Protection for sale under monopolistic competition: Beyond the CES

We extend the protection for sale model of Grossman and Helpman (1994) by introducing a general model of monopolistic competition with variable markups and incomplete pass-through. We show that the structure of protection emerging in the political equilibrium not only depends on the weight attached by the government to consumer welfare when making its policy decision, but also on the degree of market power of firms and on the terms-of-trade variations due to the degree of pass-through. Our results highlight the importance of preferences in shaping the structure of protection and are consistent with the occurring of protectionism also in unorganized industries.     

Technical compatibility and the mode of foreign entry with network externalities

Abstract.  We examine the preferences of a foreign firm and a local government over two modes of foreign direct investment: de novo entry and acquisition of the domestic incumbent. Two crucial features of the model are network externalities and partial incompatibility between the domestic and the foreign technology. The relative welfare impact of the two entry modes depends on the degree of market competition and the strength of the network externality. The clash between the foreign firm's choice and the local government's ranking of the two entry modes can motivate limits on the degree of foreign ownership of the local firm.     

Regionalism in standards: good or bad for trade?

Abstract.  Regional agreements on standards have been largely ignored by economists and blessed by multilateral trade rules. Using a constructed panel data that identifies the different types of agreements at the industry level, we find that such agreements increase the trade between participating countries but not necessarily with the rest of the world. Harmonization of standards may reduce the exports of excluded countries, especially in markets that have raised the stringency of standards. Mutual recognition agreements are more uniformly trade promoting unless they contain restrictive rules of origin, in which case intra-regional trade increases at the expense of imports from other countries.     

Trade effects of monetary agreements: Evidence for OECD countries

This paper analyses the effects of monetary agreements on trade flows using a sample of 25 OECD countries over the period 1950-2004. We find that these agreements have boosted intra-bloc trade. This result especially applies to the case of the euro. More importantly, in contrast to regional trade agreements, all monetary agreements analysed show evidence of trade-creating effects with third countries. Finally, only the euro shows a symmetric impact for the trade-creating effect with non-members, that is, using the euro promotes both the Eurozone's exports and its imports to non-Eurozone markets to a similar extent.     

Standards vs. labels with imperfect competition and asymmetric information

I demonstrate that providing information about product quality is not necessarily the best way to address asymmetric information problems when markets are imperfectly competitive. In a vertical differentiation model I show that a Minimum Quality Standard, which retains asymmetric information, generates more welfare than a label, which provides full information.     

Time-consistent protection with learning by doing

Can a government induce efficiency gains in his domestic industry by protecting it against foreign competition? Would such trade protection be time consistent? The present paper builds a dynamic equilibrium model that accounts for learning-by-doing effects that link firms’ strategies over time. The model shows that the existence of dynamic economies of scale suffices to overcome the traditional government's lack of commitment of its tariff policy. This paper compares the infinite horizon Markov perfect equilibrium of this game with the dynamic equilibrium under commitment as well as the static Nash equilibrium. Equilibrium strategies are derived in closed form by solving a linear-quadratic differential game. Optimal trade policy involves higher tariff levels than in the static setup in order to account for future gains in efficiency. Under reasonable assumptions, the unique stable MPE is characterized by a domestic price and tariff that decrease as experience accumulates, thus supporting the future liberalization of trade as an equilibrium feature of this dynamic game.     

Industrial targeting in free trade areas with policy independence

Abstract.  We investigate the limits of a mechanism for free trade area (FTA) formation that simultaneously satisfies internal industrialization targets. For arbitrary targets, we find necessary and sufficient conditions that guarantee that the mechanism is efficient for member countries individually, even if other members do not implement the efficient policy. When the objective is conservative – designed to protect the level of industrialization previously achieved by the target industry – member countries are guaranteed gains from the efficient policy and their FTA participation. The analysis covers cases with transportation costs and explains why minimally restrictive rules of origin support efficiency and policy independence.     

