Folie 1 - Uni Bamberg
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Preferential Trade Agreements
and
Multi-Product Firms
Stefan Rouenhoff & Carsten Eckel
University of Bamberg
11th Annual Conference of the European Trade Study Group
Rome, September 10, 2009
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Literature
Preferential trade agreements and FDI
•
Horizontal FDI as tariff jumping motive and the intention to exploit the
proximity to larger regional markets
•
E.g., Motta & Norman (1996), Puga & Venables (1997)
Multi-product firms
•
High importance of multi-product firms (MPFs)
•
Horizontal FDI causes multiple way trade in differentiated final products
•
“Cannibalization” of own sales
•
E.g., Baldwin & Ottaviano (2001), Eckel & Neary (2009)
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Theoretical Framework
• Partial equilibrium analysis
• One monopolistic MPF, located in a third country (C)
wants to supply two identical countries (j=A,B)
produces two product varieties (i=1,2), which are
substitutable, 0<b<1
• Each variety is produced in a separate production plant under
constant variable costs c
• Each production plant is associated with fixed costs F
• Unit tariff costs t are identical between all three countries
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Theoretical Framework
• Comparison of two economic settings
• No preferential trade agreement between country A & B
(non-integrated markets (NIM))
• A preferential trade agreement between country A & B
(integrated markets (IM))
No tariff costs between country A & B
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Consumers in non-integrated and integrated markets
xi2
U xi bx1 x2
2
i 1
2
j
Utility function:
Demand function
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
j
j
j
Variety 1: p1 1 x1 bx2
j
j
j
Variety 2: p2 1 x2 bx1
Preferential Trade Agreements and Multi-Product Firms
Manufacturing in non-integrated markets
Market supply strategies A1 - A4
2 B j
t xi
i 1 j A
2
B
A
2 B
2 B
t x xi F
pij xij c xij 1
i 1
i 1 j A
i 1 j A
2
t x A
2F
i
i 1
B A
t x1 x2
2F
Objective functions
Trade
costs
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
ПA1
ПA2
ПA3
ПA4
Investment
costs
Preferential Trade Agreements and Multi-Product Firms
Manufacturing in non-integrated markets
Market supply strategies A1 - A4
2 B j
t xi
i 1 j A
2
B
A
2 B
2 B
t x xi F
pij xij c xij 1
i 1
i 1 j A
i 1 j A
2
t x A
2F
i
i 1
B A
t x1 x2
2F
Objective functions
Trade
costs
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
ПA1
ПA2
ПA3
ПA4
Investment
costs
Preferential Trade Agreements and Multi-Product Firms
Manufacturing in non-integrated markets
Market supply strategy A4
Country B
Country A
t
Production plant
variety 1
Production plant
variety 2
t
Country C
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Manufacturing in non-integrated markets
A4 A1 , A2 , A3
Profit conditions:
Critical tariff rate:
Invest
t NIM
(1 c)(1 b)
(1 2b)
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
2
(1 c)(1 b) 4 F (1 b 2 )
1 2b
(1 2b)
Preferential Trade Agreements and Multi-Product Firms
Manufacturing in non-integrated markets
Profits of market supply
strategies
A1
A2
A4
A3
0
t
Invest
NIM
t max
t
Parameters: c 0.005,F 0.05,b 0.84
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Manufacturing in integrated markets
Market supply strategies A5 – A7
Objective functions
2F
2 B
2 B
pij xij c xij t x1A x1B
F
i 1 j A
i 1 j A
2 B
j
t
xi
i 1 j A
Trade
costs
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
ПA5
ПA6
ПA7
Investment
costs
Preferential Trade Agreements and Multi-Product Firms
Manufacturing in integrated markets
Market supply strategies A5 – A7
Objective functions
2F
2 B
2 B
pij xij c xij t x1A x1B
F
i 1 j A
i 1 j A
2 B
j
t
xi
i 1 j A
Trade
costs
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
ПA5
ПA6
ПA7
Investment
costs
Preferential Trade Agreements and Multi-Product Firms
Manufacturing in integrated markets
Market supply strategy A6
Country A
Country B
Production plant
variety 2
t
Country C
t
Production plant
variety 1
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Manufacturing in integrated markets
A6 A5 , A7
Profit conditions:
Invest
t IM
(1 c)(1 b) (1 c) 2 (1 b) 2 2 F (1 b 2 )
Critical tariff rates:
t
Export
IM
(1 c)(1 b)
(1 2b)
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
2
(1 c)(1 b) 2 F (1 b 2 )
1 2b
(1 2b)
Preferential Trade Agreements and Multi-Product Firms
Manufacturing in integrated markets
Profits of market supply
strategies
A7
A6
A5
0
Export
t IM
t max
t
Parameters: c 0.005,F 0.05,b 0.84
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Comparative Static Analysis
Investment location
t
Export
Invest
Invest
tIM
t NIM
t tIM
tH
t max
Invest
t IM
(2,1)
tM
Invest
t NIM
tL
bL
bM
bH
b
Parameters: c 0.005,F 0.05
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Comparative Static Analysis
Welfare (Extension I: transportation costs )
j
j
j
W j U
E
TR
Export
Invest
Invest
tIM
t NIM
t tIM
j
B
B
NIM
IM
B
B
TRNIM
TRIM
A
NIM
A
IM
A
A
TRNIM
TRIM
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
A
WNIM
WIMA
A
WNIM
WIMA , if 1 c
2 t
1 c
A
WNIM
WIMA , if
2 t
2
b
2 1 b
2
b
2 1 b
Preferential Trade Agreements and Multi-Product Firms
Results and Outlook
Relocation of production possible
Both, “tariff jumping motive” and “cannibalization
reduction motive” are decisive for market supply
stragegy
Welfare decrease possible
Extension II: varying country size
Extension III: varying tariff costs
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms