariff coordination in a model of differentiated products in which tariffs affect domestic costs and thus export prices and the magnitude of monopolistic rents. We show that when workers choose the tariffs and receive but a small portion of tariff revenues, the union's tariff wall falls.     

The influence of international trade on labour productivity in services: The case of Brazil in the 1990s

In the developing world, services account for a rising share of domestic employment and international trade. Thus, it is important to know whether trade liberalization contributes to labour productivity in services. We explore this question, examining the 1990–2000 Brazilian trade liberalization. We find that growth of imports and exports strengthened labour productivity in services, but the contribution was smaller in subsectors with more college graduates, and this negative offset was larger in subsectors that received large foreign direct investment (FDI) inflows. Improved access to imported manufactured intermediate inputs raised downstream services' labour productivity and downstream manufacturing firms benefitting from tariff cuts enacted by trade partners generated spillovers that improved the labour productivity of upstream service subsectors. However, FDI inflows and investments in human and physical capital modified these downstream factors. We conclude that the Brazilian trade liberalization strengthened productivity in services, but unequally across subsectors.     

Tariff effects on MNC decisions to engage in intra-firm and arm's-length trade

Abstract .  Using confidential firm-level data from the Bureau of Economic Analysis (BEA) on activities of U.S. multinational corporations (MNCs) and their Canadian affiliates, we study the dramatic growth of intra-firm and arm's-length U.S.-Canada trade over the 198495 period. We find that decisions to engage in intra-firm and arm's-length trade are essentially unrelated to tariff and transport cost reductions over this sample period. Thus, we find that the increase in trade occurred almost entirely on the  intensive  rather than the  extensive  margin. This is consistent with case study evidence in Keane and Feinberg (2006), where MNC executives consistently indicate that the modest tariff reductions of the 198495 period were not sufficient to justify fixed costs of overhauling international supply chains. Our results have important implications for recent influential models of international trade that rely on sensitivity of intra-firm trade to tariffs at the  extensive  margin to explain how small tariff declines could have led to the explosion of intra-firm trade since the 1980s. We also find that initial conditions (i.e., 1983 tariffs) are uncorrelated with whether firms engaged in intra-firm or arm's-length trade activity at the start of the sample period. This result is surprising as it implies that firms/industries with a greater propensity to engage in trade were not, in general, successful at lobbying for more favourable tariff treatment.     

Foreign firm entry in an open economy: the case of Portugal

The purpose of this paper is to analyse the entry process of foreign direct investment (FDI) in Portuguese industrial sectors. Portugal presents an interesting case where firms enter to take advantage of export opportunities. The results suggest that foreign firms possess the ability to overcome existing entry barriers that affect domestic firms. Apparently, foreign firms have different expectations about profitability than domestic firms, possibly due to foreign firms’ export-orientation to the rest of the European Union (EU). They appear to desire industries where other foreign firms have clustered. Above all, it appears that these foreign firms enter industries to exploit Portugal's chief location advantage in Western Europe: low wages. Portugal's FDI experience is relevant to other countries that have opened their economies to greater trade and investment and attracted export-oriented firms.     

TARIFF JUMPING FOREIGN DIRECT INVESTMENT DECISION IN A QUALITY‐DIFFERENTIATED MARKET

Using a product differentiation model, this paper discusses the issue of transnational firms evading tariffs and investing directly in a host country (through foreign direct investment (FDI)). Where product quality is differentiated between foreign and host country firms and assuming a firm's quality requirement is a long‐term strategy and is not affected by a foreign firm's trade decision, we obtain the following findings. First, whether or not a host country firm produces high or low quality products, raising the quality requirement for foreign products will increase the possibility of a foreign firm choosing FDI instead of exporting a product to the host country. Second, raising the quality requirement for domestic products will lower the possibility of foreign firms choosing FDI without regard to the product's quality. Finally, given a competitor in the host country, in FDI, a foreign high‐quality product‐producing firm has an advantage over a low‐quality product‐producing firm. We also find that even when firms' quality decisions are affected by a foreign firm's trade decision, most of the above results will still hold.     

Cross‐border Mergers and Greenfield Foreign Direct Investment

This paper presents a model of international trade and foreign direct investment (FDI), where FDI is comprised of greenfield FDI and mergers and acquisitions (M&A). In a monopolistically competitive environment merging firms do not reduce competition. Mergers are motivated by efficiency gains and transfer of technology. Following empirical evidence, greenfield investors are modeled as more productive than M&A firms, which are in turn more productive than exporters. The model has two symmetric countries and generates two‐way flows of both M&A and greenfield FDI. Trade liberalization makes more firms choose greenfield FDI over M&A and leads to lower productivity and welfare.     

Reconciling Observed Tariffs and the Median Voter Model

Median voter theory applied to trade policy predicts positive tariffs in capital‐abundant countries and negative tariffs in labor‐abundant countries. Negative tariffs are rare, and this paper reconciles the median voter theory with observed protectionism across countries. By considering large countries, I show the optimal tariff is a sum of the median voter component and a positive term of trade component. Positive terms of trade effects raise tariffs in all countries, and can overcome the negative median voter component in labor‐abundant countries. Testing the tariff prediction with cross‐section and panel data from the 1990s, I show the median voter component is negative in labor‐abundant countries and positive in capital‐abundant countries. As expected, terms of trade effects raise tariffs across all countries and are stronger among nonmembers of the WTO.     

DECISION TO INVEST ABROAD: THE CASE OF SOUTH KOREAN MULTINATIONALS

Recent firm‐based empirical studies examine whether firms serving foreign markets either through exports or foreign direct investment (FDI) are more efficient than their domestically‐oriented counterparts. The purpose of the present paper is to study the link between performance of multinational firms and the choice to participate in foreign investment. In so doing, this paper explicitly differentiates exports and FDI decisions. Using firm‐level data for large South Korean manufacturing firms, I provide evidence that the premium for FDI is huge compared to exports, and that good firms undertake FDI. Studying performance across firms, I find that firms that engage in FDI outperform other firms in the future in all possible dimensions; they are larger, pay higher wages, and are also more productive. These results are consistent with the hypothesis that good firms self‐select to engage in FDI. I also find clear evidence that past FDI experience has a strong positive effect on the probability of current investment abroad. This implies that the sunk cost involved in FDI plays a role in current decisions to undertake FDI.