Cross-border rent shifting in international telecommunications

While scholars have questioned the merits of strategic trade policy, such policies have played a major role in international telecommunications. Countries have traditionally linked bilaterally their termination prices for international telephone calls. I show that this linkage can be rationalized as a mutually beneficial constraint on rent seeking. Linkage becomes more challenging to maintain with telecommunications liberalization, competition, and the growth of alternatives for terminating traffic. I consider possible policy approaches to such developments. Overall, this case study suggests that constraining cross-border rent shifting will present a major transitional challenge in international efforts to liberalize services.     

U.S. trade remedy law and agriculture: trade diversion and investigation effects

Abstract .  We study U.S. agricultural antidumping and countervailing duty cases from 1980 to 2005, and gauge the effectiveness of trade remedy law as a form of protection. The purpose is to measure the resulting investigation and trade diversion effects. Previous research on trade in manufactured products has shown that the domestic protection offered by AD and CV duties is largely offset by trade diversion. In contrast, we find that for agriculture, trade diversion is relatively unimportant. So AD and CVD cases are very effective forms of protection for U.S. agriculture.     

Globalization, rent protection institutions, and going alone in freeing trade

We construct a two-country North-South Product-cycle model of trade with endogenous growth and trade barriers. We remove the scale effects on growth by incorporating rent protection activities by Northern incumbents. We examine the effects of two forms of globalization - an expansion of the relative size of the South and unilateral trade liberalization by either country. We find that the location of rent protection institutions and the sectoral trade structure determine whether or not globalization raises steady-state economic growth. We demonstrate that for accelerating worldwide economic growth, contrary to conventional wisdom, unilateral Northern trade liberalization is preferable to bilateral trade liberalization.     

Do trade missions increase trade?

Abstract In an effort to stimulate trade, Canada has conducted regular trade missions starting in 1994, often led by the Prime Minister. According to the Canadian government, these missions generated tens of billions of dollars in new business deals. This paper uses bilateral trade data to assess this claim. We find that Canada exports and imports above‐normal amounts to the countries to which it sent trade missions. However, the missions do not seem to have caused an increase in trade. In the preferred specification, incorporating country‐pair fixed effects, trade missions have small, negative, and mainly insignificant effects.     

PROTECTION BY TARIFF BARRIERS AND INTERNATIONAL TRANSACTION COSTS

Using estimates of protection in the EU market against US exports, this paper illustrates the relative importance of natural and policy sources of protection and the measurement errors induced in the measurement of effective protection by omitting transactions costs. It also considers protection in the EU ‘domestic’ and export market, and the implications of the elimination of tariff barriers only on relative rates of protection in ‘domestic’ and export markets.     

The China-OECD trade divide: building bridges

ABSTRACT

Today’s largest trade frictions stem from differences between China and the OECD regarding the appropriate role of government. There are two types of differences. The first are legitimate attitudinal differences towards industrial policy (the use of subsidies), competition policy (the use of forced industry consolidation), and innovation policy (weak protections of intellectual property). China and the OECD will have to reach an accommodation on these differences if the end game is a rules-based trading system. Accommodation is possible, but unfortunately, both the US and China are adopting bullying tactics that diminish the effectiveness of the WTO and threaten the current rules-based system. The second class of differences is political and reflects China’s intentional lack of policy transparency and its generosity towards favoured firms. These differences will never be WTO compliant and China must either reform or give up its access to OECD markets.     

Trade policy in majoritarian systems: the case of the U.S.

Abstract We provide a theory of trade policy determination that incorporates the protectionist bias inherent in majoritarian systems, suggested by Grossman and Helpman (2005) . The prediction that emerges is that in majoritarian systems, the majority party favours industries located disproportionately in majority districts. We test this prediction using U.S. data on tariffs, Congressional campaign contributions, and industry location in districts represented by the majority party over the period 1989–97. We find evidence of a significant majority bias in trade policy: the benefit to being represented by the majority party appears at least as large in magnitude as the benefit to lobbying.     

Tariffs, market conduct and government commitment

We analyse a simple 'tariffs cum foreign competition' policy targeted at enhancing the competitive position of a domestic, developing country firm that competes with its developed country counterpart on the domestic market and that carries out an innovative (or imitative) effort. We evaluate this policy with respect to social welfare, type of oligopoly conduct, information requirement, time consistency and possibility of manipulative behaviour and conclude that the most robust policy setup is one in which the domestic government is unable to pre-commit to the level of its policy. We also study how the unit cost heterogeneity of the domestic firm affects trade protection.     

