Profit tax and tariff under international oligopoly

A simple model of international duopoly is developed to examine the effects of tariff and corporate profit tax. It is shown that in an export-cum-on-site-production regime, a tariff continues to be an effective instrument for shifting net profit away from foreign to domestic firms. A corporate profit tax, on the other hand, could lower the domestic output and employment and decrease the net earnings of both domestic and foreign firms. Thus when the host government's ability to raise tariff is limited, it should seriously consider a corporate tax cut policy to achieve the dual purpose of creating more jobs and increasing corporate earning at home.     

Corporate Social Responsibility and International Competition: A Welfare Analysis

This paper examines the welfare implications of corporate social responsibility (CSR) in international markets under imperfect competition. Based on a stylized model of an import‐competing duopolistic market, we show the feasibility of moving toward tariff reductions when both domestic and foreign firms launch CSR initiatives in that their payoffs include not only individual profits, but also the benefits of consumers. For the case where the foreign exporter unilaterally adopts the consumer‐oriented CSR as a strategy, there is a rent‐shifting effect because the foreign firm's payoff increases whereas the domestic firm's profit decreases. In response, the importing country's government raises its tariff on the foreign product. If, instead, the domestic firm adopts the CSR strategy unilaterally, the rent‐shifting effect disappears and both the competing firms’ payoffs increase. We further identify the conditions under which the CSR initiatives of the firms constitute the dominant strategy, leading to a Pareto efficient outcome at which the firms’ payoffs, consumer surplus, and social welfare are at their maximum levels.     

On the Equivalence of Tariffs and Quotas under a Revenue Constraint

This paper sets out a duopolistic model to examine the price and welfare equivalence of tariffs and quotas, given the quota rent is equal to the tariff revenue. It shows that the domestic welfare ranking of the two trade policies crucially depends on the relative costs of the domestic and foreign firms; when the domestic firm's relative costs are lower than those of the foreign firm, a quota regime generally leads to a higher welfare level than that of an equivalent tariff regime. This finding contrasts sharply with the conclusions of Dasgupta and Stiglitz (1977 ), where it was found that a tariff regime always generates higher domestic welfare.     

Trade Liberalization and the Profitability of Domestic Mergers

It is often thought that a tariff reduction, by opening‐up the domestic market to foreign firms, should lessen the need for a policy aimed at discouraging domestic mergers. This implicitly assumes that the tariff in question is sufficiently high to prevent foreign firms from selling in the domestic market. However, not all tariffs are prohibitive, so that foreign firms may be present in the domestic market before it is abolished. Furthermore, even if the tariff is prohibitive, a merger of domestic firms may render it nonprohibitive, thus inviting foreign firms to penetrate the domestic market. Using a simple example, the authors show that, in the latter two cases, abolishing the tariff may in fact make the domestic merger more profitable. Hence trade liberalization will not necessarily reduce the profitability of domestic mergers.     

Why does China protect its labour‐intensive industries more?*

China's tariff structure favours labour‐intensive sectors, and this is at odds with traditional theory of comparative advantage. The paper argues that tariffs in China are a mechanism for protecting technology‐backward domestic – especially state‐owned enterprises (SOEs) from competition technology‐advanced foreign enterprises producing in China. With relatively integrated labour markets and cross‐firm technology differences, SOEs’ subsistence is supported by subsidized credit and limited access of foreign firms’ local production to tariff‐protected domestic markets. Labour market integration and capital subsidies increase the relative cost of labour in SOEs compared to their foreign competitors, hurting more domestic firms in industries that use labour more intensively. Restrictions to FIEs’ (foreign‐invested enterprises) access to tariff‐protected product markets, which protect more labour‐intensive industries, compensate for the greater cost disadvantage of SOEs in labour‐intensive sectors.     

Strategic trade policy under asymmetric information with screening

The design of strategic rent-extracting trade policies requires information that may be private, such as the cost structure of an industry or parameters of the demand function. As a consequence, under asymmetric information, the design of these policies is problematic. We propose screening menus consisting of different instruments (tariff vs. quota) designed to solve this informational issue. We first use a simple model that examines a Cournot duopoly between a domestic firm and a foreign firm with linear demand and cost functions, with both firms supplying a homogeneous good on the domestic market. In this scenario, if the government does not have information regarding the demand parameter, which is known by both firms, a menu consisting of a rent-extracting tariff for a low demand parameter and a rent-extracting quota for a high demand parameter maximizes the government's objective function. This menu leads the domestic firm to reveal private information. We then generalize this framework to a scenario with imperfect information regarding the firms' marginal cost. Finally, we discuss the issue of quotas generating public revenues and study the case of a menu consisting of a tariff and a free quota.     

