Gray markets arise when a manufacturer's products are sold outside of its authorized channels, for instance when goods designated for a foreign market are resold domestically. One method multinationals use to combat gray markets is to increase internal transfer prices to foreign subsidiaries in order to increase the gray market's cost base. We illustrate that, when a gray market competitor is present, the optimal price for internal transfers not only exceeds marginal cost, but is also a function of the competitiveness of the upstream economy. Moreover, the presence of a gray market competitor may cause unintended social welfare consequences when domestic governments mandate the use of arm's length transfer prices between international subsidiaries. When markets are sealed, arm's length transfer pricing strictly increases domestic social welfare. In contrast, we demonstrate that when a gray market competitor is present, mandating the use of arm's length transfer pricing decreases domestic social welfare when the domestic market is sufficiently large relative to the foreign market. Specifically, a shift to arm's length transfer pricing erodes domestic consumer surplus by making the gray market less competitive domestically, which in turn may offset any domestic welfare gains that accompany a shift to arm's length transfer pricing. Finally, the analysis illustrates that in a gray market setting, the transfer price that maximizes a multinational's profits may also be the same one that maximizes the social welfare of the domestic economy that houses it.
{"title":"Gray Markets and Multinational Transfer Pricing","authors":"Romana L. Autrey, Francesco Bova","doi":"10.2308/ACCR-10199","DOIUrl":"https://doi.org/10.2308/ACCR-10199","url":null,"abstract":"Gray markets arise when a manufacturer's products are sold outside of its authorized channels, for instance when goods designated for a foreign market are resold domestically. One method multinationals use to combat gray markets is to increase internal transfer prices to foreign subsidiaries in order to increase the gray market's cost base. We illustrate that, when a gray market competitor is present, the optimal price for internal transfers not only exceeds marginal cost, but is also a function of the competitiveness of the upstream economy. Moreover, the presence of a gray market competitor may cause unintended social welfare consequences when domestic governments mandate the use of arm's length transfer prices between international subsidiaries. When markets are sealed, arm's length transfer pricing strictly increases domestic social welfare. In contrast, we demonstrate that when a gray market competitor is present, mandating the use of arm's length transfer pricing decreases domestic social welfare when the domestic market is sufficiently large relative to the foreign market. Specifically, a shift to arm's length transfer pricing erodes domestic consumer surplus by making the gray market less competitive domestically, which in turn may offset any domestic welfare gains that accompany a shift to arm's length transfer pricing. Finally, the analysis illustrates that in a gray market setting, the transfer price that maximizes a multinational's profits may also be the same one that maximizes the social welfare of the domestic economy that houses it.","PeriodicalId":14396,"journal":{"name":"International Trade","volume":"26 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2011-07-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"83243853","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper, I test the theory that weak economic conditions in a foreign economy cause cyclical dumping, i.e., the temporary sale of products in a trading partner’s economy at a price below average total cost. In order to test this theory, the econometrician would like to have the information on prices and costs available to two agents, the domestic industry seeking protection and the government that makes a dumping determination. Because this information is not available to the econometrician, I utilize a novel strategy to try to uncover evidence of cyclical dumping. Using country-specific information on foreign economic shocks in manufacturing industries, I estimate a joint model of filing decisions by the US industry and antidumping decisions by the US government. I identify strong evidence of cyclical dumping - economic weakness in a foreign industry is associated with an increase in the probability of antidumping protection. After controlling for other factors that likely drive industry filing and government decisions, I find that a one standard deviation fall in the growth of employment in a foreign economy’s manufacturing industry (a measure of the strength of demand) increases the joint probability that the US industry will file an antidumping petition and the US government will impose a preliminary (temporary) antidumping measure by a factor of 3 to 10, depending on the exact model specification. Further, a one standard deviation fall in foreign employment growth doubles to quadruples, depending on specification, the joint probability that a petition will be filed and a final (long-lasting) antidumping measure will be imposed. In finding that US trade policy is applied countercyclically to foreign economic fluctuations, the paper suggests that trade policy may reduce the extent of business cycle transmission across countries.
