Trade Liberalization and the Profitability of Mergers: a Global Analysis*

We analyze the effects of bilateral tariff reductions on the profitability of cost‐reducing horizontal mergers. Given Cournot competition in a two‐country world, for any positive tariff below a certain threshold, marginal trade liberalization is shown to encourage only those domestic mergers with sufficiently large cost‐savings and to discourage the rest. For tariffs close to, but smaller than, the prohibitive tariff, however, marginal trade liberalization necessarily encourages all domestic mergers. Moreover, we show that for a given level of cost‐savings, the impact of marginal trade liberalization may not reliably predict that of nonmarginal liberalization. Although at high tariffs, domestic mergers are shown to be unambiguously more profitable than cross‐border mergers, near free trade, mergers which yield the most cost‐savings become the most profitable. Thus, when comparing domestic and cross‐border mergers, trade liberalization encourages the type which yields the most cost‐savings.     

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.     

Tariff evasion and rules of origin violations under the Canada‐U.S. Free Trade Agreement

Abstract Using product‐level data on trade between Canada and the U.S., this paper presents evidence of tariff evasion and violation of the rules of origin occurring under the Canada‐U.S. Free Trade Agreement (CUSFTA). It shows that more imports go unreported at the destination country when tariffs are higher. Consistent with the tariff evasion hypothesis, this result implies that the trade creation effect of a free trade agreement may in fact be due to less underreporting. Further, this paper shows that the larger Canadian tariff preference margin for the U.S. is associated with more goods originating in third countries being transshipped through the U.S. territory for re‐export. The preference margin is also positively correlated with the value of excess imports from the U.S., which qualify for preferential treatment. Both results suggest the presence of persistent violations of CUSFTA’s rules of origin.     

The impact of trade promotion services on Canadian exporter performance

From 1999 to 2006, Canadian firms successfully diversified their exports to destinations beyond the United States while smaller firms increased their share in total exports. Both are explicit aims of the Trade Commissioner Service export promotion program. Exploiting assumptions from the treatment effects literature, we identify a causal, export‐boosting effect. In contrast with existing evidence for Latin American countries, the intensive margin effect—higher exports to existing product‐destination markets—dominates. Effects at the extensive margin—exporting more products to more destinations—are smaller and sensitive to identification assumptions. We interpret this evidence in light of trade models with heterogeneous firms.     

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.     

Non-tariff measures: What's tariffs got to do with it?

After successive rounds of tariff reductions by GATT/WTO members, non-tariff measures (NTMs) have increasingly become the focal point of multilateral trade negotiations. It remains an open question whether the liberalization in tariff rates has subsequently been weakened or even erased by increases in NTMs. Using a product-level global panel of WTO members over the period 1996–2019, this paper systematically examines the empirical link between various tariff measures and the imposition of NTMs. I find that bound or applied tariff reductions do not correlate much on their own with NTM incidence. The relevant trade policy margin for detecting a tariff–NTM nexus is instead tariff overhangs, the difference between WTO members' bound and applied tariff rates. Countries impose more NTMs when their sectoral applied tariffs are close to their respective bound rates, indicating that small tariff overhangs signal limited legal trade policy flexibility.     

Trade imbalance and the endogenous optimal tariff

Endogenous tariff literatures reveal empirically that trade imbalance is negatively related with import tariff, this article gives a theoretical evidence and explanation to support this finding with the methodology of multi-country numerical general equilibrium modelling and simulation. We explore how optimal tariff changes after trade imbalance is introduced, and find that optimal tariffs decrease substantially, either for surplus or deficit countries, when imbalance is considered. Specifically, when the imbalance is modelled in endogenous monetary and inside-money structures, the optimal tariffs decrease by 26% globally on average. Our results suggest that the deepening trade imbalance is beneficial to the global trade liberalization due to its driving tariffs down.     

Industrial labour productivities and tariffs in South Africa

The analysis of the effect of tariffs for labour productivity faces the challenge of tariff policy endogeneity. Tariff policy is designed to promote economic development and the industrial sector tariff structure may reflect characteristics of the industries protected. We seek to identify the effect of tariffs by taking advantage of multilateral tariff liberalization using reductions in industrial sector tariffs in other world regions as instruments for sectoral tariff reductions in South Africa. The data cover 28 manufacturing sectors over the period 1988–2003. We find that tariff reductions have stimulated labour productivity when instrumented by multilateral tariffs. The ordinary least‐squares estimates show downward bias and this confirms the endogeneity of tariffs. Investigation of channels of effects shows some support for the importance of competitive pressure and technology spillover from trade liberalization.     

