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.     

Effects of the Regional Trading Arrangements on Trade: Evidence from the NAFTA,ANZCER and ASEAN Countries, 1989 – 2000

Using the modified gravity model, this study examines whether the free trade areas of NAFTA, ANZCER and ASEAN would result in trade creation among the member countries and trade diversion with the non-member countries. Further, it applies Linder's income similarity concept to explain the trade patterns in the developed and developing countries within these free trade areas. First, the results suggest that the implementations of the free trade areas have facilitated higher trade among the member countries, particularly the ANZCER and ASEAN countries. However, among all three free trade areas, the formation of the ANZCER free trade area has resulted in trade diversion with non-member countries, whereas that of the ASEAN free trade area has resulted in a trade increase with non-member countries. Surprisingly, the formation of the NAFTA free trade area has no significant effect on trade with non-member countries as their trade flows remain quite low even before its implementation. Second, the result indicates that the trade-enhancing effect of income similarity is confirmed for the developing rather than developed member countries. The developing member countries with similar incomes would trade extensively more with each other. This result can be partly explained by Hanink's income threshold concept, which argues that the income similarity effect is only applicable to developed countries with very small difference in incomes. Given the heterogeneous country sample in this study, the substantial income differences among the developed member countries would probably account for the lack of income similarity effect in these countries.     

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.     

On necessarily welfare-enhancing free trade areas

The well-known Kemp-Vanek-Ohyama-Wan proposition establishes that if two or more countries form a customs union (CU) by freezing their net external trade vector through a common external tariff and eliminating internal trade barriers, the union as a whole and the rest of the world cannot be worse off than before. Owing to the fact that a Free Trade Area (whose member countries impose country specific external tariff vectors) does not equalize marginal rates of substitution across its member countries (in contrast to a CU), the literature has been unable to provide a parallel demonstration regarding welfare improving Free Trade Areas (FTAs). The present paper eliminates this gap. In extending the result to the case with intermediate inputs, the paper also sheds new light on the rules of origin required to support such necessarily welfare enhancing FTAs. We show here that provided no trade deflection is permitted, all that is required by way of rules of origin is that the goods produced within the union - whether final or intermediate - be allowed to be traded freely. The proportion of domestic value added in final goods does not enter as a criterion in the rules of origin.     

Infant industry protection with oligopoly and learning-by-doing

I use a simple two-period learning-by-doing model to examine optimal home country protection policy. In some cases, as in Dasgupta and Stiglitz (Oxford Economic Papers 40 (1988), 246–68), the home government will impose an import ban to protect the home firm from foreign competition. On the other hand, a protective tariff often provides greater welfare than when an import ban is imposed. In these cases, the first-period dynamic tariff is greater than the static Brander and Spencer ‘profit shifting tariff’. Protection in the form either of a tariff or an import ban encourages the home firm to invest in current output which reduces future costs. In addition to dynamic profit shifting, protection can bc valuable because the home firm does not consider the effect of its current learning on future consumer surplus. Tariffs can thus encourage the growth of infant industries while benefiting consumers in the future. Furthermore, the home firm can have an incentive to price below cost if the potential cost savings are sufficiently valuable.     

Environmental Policy,North-South Trade and FDI

We analyze trade between two countries, called the North and the South. There is one firm in each country and production costs are lower in the South. To serve foreign markets firms may export or engage in FDI. Both countries set tariffs on imported goods. We find that the implementation of an environmental policy by the South may affect the location decision of the Southern firm. When only the North sets an environmental tax, firms engage in FDI if the difference in costs between the two countries is low, otherwise the South exports and the Northern firm engages in FDI. If the South also sets an environmental tax, this does not restrict FDI by Northern firm, encourages FDI by the domestic firm, reduces its environmental damage and increases joint welfare. Finally, in equilibrium the South decides to implement an environmental policy and both firms engage in FDI.     

Optimal Rules of Origin with Asymmetric Compliance Costs under International Duopoly

We examine the optimal rules of origin (ROO) in a free trade area/agreement (FTA) by employing a stylized three-country partial equilibrium model of an international duopoly. We incorporate compliance costs of the ROO into the model. In particular, compliance costs are higher for a firm located in a non-member country of the FTA than for a firm (an internal firm) located in an FTA member country, whereas marginal production costs are lower for the former. The FTA member countries set the optimal level of ROO to maximize their joint welfare. An importing country within the FTA imposes tariffs on imports that do not comply with the ROO. We show that the optimal ROO may have a protectionist bias in the sense that they are set for only the internal firm to comply. ROO may also cause low utilization of FTAs when they are set such that even the internal firm does not comply with them. These cases arise depending on parameter values.     