{"title":"Cyclical Dumping and US Antidumping Protection: 1980-2001","authors":"M. Crowley","doi":"10.2139/ssrn.1083814","DOIUrl":"https://doi.org/10.2139/ssrn.1083814","url":null,"abstract":"In this paper, I test the theory that weak economic conditions in a foreign economy cause cyclical dumping, i.e., the temporary sale of products in a trading partner’s economy at a price below average total cost. In order to test this theory, the econometrician would like to have the information on prices and costs available to two agents, the domestic industry seeking protection and the government that makes a dumping determination. Because this information is not available to the econometrician, I utilize a novel strategy to try to uncover evidence of cyclical dumping. Using country-specific information on foreign economic shocks in manufacturing industries, I estimate a joint model of filing decisions by the US industry and antidumping decisions by the US government. I identify strong evidence of cyclical dumping - economic weakness in a foreign industry is associated with an increase in the probability of antidumping protection. After controlling for other factors that likely drive industry filing and government decisions, I find that a one standard deviation fall in the growth of employment in a foreign economy’s manufacturing industry (a measure of the strength of demand) increases the joint probability that the US industry will file an antidumping petition and the US government will impose a preliminary (temporary) antidumping measure by a factor of 3 to 10, depending on the exact model specification. Further, a one standard deviation fall in foreign employment growth doubles to quadruples, depending on specification, the joint probability that a petition will be filed and a final (long-lasting) antidumping measure will be imposed. In finding that US trade policy is applied countercyclically to foreign economic fluctuations, the paper suggests that trade policy may reduce the extent of business cycle transmission across countries.","PeriodicalId":14396,"journal":{"name":"International Trade","volume":"23 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2011-01-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84609852","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We show that multilateral environmental regulations may affect trade flows differently than unilaterally generated regulations. Using the gravity equation, we test the effect on bilateral trade flows of increases in environmental regulation stringency ratings, taken from survey data, with a panel of 97 countries, controlling for European Union (EU) membership. We find significant differences in the effects on intra-EU exports compared to trade involving at least one non-EU country. We also find differing effects for high income countries compared to low income countries. An increase in environmental regulation stringency leads to a dramatic decrease in intra-EU exports originating in low income countries. Conversely, a similar change in environmental regulation stringency does not statistically affect intra-EU exports originating in high income countries. The results are consistent with the uneven competitiveness effect and the uneven burden of compliance shown in our model.
{"title":"Trade Flow Consequences of the European Union’s Regionalization of Environmental Regulations","authors":"P. McLaughlin, Bentley Coffey","doi":"10.2139/ssrn.1413834","DOIUrl":"https://doi.org/10.2139/ssrn.1413834","url":null,"abstract":"We show that multilateral environmental regulations may affect trade flows differently than unilaterally generated regulations. Using the gravity equation, we test the effect on bilateral trade flows of increases in environmental regulation stringency ratings, taken from survey data, with a panel of 97 countries, controlling for European Union (EU) membership. We find significant differences in the effects on intra-EU exports compared to trade involving at least one non-EU country. We also find differing effects for high income countries compared to low income countries. An increase in environmental regulation stringency leads to a dramatic decrease in intra-EU exports originating in low income countries. Conversely, a similar change in environmental regulation stringency does not statistically affect intra-EU exports originating in high income countries. The results are consistent with the uneven competitiveness effect and the uneven burden of compliance shown in our model.","PeriodicalId":14396,"journal":{"name":"International Trade","volume":"149 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2010-12-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"73641799","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Michael A. Anderson, K. Schaefer, Stephen L. S. Smith
We develop a simple Hotelling spatial-trade model of price dispersion to examine how distance-related costs affect price dispersion, and we offer some insights on how such costs may best be inferred from price-dispersion measures. Our theoretical model suggests that measures of price dispersion that are not spatially-informed can mislead researchers into concluding that distance-related costs are small even when such costs are the major determinant of price dispersion. In estimates based on price dispersion across U.S. cities of eleven goods, we find that distance-related costs are large and are indeed under-estimated when inferred from standard, non-spatial, price dispersion measures.
