Intra-Industry Trade, Imperfect Competition, Trade Integration and Invasive Species Risk

1. Intra-Industry Trade, Imperfect Competition, Trade Integration and Invasive Species Risk Anh T. Tu and John Beghin Iowa State University

2. Introduction • A new dimension in the trade and environment nexus. • Trade as a vector for invasive species (IS). • Many horror stories but limited formal analysis. • Interest in the implications of trade integration for IS, especially in agricultural trade.

3. What this paper is about • Addresses the implications of trade integration on IS in a second best setting. • Extends the analytical work on trade and IS (Costello & McAuland) in important ways. • Provides some numerical illustrations of magnitudes at work on grain trade and IS risk based on the CABI Compendium (ongoing).

4. Modeling two-way trade for differentiated products

5. Modeling approach • A segmented-market model with differentiated products, imperfect competition, and two-way trade. • Similar to the “reciprocal dumping” model with differentiated goods and many distortions added. • Key assumptions: • 2 countries, each with one firm producing for domestic and export markets. • Two markets are segmented. • Home and Foreign goods are differentiated. • Symmetrical setup for Home and Foreign. • Governments intervene in markets.

6. Demand specification Home demands for domestic good x & imports y: (Similar setup for Foreign demands x*, y*.)

7. Policy assumptions • Home and Foreign governments impose ad valorem import tariffs & production subsidies proportional to their firm’s unit cost. • These policies are exogenous to firms. • Trade integration is modeled as a joint reduction of tariffs and domestic subsidies.

8. Two firms make price discrimination between domestic and export markets • Each firm maximizes total profit in the two markets given strategies of the other firm wrt to prices px and px* with tariff τ, subsidy s, unit cost c, prices p, fixed cost FC, demand x and x*. • Nash equilibrium in price best responses yield equilibrium quantities X, X*, Y, Y*.

9. Home and Foreign equilibrium quantities consumed for both goods

10. Some useful intermediate results • Export demand for Home good ii) Home domestic demand iii) Home total production iv) Home imports ,

11. The comparative-statics of policy reform

12. The comparative-statics of policy reform Under the URAA, WTO member countries had to implement tariffication and increase market access. Second, a reduction of distorting domestic support had to be implemented to limit and reduce the most trade-distorting forms of domestic support. We parameterize these reforms as joint proportional reductions of tariffs and subsidies

13. Policy scenarios considered • Pure trade regime (only trade policies are active and production subsidies = 0). Tariffs are reduced. • Both trade and agricultural policies are active. Tariffs only are reduced. • Trade policies are active, and Home government subsidizes its production. Trade and agricultural policy reforms take place. (OECD and developing member). • Both trade and agricultural policies are active in both countries and are both reformed (US-EU situation in the URAA).

14. Modeling Invasive Species Hazard

15. Modeling IS hazard • We elaborate on the framework followed by Costello & McAusland but with our setup (imperfect competition, two-way trade and joint reforms). • The arrival time of exotic species is stochastic. • The inter-arrival time between two successive introductions is an exponentially distributed random variable increasing in the volume of imports Y.

16. Modeling IS hazard The expected value of type-k damage through time T as where is the probability that an introduced species established a viable population in Home, and is the cumulative density function for the present value of type k damage through time T caused by the successful introduction , conditional on The probability that a successful arrival at timehas a present value of type-k damage by time T of less thangiven the total production Q.

17. Modeling IS hazard and policy interface To understand the effect of trade liberalization on the damage from IS, we sign the total derivative dE[Dk(T)] with respect to the policy reform parameters. Recall: In HO model with unilateral tariff reduction, IS damages can decrease with trade liberalization even though imports increase (Costello and McAusland, 2003). Both imports and total productions are important determinants of the expected damages.

18. Results

19. Policy reforms impact on IS introduction Proposition 1: Given the demand structure as specified previously, multilateral trade liberalization involving joint tariff reductions but no domestic policy change increases the rate of successful IS introduction to Home.

20. Policy reforms impact on damages from IS introduction Proposition 2: Under our assumptions, multilateral trade reforms involving joint tariff reductions but no domestic policy change the expected damages if and only if [the absolute value of] the elasticity of imports to tariff is higher than (equal to or lower than) (See paper for the expression of .)

21. Policy reforms impact on IS damages Corollary 2: If it were the one-way trade context, then trade liberalization the expected damages if and only if [the absolute value of] the elasticity of imports to tariff is higher than (equal to or lower than) (See paper for the expression of )

22. Policy reforms impact on IS damages Assuming damages are augmented, by proposition 2 and corollary 2, and one sees that it is less likely for trade liberalization to decrease the expected damages in the two-way-trade cum multilateral-reform context than in a one-way-trade cum unilateral reform case.

23. Policy reforms impact on damages from exotic species introduction Corollary 3: Given our assumptions, and assuming demand symmetry , , joint tariff reductions always increase expected damages if i) Home pre-reform tariff is lower than foreign pre-reform tariff; Or if ii) Home pre-reform tariff is higher than Foreign pre-reform tariff but not substantially (see paper for condition ) • > Under a wide range of initial tariffs, IS damages would increase with trade integration.

24. Policy reforms impact on IS Introduction Proposition 3: Given the demand structure as specified previously, and assuming both trade and agricultural policies active, then trade and domestic reforms increase the rate of successful IS introduction to Home.

25. Policy reforms impact on damages from IS introduction Proposition 4: Given our assumptions, and if both trade and agricultural policies exist, then the reform the expected damages if and only if [the absolute value of] the elasticity of imports to tariff is higher than (equal to or lower than) (See paper for the expression of .)

26. Ongoing simulation work • Current illustration based on wheat trade. • The CABI Compendium data to model IS and damages (expected reductions in yield). • Calibration procedure (12 equations example for 2 countries).

27. Tentative conclusions • When accounting for two-way trade and joint distortion reductions, IS damages are more likely with trade integration because production does not have to fall as imports increase. • Production subsidies and their reform increase the complexity of the effects; their relative impacts on production and imports determine the impact on IS.