Preferential Liberalization,Antidumping, and Safeguards: Stumbling Block Evidence from MERCOSUR

There is not yet consensus in the trade agreements literature as to whether preferential liberalization leads to more or less multilateral liberalization. However, research thus far has focused mostly on tariff measures of import protection. We develop more comprehensive measures of trade policy that include the temporary trade barrier (TTB) policies of antidumping and safeguards; studies in other contexts have also shown how these policies can erode some of the trade liberalization gains that arise when examining tariffs alone. We examine the experiences of Argentina and Brazil during the formation of the MERCOSUR over 1990–2001, and we find that an exclusive focus on applied tariffs may lead to a mischaracterization of the relationship between preferential liberalization and liberalization toward non‐member countries. First, any “building block” evidence that arises by focusing on tariffs during the period in which MERCOSUR was only a free trade area can disappear once we also include changes in import protection that arise through TTBs. Furthermore, there is also evidence of a “stumbling block” effect of preferential tariff liberalization for the period in which MERCOSUR became a customs union, and this result tends to strengthen upon inclusion of TTBs. Finally, we also provide a first empirical examination of whether market power motives can help explain the patterns of changes to import protection that are observed in these settings.     

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.     

GATT/WTO Promotes Trade Strongly: Sample Selection and Model Specification

Some recent empirical studies examine the impact of the GATT/WTO on trade. This paper investigates the sample selection bias and the gravity model specification issues in the literature. First, the GATT/WTO not only makes existing trading partners trade more at the intensive margin, but also creates new trading relationships at the extensive margin. Most existing papers exclude zero trade observations and hence ignore the extensive margin. Secondly, due to the violation of some maintained assumptions, the traditional log-linear gravity regressions fail to uncover the role of the GATT/WTO even at the intensive margin. Using a large bilateral panel dataset including zero trade flows and a more appropriate econometric method, this paper finds that the GATT/WTO has been very effective in promoting world trade at both the intensive and extensive margins.     

Austerity and Exports

Recent papers have focused attention on the potential for expansionary austerity (i.e. that cutting budget deficits may increase growth in the short run). In this paper we investigate the impact of fiscal consolidation on trade using bilateral trade data. The use of bilateral trade data allows us to demonstrate three novel empirical results. First, while fiscal consolidation is associated with an increase in own‐country exports, it is also correlated to an equal extent with a decrease in foreign‐country exports (i.e. imports); indeed, simultaneous austerity has no statistically significant impact on bilateral trade. Second, the positive effect of austerity on exports disappears when trading partners share a common currency. Third, the increase in exports as a result of austerity is associated entirely with an increase in the range of goods exported (the extensive margin), at the expense of trade volume among existing trade relationships (the intensive margin).     

Trade liberalization and markups: Micro evidence from China

This paper presents evidence from highly disaggregated Chinese firm-product data that, given productivity, input tariff reductions induce an incumbent importer/exporter to increase product markups. We further investigate empirically the mechanisms underlying this trade liberalization effect, and find that input tariff reductions decrease marginal costs, and their effects on markup adjustments are more profound among firms with higher import dependence. Moreover, we exploit unique features of Chinese data by comparing results for two trade regimes: ordinary trade (wherein firms pay import tariffs to import) and processing trade (wherein firms are not subject to import tariffs). While the aforementioned trade liberalization effects and mechanisms only apply to ordinary trade, processing trade samples are used in a placebo test. The paper also shows that more productive firms charge higher markups for products. All these findings are robust to alternative markup measures including one estimate using physical-quantity output data, different production function specifications, a subsample consisting only of pure exporters, and estimations based on our theoretical derivations.     

Trade Liberalization and Antidumping: Is There a Substitution Effect?

Many nations have undergone significant trade liberalization even as they have increased their use of contingent protection measures. This raises the question of whether some of the trade liberalization efforts, at times accomplished through painful reforms, have been undone through a substitution from tariffs to non‐tariff barriers. Among the new forms of protection, antidumping is the most relevant. This paper examines whether the use of antidumping is systematically influenced by the reduction of applied sectoral tariffs in a sample of 29 developing and six developed countries from 1991 through 2002. Evidence is found of a substitution effect only for a small set of heavy users of antidumping among developing countries. There is no similar statistically significant result for other developing countries or developed countries. Robust evidence is also found of retaliation and deflection effects as determinant of antidumping filings across all subsamples.     