{"title":"Price Dispersion in Spatial Perspective: Theory and Evidence","authors":"Michael A. Anderson, K. Schaefer, Stephen L. S. Smith","doi":"10.2139/ssrn.1275776","DOIUrl":"https://doi.org/10.2139/ssrn.1275776","url":null,"abstract":"We develop a simple Hotelling spatial-trade model of price dispersion to examine how distance-related costs affect price dispersion, and we offer some insights on how such costs may best be inferred from price-dispersion measures. Our theoretical model suggests that measures of price dispersion that are not spatially-informed can mislead researchers into concluding that distance-related costs are small even when such costs are the major determinant of price dispersion. In estimates based on price dispersion across U.S. cities of eleven goods, we find that distance-related costs are large and are indeed under-estimated when inferred from standard, non-spatial, price dispersion measures.","PeriodicalId":14396,"journal":{"name":"International Trade","volume":"15 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2010-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87914006","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Foreign Direct Investment (FDI) into Mexico has increased dramatically since the inception of the North American Free Trade Agreement (NAFTA), raising questions about its effect on the Mexican economy. This paper studies the impact of FDI on industry productivity and wages over the first ten years of NAFTA, paying particular attention to the source country and destination industry of investments. It also offers a detailed description of the evolution of FDI, its components, sectoral composition, and sources from 1994-2005. There is evidence of a positive effect of FDI on productivity, particularly total factor productivity (TFP). The effect on wages is negative or zero at best, suggesting a divergence from productivity over this time period. The positive productivity effect stems largely from U.S. FDI into non-maquiladora industries, which receive over two thirds of manufacturing FDI. There is no evidence that more distant source countries have a differential effect. Consistent with theoretical expectations, FDI into maquiladoras benefits unskilled workers at the expense of skilled workers. This effect may be strong enough to dampen income inequality.
{"title":"The Effects of Foreign Direct Investment in Mexico Since NAFTA","authors":"A. Waldkirch","doi":"10.2139/ssrn.1115300","DOIUrl":"https://doi.org/10.2139/ssrn.1115300","url":null,"abstract":"Foreign Direct Investment (FDI) into Mexico has increased dramatically since the inception of the North American Free Trade Agreement (NAFTA), raising questions about its effect on the Mexican economy. This paper studies the impact of FDI on industry productivity and wages over the first ten years of NAFTA, paying particular attention to the source country and destination industry of investments. It also offers a detailed description of the evolution of FDI, its components, sectoral composition, and sources from 1994-2005. There is evidence of a positive effect of FDI on productivity, particularly total factor productivity (TFP). The effect on wages is negative or zero at best, suggesting a divergence from productivity over this time period. The positive productivity effect stems largely from U.S. FDI into non-maquiladora industries, which receive over two thirds of manufacturing FDI. There is no evidence that more distant source countries have a differential effect. Consistent with theoretical expectations, FDI into maquiladoras benefits unskilled workers at the expense of skilled workers. This effect may be strong enough to dampen income inequality.","PeriodicalId":14396,"journal":{"name":"International Trade","volume":"45 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2010-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"90102555","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2010-03-01DOI: 10.1016/J.JDEVECO.2009.07.004
Miaojie Yu
{"title":"Trade, Democracy, and the Gravity Equation","authors":"Miaojie Yu","doi":"10.1016/J.JDEVECO.2009.07.004","DOIUrl":"https://doi.org/10.1016/J.JDEVECO.2009.07.004","url":null,"abstract":"","PeriodicalId":14396,"journal":{"name":"International Trade","volume":"19 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2010-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"74819540","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper uses a Ricardian model to generate predictions about the influence of institutions on trade in differentiated (complex) and commoditized (simple) products and then uses a rich international trade data set for empirical tests. The model draws the distinction between the role of international transactions costs and domestic production costs in the trade of complex and simple products. The effects of institutions predicted by the model are identified with a three step estimation procedure. We find that when countries have low quality institutions, institutional reform primarily influences production costs and has little influence on the volume of trade. Institutional reform, however, increases the diversity of exports in complex goods markets. Conversely, in countries with more developed institutions, institutional reform primarily influences transaction costs and is associated with gains in the volume and the diversity of complex exports.