Strategic trade policies with first-mover and second-mover advantages in a vertical structure

With strategic trade policies, we consider first- and second-mover advantages in a vertical structure given the two-part tariff contract (composed of the input price and the fixed fee) of an upstream firm, where a home and a foreign final-good firms export to a third-country market. We find that the upstream firms’ and governments’ preference orderings over sequential versus simultaneous play and over free trade versus a regime of subsidies contrast with early results in the strategic trade policy. Thus, the endogenous market structure is that (i) the potential leader chooses the Leader role with quantity strategies, and the equilibrium trade regime is unilateral subsidy regardless of the nature of goods; (ii) with price strategies, the potential leader chooses the simultaneous timing, and the equilibrium trade regime is bilateral taxes (free trade) when goods are substitutes (complements).     

Tariffs and formation of free trade agreements networks

This paper examines the formation of bilateral free trade agreements (FTAs) on the basis of country heterogeneity in the tariff level. We demonstrate that a country's unilateral incentive to form an FTA depends on the relative magnitudes of the (negative) market concession effect and the (positive) market expansion effect, both of which are determined by the tariff levels of the two FTA partner countries. Global welfare is maximised when all country pairs form FTAs. Two countries in equilibrium are more likely to form an FTA when their tariff gap is smaller or when their tariff levels are neither very high nor very low. This finding is robust to several extensions of the model. Our preliminary empirical analysis provides some evidence for the finding.     

Reverse importing and asymmetric trade and FDI: a networks explanation

This paper considers the impact of business and social networks on international trade and FDI. I propose that differences in the strength of network effects across countries can produce asymmetric trade and investment flows that may lead to trade friction. A firm from a country with strong network effects has a cost advantage in selling to buyers from its own country. This advantage results in lower inward FDI, lower total imports but larger volumes of reverse imports into the country with strong network effects. The model’s predictions match observed asymmetric trade and investment flows that sometimes lead to US-Japan trade friction.     

Maximum-Revenue and Optimum-Welfare Tariffs in International Mixed Duopoly: Does the Order of Firms’ Move Matter?

This paper examines the effect of privatization on the priority of the maximum-revenue tariff and the optimum-welfare tariff in a mixed oligopoly with partial privatization and foreign competition. Major findings of this paper are that: firstly, in a mixed duopoly with partial privatization and asymmetric marginal costs, when the marginal cost of the privatized firm is higher than a critical value, the optimum-welfare tariff will be lower than the maximum-revenue tariff regardless of the order of firms?? move; secondly, if the degree of privatization is sufficiently high and cost is symmetric, the optimum-welfare tariff will be higher than the maximum-revenue tariff; thirdly, if the degree of privatization is sufficiently high and the domestic firm is highly ineffective in production, under Stackelberg public leadership, the optimum-welfare tariff is low and then it is more possible that the optimum-welfare tariff is lower than the maximum-revenue one.     

The Impact of Bilateral Free Trade Agreements on Bilateral Foreign Direct Investment among Developed Countries

Previous studies find that a trade treaty positively impacts foreign direct investment (FDI). But does a trade treaty always have positive effects on FDI? What is the effect of bilateral free trade agreement (FTA) on bilateral FDI among developed countries? Based on the Knowledge‐Capital model, I hypothesize that bilateral FTA has negative effects on bilateral FDI in developed–developed country pairs, but positive effects in developed–developing country pairs. To test this hypothesis empirically, I conduct the within estimator, the Difference‐in‐Difference estimator and the Arellano–Bond estimator with panel data of bilateral FTA and outward FDI in 30 OECD countries and 32 non‐OECD countries between 1982 and 2005. The result supports the hypothesis. The existence of bilateral FTA decreases bilateral FDI in the OECD–OECD country pairs but increases bilateral outward FDI in the OECD–non‐OECD country pairs. The finding of negative effects of bilateral FTA on FDI is robust to different country classifications by gross national income (GNI) per capita and secondary school enrolment. Hence, the results are consistent with what Carr et al. (2001) predicts about the effects of trade cost on FDI in developed–developed country pairs and in developed–developing country pairs.     

The determinants of foreign direct investment in China: The case of Taiwanese firms in the IT industry

This study illustrates the factors that affect a firm's intention to engage in foreign direct investment (FDI) in China, using Taiwanese firms in the Information Technology (IT) sector as an example. By building upon the literature, we investigate a firm's decision to engage in FDI by taking industry and firm factors into consideration. This study applies an event history technique to perform an empirical analysis, taking into account the conditional probability of the element of time. These factors are analyzed in a dynamic context using a sample of 667 Taiwanese firms in 10 industries between 1996 and 2005. We find that network linkages, the expansion of markets, and China's incentive policies positively affect the intention to engage in FDI. A firm with a higher degree of export orientation and larger firm size also has a strong effect on motivating FDI.     