Evolving discretionary practices of U.S. antidumping activity

Abstract .  Using data on U.S. dumping margin calculations by the U.S. Department of Commerce (USDOC), we first document the rapid rise in U.S. dumping margins from around 15% in the early 1980s to over 60% by 2000. Second, statistical analysis finds that USDOC discretionary practices have played the major role in rising U.S. dumping margins over this period. Importantly, the evolving effect of discretionary practices is due not only to increasing use of these practices over time, but to apparent changes in implementation of these practices that mean a higher increase in the dumping margin whenever they are applied.     

Trade liberalization, antidumping, and safeguards: Evidence from India's tariff reform

This paper is the first to use product-level data to examine empirically whether countries use antidumping and safeguard exceptions to unwind commitments to lower tariffs in the face of domestic political-economic pressure. We focus on the case of India, a country that underwent a major exogenous tariff reform program in the early 1990s and subsequently initiated substantial use of safeguard and antidumping import restrictions. We first estimate structural determinants of India's import protection using the Grossman and Helpman (1994) model and provide evidence from its pre-reform tariff data of 1990 that is consistent with the theory. We then re-estimate the model on the Indian tariff data after the trade liberalization is complete and find that the model no longer fits, a result consistent with theory and evidence provided in other settings that India's 1991-1992 IMF arrangement can be interpreted as resulting in an exogenous shock to India's tariff policy. However, when we re-estimate the model on data from 2000-2002 that more completely reflects India's cross-product variation in import protection by including both its post-reform tariffs and its additional non-tariff barriers of antidumping and safeguard import protection, the significance of the Grossman and Helpman model determinant estimates is restored. We interpret these combined results as evidence that India unwound its commitment to reduce tariffs through use of antidumping and safeguard protection in the face of political-economic pressure. The estimates are also economically important and provide one explanation for separate results in the literature that the magnitude of import reduction associated with India's use of antidumping is similar to the initial import expansion associated with its tariff reform. Finally, we interpret the implications of our results for the burgeoning research literature examining the effects of liberalization on India's micro-level development.     

Trade policy mix: IPR protection and R&D subsidies

Abstract .  This paper analyses strategic R&D policy under circumstances where intellectual property rights protection resulting from firms' R&D investment is not perfect. By examining policy choices wherein a government chooses both R&D subsidies and IPR protection levels simultaneously, we show that it is optimal for a government to adopt sufficiently weak IPR protection and to subsidize R&D investments of domestic firms. Inducing R&D investment of foreign rival firms will increase the profits of domestic firms.     

Shadow pricing market access: A trade benefit function approach

Appropriate assessment of the social value of market access is at the core of a broad range of inquiries in trade research. We propose a new approach based on a trade benefit function to obtain the shadow value of net imports. Our approach is in keeping with well-established trade welfare measurement techniques, for the trade benefit function is dual to the standard trade expenditure function. This dual relation further allows for a direct retrieval of the shadow values of net imports from the trade benefit function. The operationality of our approach is demonstrated in a series of applications and simulations.     

The trade distorting effect of state trading enterprises in importing countries

This paper focuses on the potential trade distorting effect of state trading enterprises, an issue that is likely to receive greater attention than hitherto in the context of the current agricultural negotiations in the WTO. Although state trading enterprises can arise in both exporting and importing countries, the emphasis here is on the importing country case. Our results show that state trading enterprises do distort trade, though the nature of the distortion (i.e., whether it is equivalent to an import tariff or import subsidy) depends on the nature of exclusive rights bestowed by government on the state enterprise. We also consider state trading enterprises in both developed and developing economies, the main difference being the nature of the government's pay-off function. The theoretical framework allows us to derive the tariff equivalent effects for various types of STEs, the results suggesting that the trade distorting effect is likely to vary considerably dependent on the type of STE that arises in particular circumstances.