Corporate social responsibility and strategic trade policy: An endogenous timing game and its policy implications

This study incorporates the corporate social responsibility (CSR) initiatives of a domestic firm and analyses strategic trade policy towards a foreign firm in a different market structure. We show that the tariff rate under a foreign (domestic) firm's leadership is lowest when the degree of CSR is large (small). We also show that the foreign firm's leadership yields the highest welfare when the degree of CSR is intermediate, while the domestic firm's leadership yields the highest welfare otherwise. In an endogenous‐timing game, we show that a simultaneous‐move outcome is the unique equilibrium when the degree of CSR is small; thus, it is never socially desirable. We also show that the domestic firm's leadership can be an equilibrium, which results in the highest welfare when the degree of CSR is large. Finally, when the degree of CSR is large, collusive behaviours between the domestic and foreign firms can increase welfare.     

Tariff Rate as a Public Good

If domestic firms lobby for protection, the tariff rate is a public good to all domestic firms, whether they engage in lobbying or not. This paper analyzes how the endogenous tariff rate as a public good depends on the group size in two‐stage lobbying models. The result depends not only on whether domestic firms lobby cooperatively or not, but also on whether domestic firms incur indirect lobbying costs or not. This paper shows that if free riding is not very serious and if the number of domestic firms is small compared to the number of foreign firms, entry of a domestic firm is likely to increase the equilibrium tariff rate.     

外国技术授权策略与本国关税政策之探讨

该文将以一个拥有技术优势,且将其产品输往本国寡占市场中的外国厂商为对象,探讨其对本国厂商的最适技术授权策略,以及该策略是否受关税保护贸易政策之影响.在该文的研究结论中,我们可以发现下列三点:(1)在自由贸易条件下,当外国企业可授权国内二家厂商时,其最适授权策略,会选择同时授权于国内二家技术劣势厂商.当外国厂商仅可授权国内一家技术劣势厂商时,若市场规模相对较小,国外技术优势厂商之最适单位权利金订定为存在内部解,且会受市场规模的影响,市场规模值愈大,权利金愈高.当市场规模相对较大时,则国外技术优势厂商之最适单位权利金恰等于其技术创新所能节省的成本幅度.(2)在关税政策条件下,国外技术优势厂商可同时授权国内二家厂商时,其授权策略不受关税政策影响.在可授权国内一家技术劣势厂商时,若市场规模相对较大,其授权策略不受关税政策影响.若市场规模相对较小,在自由贸易条件下外国厂商的授权权利金将高于采取关税政策条件下的水准.(3)在本国政府的最适关税政策下,不论是当外国厂商可授权本国二家厂商之 Nash 均衡或可授权本国一家厂商之 Nash 均衡,皆有助于本国福利水准的提升.     

Lobbying, corruption and “optimal” tariff

This paper explores how a government officer enacts “optimum” import policy when confronting lobbies on trade policies from both domestic and foreign firms in a transition economy. Two results are found: firstly, if the inducement from the foreign firm on the government officer works, then the optimum tariff is negative, that is, import subsidy. However, this subsidy will turn to a positive tariff rate with the increasing lobbying inducement from domestic firms. Secondly, zero tariff duty is not an optimum choice under most circumstances. Besides, an asymmetric result is that when these two firms’ marginal costs are different, the optimum policy is to levy an import tariff on the one whose marginal cost is relatively small, while the other firm will get an import subsidy.     

Ranking the optimum tariff and the maximum revenue tariff in vertically related markets

This paper firstly shows that in a vertically related industry with either domestic upstream monopolist or foreign upstream monopolist, when the upstream firm adopts uniform input pricing, the optimum-welfare tariff is higher than the maximum-revenue tariff, if the number of foreign competitors is sufficiently large. Secondly, when domestic upstream monopolist adopts discriminatory input pricing, the maximum-revenue tariff is higher than the optimum-welfare tariff. Thirdly, when foreign upstream monopolist adopts discriminatory input pricing, the optimum-welfare tariff will exceed the maximum-revenue tariff if the sizes of domestic and foreign firms become more unequally distributed.     

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.     

The Effects of Trade Liberalization On Cost-Reducing Horizontal Mergers*

This paper analyzes the effects of tariff reductions on horizontal mergers in a Cournot oligopoly in a two-country world. It is shown that for mergers between two domestic firms and for cross-border mergers which supply both markets from a foreign plant, unilateral tariff reduction encourages mergers which concentrate market power at the expense of mergers which reduce cost, while bilateral tariff reductions have the opposite effect, encouraging mergers which significantly reduce cost. Cross-border mergers which continue to supply each market from a local plant are discouraged by both unilateral and bilateral tariff reduction.     

