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Preferential Trade Agreements and Multi-Product Firms

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. Literature. Preferential trade agreements and FDI

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Preferential Trade Agreements and Multi-Product Firms

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  1. Preferential Trade Agreements andMulti-Product Firms Stefan Rouenhoff & Carsten Eckel University of Bamberg 11th Annual Conference of the European Trade Study Group Rome, September 10, 2009

  2. 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)

  3. 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 aresubstitutable, 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

  4. 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

  5. Consumers in non-integrated and integrated markets Utility function: Variety 1: Demand function Variety 2:

  6. Manufacturing in non-integrated markets Market supply strategies A1 - A4 Objective functions ПA1 ПA2 ПA3 ПA4 Tradecosts Investmentcosts

  7. Manufacturing in non-integrated markets Market supply strategies A1 - A4 Objective functions ПA1 ПA2 ПA3 ПA4 Tradecosts Investmentcosts

  8. Manufacturing in non-integrated markets Market supply strategy A4 Country B Country A Production plantvariety 2 Production plantvariety 1 Country C

  9. Manufacturing in non-integrated markets Profit conditions: Critical tariff rate:

  10. Manufacturing in non-integrated markets Profits of market supply strategies

  11. Manufacturing in integrated markets Market supply strategies A5 – A7 Objective functions ПA5 ПA6 ПA7 Tradecosts Investmentcosts

  12. Manufacturing in integrated markets Market supply strategies A5 – A7 Objective functions ПA5 ПA6 ПA7 Tradecosts Investmentcosts

  13. Manufacturing in integrated markets Market supply strategy A6 Country B Country A Production plantvariety 2 Country C Production plantvariety 1

  14. Manufacturing in integrated markets Profit conditions: Critical tariff rates:

  15. Manufacturing in integrated markets Profits of market supply strategies

  16. Comparative Static Analysis Investment location

  17. Comparative Static Analysis Welfare (Extension I: transportation costs ) , if , if

  18. 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

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