The Role of GATT/WTO as a Commitment Device in the Presence of a Time Lag: Free Trade,Time‐consistent Tariff Policy and Market Size

We consider whether a free trade policy is superior to tariff policies in the presence of a time lag between production and trade decisions. We show that the preferable choice between a free trade policy and a time‐consistent tariff policy depends on the market size of the importing country. However, because a free trade policy itself is not necessarily credible in the presence of a time lag, the importing country requires an international organisation such as GATT/WTO as a commitment device. Accordingly, employing a non‐cooperative game approach, we analyse under what conditions becoming a member of such an international organisation is a subgame perfect Nash equilibrium and show that free trade under the GATT/WTO regime is Pareto improving for the importing and exporting countries.     

CAFTA早期收获产品的贸易效应评估

文章基于1999～2006年中国和东盟五国早期收获产品(EHP)贸易流量数据,应用贸易比重指数和行业贸易引力模型,评估中国和东盟五国早期收获产品的贸易效应。结果表明,CAFTA对成员国的EHP区内出口具有贸易扩大效应;同时对东盟五国之间和区外国家与成员国的EHP进出口存在贸易转移效应。在CAFTA今后的建设中,成员国应该采取措施,在促进区内贸易扩大的同时,减少对区外的贸易转移,以获得更大的贸易创造。     

The GATT and gradualism

This paper shows how the institutional rules imposed on its signatories by the GATT created a strategic incentive for countries to liberalize gradually. Trade liberalization must be gradual, and free trade can never be achieved, if punishment for deviation from an agreement is limited to a ‘withdrawal of equivalent concessions’ and if initial deviation from an agreement is also limited. The paper shows how (sufficiently patient) countries have an incentive to deviate in a limited way when operating under GATT dispute settlement procedures.     

Negotiating free trade

We develop a dynamic bargaining model in which a leading country endogenously decides whether to sequentially negotiate free trade agreements with subsets of countries or engage in simultaneous multilateral bargaining with all countries at once. We show how the structure of coalition externalities shapes the choice between sequential and multilateral bargaining, and we identify circumstances in which the grand coalition is the equilibrium outcome, leading to worldwide free trade. A model of international trade is then used to illustrate equilibrium outcomes and how they depend on the structure of trade and protection. Global free trade is not achieved when the political-economy motive for protection is sufficiently large. Furthermore, the model generates both “building bloc” and “stumbling bloc” effects of preferential trade agreements. In particular, we describe an equilibrium in which global free trade is attained only when preferential trade agreements are permitted to form (a building bloc effect), and an equilibrium in which global free trade is attained only when preferential trade agreements are forbidden (a stumbling bloc effect). The analysis identifies conditions under which each of these outcomes emerges.     

Tariffs and the most favored nation clause

In an n country oligopoly model of intraindustry trade (n≥3), this paper explores the economics of the most-favored-nation (MFN) principle. Under the non-cooperative tariff equilibrium, each country imposes higher tariffs on low cost producers relative to high cost ones thereby causing socially harmful trade diversion. MFN adoption by each country improves world welfare by eliminating this trade diversion. Under linear demand, MFN adoption by the country with the average production cost is most desirable. High cost countries refuse reciprocal MFN adoption with other countries and also lose even if others engage in reciprocal MFN adoption amongst themselves.     

Non‐Tariff Measures,Specific Trade Concerns and Tariff Reduction

This paper studies the determinants of the recent proliferation of Specific Trade Concerns raised at the WTO on non‐tariff trade measures (NTMs), with a focus on sanitary and phytosanitary (SPS) and technical barriers to trade (TBTs). Even though NTMs are imposed de jure to protect consumers from unhealthy products, they increase trade costs de facto. So, when tariff protection lowers, NTMs become effective barriers to trade and the exporting countries can complain at the dedicated committee at the WTO (STCs). Therefore, we study whether STCs are raised by exporting countries as a consequence of tariff reductions in importing countries, that is when non‐tariff measures become barriers to trade. Using a recent database on STCs over the period 1996–2010, we find empirical evidence that SPS and TBT concerns are raised by exporting country as a consequence of importer's tariff cut.     

Short‐run Strategies for Attracting Foreign Direct Investment

This paper empirically investigates the effectiveness and feasibility of two FDI policies, fiscal incentives and deregulation, aimed at improving the attractiveness of a country in the short run. Using disaggregated data on sales by US MNEs’ foreign affiliates in 43 developed and developing countries over the 1982–94 period, results show that the provision of fiscal incentives or the deregulation of the labour market would exert a positive impact on total FDI. Given the drawbacks frequently associated with the use of incentive packages, economy‐wide policies which ease firing procedures and reduce severance payments would certainly be the best policy option. This paper also highlights the different aggregation and omitted variable biases that have affected results of previous studies and provides some support to recent theoretical models of FDI by showing that third‐country effects and spatial interdependence influence respectively the location of export‐platform FDI and vertical FDI.