Corporate social responsibility,vertical product differentiation and international competition

Would a foreign firm’s consumer‐oriented corporate social responsibility (CSR) activities be rewarded by an importing country’s voluntary tariff reduction? The current paper addresses this question in an import‐competing duopoly model with vertical product differentiation. It is shown that the tariff will decrease if the foreign firm switches from a purely profit‐driven firm to a CSR firm. A consumer‐oriented CSR strategy will always hurt the domestic firm’s profit, whereas the relationship between the foreign firm’s profit and CSR sensitivity (the degree to which a firm cares about consumer welfare) is invertedly U‐shaped. When firms’ decisions to switch to CSR are endogeneized, only the foreign firm will become a CSR firm.     

Vertically Related Markets,Foreign Competition and Optimal Privatization Policy

This paper examines the optimal privatization policy in vertically related markets in which an upstream public firm competes with a foreign private rival in supplying a produced input to the domestic and foreign downstream firms competing in the domestic market. It shows that if the upstream public firm's market share is sufficiently high, full nationalization is optimal and the resulting profit margin is positive. However, complete privatization is never optimal. Numerical simulations reveal both the diverse optimal privatization regimes and the patterns of optimal privatization levels with varying numbers of the domestic and foreign downstream firms.     

PRIVATIZATION AND EFFICIENCY GAIN IN AN INTERNATIONAL MIXED OLIGOPOLY WITH ASYMMETRIC COSTS*

This paper examines two policy instruments, privatization of the domestic public firm and imposition of a tariff on foreign private firms in an international mixed oligopolistic model with asymmetric costs. It first demonstrates that different orders of moves of firms will imply different government decisions on optimal tariff and on privatization policy. Following Hamilton and Slutsky (1990 ), this paper then uses an extended game to discuss endogenous roles. It indicates that the efficiency gain that highlights the importance of foreign competition is crucial in determining the welfare improving privatization policy. Moreover, the endogenous equilibria are associated with different government decisions on privatization.     

Manipulable behavior in international trade

In this paper, we present a Cournot duopoly model to analyze the manipulated behavior in international trade. The WTO is assumed as an arbitrator for the exchange in an oligopolistic industry and sets tariff rules according to the SDT principles; a firm's cost is private information both for the WTO and the foreign rivalries. Subsequent to our analysis of several cases we find that a firm may misreport to the WTO for more production revenue and the government may collude with a firm for higher welfare. It is shown that the misreporting and collusion incentives are related to the WTO tariff rule, the misreported cost and market size. Furthermore, a strategy proof tariff rule has been designed in which firms can never make his revenue better off by misreporting production cost.     

OPTIMUM-WELFARE AND MAXIMUM-REVENUE TARIFFS IN MIXED OLIGOPOLY WITH FOREIGN COMPETITORS

This paper re-examines the important tariff ranking issue under a linear mixed oligopoly model with foreign competitors and asymmetric costs. We demonstrate that under Cournot competition, when the size of domestic private and foreign private firms become more unequally distributed, optimum-welfare tariff will exceed maximum-revenue tariff. We also show that under Stackelberg competition, when the domestic government protects its domestic sector, it will levy higher optimum-welfare tariffs versus maximum-revenue tariffs; however, when it decides to open its doors more for foreign competitors, it will need to levy higher maximum-revenue tariffs versus optimum-welfare tariffs. The above results remain valid whether the domestic public firm acts as a leader or a follower.     

Importing under trade policy uncertainty: Evidence from China

This paper empirically explores the adjustment of imports to reductions in trade policy uncertainty (TPU), taking into account that firms may face large sunk costs when purchasing foreign goods. We investigate how product-level Chinese imports react to tariff binding arising from China's accession to the WTO, by distinguishing both country-related and firm-related margins. Our main results suggest that a decline in TPU allows access to a greater variety of foreign goods, that are also associated with higher quality. At the same time, tariff binding leads more Chinese producers and trade intermediaries to start importing, thus allowing a greater number of firms and consumers to enjoy potential gains from imports. Finally, we document heterogeneous TPU effects across firms with different ownership, as well as across products with different end use, revealing interesting insights into the context of global value chains.     

Technological Upgrading under Tariffs and Equivalent Quotas*

This paper compares the effect of tariffs and that of equivalent quotas on the domestic firm’s production technology choice when it competes with a foreign firm in the domestic market. It is shown that under Bertrand price competition, the ranking of technology under tariff protection and quota protection is ambiguous, as it depends on the relative strength of the strategic vs output effects. The equivalent quota regime can generate a higher‐technology (implying a lower production cost) choice than the tariff regime if the strategic effect dominates the output effect. In contrast, the technology level is necessarily higher under the tariff regime than under the equivalent quota regime when the firms engage in Cournot quantity competition.