{"title":"Law, Trade, and Development","authors":"Johannes Moenius, Daniel Berkowitz","doi":"10.2139/ssrn.525485","DOIUrl":"https://doi.org/10.2139/ssrn.525485","url":null,"abstract":"This paper uses a Ricardian model to generate predictions about the influence of institutions on trade in differentiated (complex) and commoditized (simple) products and then uses a rich international trade data set for empirical tests. The model draws the distinction between the role of international transactions costs and domestic production costs in the trade of complex and simple products. The effects of institutions predicted by the model are identified with a three step estimation procedure. We find that when countries have low quality institutions, institutional reform primarily influences production costs and has little influence on the volume of trade. Institutional reform, however, increases the diversity of exports in complex goods markets. Conversely, in countries with more developed institutions, institutional reform primarily influences transaction costs and is associated with gains in the volume and the diversity of complex exports.","PeriodicalId":14396,"journal":{"name":"International Trade","volume":"71 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2010-02-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"83345441","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
There is strong evidence that different income groups consume different bundles of goods. This evidence suggests that trade liberalization can affect welfare inequality within a country via changes in the relative prices of goods consumed by different income groups (the price effect). In this paper, I develop a framework that enables us to explore the role of the price effect in determining welfare inequality. There are two core elements in the model. First, I assume that heterogenous in income consumers share identical but nonhomothetic preferences. Secondly, I consider a monopolistic competition environment that leads to variable markups affected by trade and trade costs. I find that trade liberalization does affect the prices of different goods differently and, as a result, can benefit some income classes more than others. In particular, I show that the relative welfare of the rich with respect to that of the poor has a hump shape as a function of trade costs.
{"title":"Trade Liberalization and Welfare Inequality: A Demand-Based Approach","authors":"A. Tarasov","doi":"10.2139/ssrn.1071263","DOIUrl":"https://doi.org/10.2139/ssrn.1071263","url":null,"abstract":"There is strong evidence that different income groups consume different bundles of goods. This evidence suggests that trade liberalization can affect welfare inequality within a country via changes in the relative prices of goods consumed by different income groups (the price effect). In this paper, I develop a framework that enables us to explore the role of the price effect in determining welfare inequality. There are two core elements in the model. First, I assume that heterogenous in income consumers share identical but nonhomothetic preferences. Secondly, I consider a monopolistic competition environment that leads to variable markups affected by trade and trade costs. I find that trade liberalization does affect the prices of different goods differently and, as a result, can benefit some income classes more than others. In particular, I show that the relative welfare of the rich with respect to that of the poor has a hump shape as a function of trade costs.","PeriodicalId":14396,"journal":{"name":"International Trade","volume":"34 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2010-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"81307311","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper explores the regionalisation of the European Union’s supply chains and the impact of enlargement by looking at trends in trade in intermediate products between 1995-2007. The findings show that enlargement has not significantly impacted overall levels of regionalization although it has led to quite major changes in the division of labor within the EU. In addition, the impacts have been very varied depending on the sector involved. There has been a greater consolidation of the EU supply chain in medium-tech and up-market goods while in low-market and high-tech goods, market share has been ceded to non-EU sources.
{"title":"How Regional is the Supply Chain in the Enlarged EU?","authors":"Louise Curran, Soledad Zignago","doi":"10.2139/ssrn.1425488","DOIUrl":"https://doi.org/10.2139/ssrn.1425488","url":null,"abstract":"This paper explores the regionalisation of the European Union’s supply chains and the impact of enlargement by looking at trends in trade in intermediate products between 1995-2007. The findings show that enlargement has not significantly impacted overall levels of regionalization although it has led to quite major changes in the division of labor within the EU. In addition, the impacts have been very varied depending on the sector involved. There has been a greater consolidation of the EU supply chain in medium-tech and up-market goods while in low-market and high-tech goods, market share has been ceded to non-EU sources.","PeriodicalId":14396,"journal":{"name":"International Trade","volume":"37 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2010-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84842647","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2009-12-02DOI: 10.1016/J.APGEOG.2011.01.009
E. Neumayer
{"title":"On the Detrimental Impact of Visa Restrictions on Bilateral Trade and Foreign Direct Investment","authors":"E. Neumayer","doi":"10.1016/J.APGEOG.2011.01.009","DOIUrl":"https://doi.org/10.1016/J.APGEOG.2011.01.009","url":null,"abstract":"","PeriodicalId":14396,"journal":{"name":"International Trade","volume":"101 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2009-12-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79059823","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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