Trade Liberalization and Firm Productivity: Evidence from Chinese Manufacturing Industries

This paper examines the impact of tariff reduction following China's World Trade Organization (WTO) entry on the productivity of Chinese manufacturing firms using a firm‐level panel database that comprises all of China's manufacturing firms with an annual turnover above 5 million yuan and that spans the period of 2000–2006. An instrumental variable estimator is used to account for the endogeneity of the tariff reduction. The results indicate that China's trade liberalization in the five years following its WTO entry has led to a 0.94% annual increase in total factor productivity for Chinese manufacturing firms. However, the overall productivity gain from the tariff reduction is a net result of a productivity depressing effect of output tariff reduction and a productivity enhancing effect of input tariff reduction. Both effects have diminished in magnitude over the years after China joined the WTO. Firm heterogeneity and turnover plays an important role in generating gains from trade liberalization. The surviving firms have managed to cope with and take advantage of lower tariffs. The extent to which the tariff reduction affects Chinese firms' productivity is also dependent on the ownership structure of the firms with foreign‐invested firms being the clear winner.     

Distorted Trade Barriers: A Dissection of Trade Costs in a “Distorted Gravity” Model

It is common in the trade literature to use iceberg transport costs to represent both tariffs and shipping costs alike. However, in models with monopolistic competition these are not identical trade restrictions. This difference is driven by how the two costs affect the extensive margin. We illustrate these differences in a gravity model. We show theoretically that trade flows are more elastic with respect to tariffs than transport costs and find a linear relationship between the elasticities with respect to tariffs, iceberg transport costs, and fixed market costs. We empirically validate these results using data on US product‐level imports.     

Distance to Frontier and New Import Growth

In a panel‐data study involving product‐level import data for 48 developing countries that underwent substantial trade liberalization between 1989 and 2001, this study finds that the growth of trade in new goods imported following major trade liberalization is related to the state of technology that existed just before liberalization. The study develops two new measures of the extensive margin. Findings indicate that greater is the distance of a country from the world technology frontier, the faster is its growth of new goods imports. This indicates a higher cost of trade protection for countries further away from the world technology frontier.     

The effect of the Canada‐US Free Trade Agreement on Canadian multilateral trade liberalization

In this paper show that the Canada‐US Free Trade Agreement (CUSFTA) tariff preferences have triggered a decline in Canadian external tariffs, explaining a two percentage point reduction in the average tariff between 1989 and 1998. Next, we found that industries that generate the least export rent to the US firms experienced deeper tariff cuts in Canada; this result provides evidence of cooperation in trade policies between the US and Canada. Finally, we estimate the effect of the CUSFTA on the intensity of industrial lobbying for trade policy in Canada and find no relationship between preferential trade liberalization and lobbying activity.     

The trade reducing effects of market power in international shipping

Developing countries pay substantially higher transportation costs than developed nations, which leads to less trade and perhaps lower incomes. This paper investigates price discrimination in the shipping industry and the role it plays in determining transportation costs. In the presence of market power, shipping prices depend on the demand characteristics of goods being traded. We show theoretically and estimate empirically that ocean cargo carriers charge higher prices when transporting goods with higher product prices, lower import demand elasticities, and higher tariffs, and when facing fewer competitors on a trade route. These characteristics explain more variation in shipping prices than do conventional proxies such as distance, and significantly contribute to the higher shipping prices facing the developing world. A simple back of the envelope calculation suggests that eliminating market power in shipping would boost trade volumes by 5.9% (for the US) to 15.2% (for Latin America). Our findings are also important for evaluating the impact of tariff liberalization. Cargo carriers decrease shipping prices by 1–2% for every 1% reduction in tariffs.     

贸易自由化是如何影响我国出口产品质量的？*--基于贸易政策不确定性下降的视角

传统理论认为贸易自由化会促进出口产品的质量升级,但我国加入W TO后的情况却并非如此。文章基于贸易政策不确定性的视角,利用我国加入W TO前后美国对我国产品进行关税调整这一自然实验,通过倍差法分析了贸易自由化对我国出口产品质量的影响。研究表明：（1）在贸易自由化的过程中,贸易政策不确定性的下降会拉低我国的出口产品质量,且这一结论在改变质量测度方法、控制成本效应以及使用不同的产品属性、贸易对象和样本的情况下依然稳健;（2）贸易政策不确定性主要是通过广延边际上的质量调整降低了我国出口产品的总体质量,即在贸易政策不确定性下降幅度越大的产品中,有越多的生产低质量产品的企业进入出口市场;（3）在集约边际上,存续企业并未针对贸易政策不确定性的下降做出及时的产品质量调整,从而无法改变我国的产品质量在短期内下降的趋势。文章为我国如何在推行贸易自由化的同时实现出口产品质量升级提供了启示。