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This study aims to determine the trigger conditions behind trade wars and explore the prerequisites required to institute trade subsidies. Additionally, it investigates the potential effectiveness of both a trade war and a trade subsidy within an economic framework shaped by the international division of labor, particularly focusing on intermediate goods production. The study formulates a theoretical model for trade wars and derives three crucial findings. Firstly, it establishes that a critical condition for triggering a trade war hinges on maintaining a balanced self-price coefficient of demand, neither excessively large nor small relative to the cross-price coefficient of demand. Secondly, failure to meet this condition would preclude the occurrence of a trade war; instead, it would prompt the emergence of trade subsidies and reciprocal actions between the two countries involved. Lastly, the scale of the trade war or a trade subsidy in this study is not influential in the countries of trade war. Therefore, this study recommends that changing the current market structure of the international division of labor would be necessary to make the trade war or trade subsidies effective.

Power laws in productivity and firm size are well documented empirical regularities. As they are upper right‐tail phenomena, this paper shows that assuming asymptotic power functions for various model primitives (such as demand and firm heterogeneity) are sufficient for matching these regularities. This greatly relaxes the functional‐form restrictions in economic modeling and can be beneficial in certain contexts. We demonstrate this in a modified Melitz (2003) model, which embeds an innovation mechanism so as to endogenize the productivity distribution and generate both of the above‐mentioned power laws. We also investigate the model's welfare implications with regard to innovation by conducting a quantitative analysis of the welfare gains from trade. [ABSTRACT FROM AUTHOR]

COVID-19 highlighted the weaknesses in the supply chain. Many have argued that a more resilient or robust supply chain is needed. But what does a robust supply chain mean? And how do firms' decisions change when taken that approach? This paper studies a very stylized model of a supply chain, where we study how the decision of a multinational corporation changes in the presence of uncertainty. The two standard theories of supply chain are just-in-time and just-in-case. Just-in-time argues in favor of pursuing efficiency, while just-in-case studies how such decision changes when the firm faces idiosyncratic risk. We find that a robust supply chain is very different specially in the presence of systemic shocks. In this case, firms need to concentrate on the worst-case. This strategy implies a supply chain where the allocation of resources and capabilities does not correspond to the standard theories studied in economics, but follow a heuristic behavioral rule called "probability matching." It has been found in nature and in experimental research that subjects appeal to probability matching when seeking survival. We find that a robust supply chain will reproduce this behavioral outcome. In fact, a multinational optimizing under uncertainty follows a probability matching which leads to an allocation that is suboptimal from the individual producer point of view, but rules out the possibility of supply disruptions. [ABSTRACT FROM AUTHOR]

The creation of the Manaus Free Trade Zone had a development purpose in the Brazilian political, economic and social scenario between 1960 and 1970. This industrial pole was an important device in achieving the desired development, populating a region considered deserted and exposed to external threats at that time. It has guaranteed the improvement on labor standards and social conditions in the Manaus’ district and has become the main driving force behind regional employment, higher salaries and growth over the past decades. Using the residuals and the stochastic frontier techniques to estimate the labor and social performances of the Manaus Free Trade Zone, the analysis confirms that the implementation of the special economic zone collaborated to labor and social efficiency in the area – compared to other important industrial Brazilian municipalities – due to the rigid checks conducted by SUFRAMA and the strict respect of labor standards applied in the MFTZ. Nevertheless, economic linkages in the region are still weak and positive spillovers from Manaus to its surroundings were probably inexistent.

We develop a simple formula for computing the global welfare effect of reduction in bilateral trade costs, such as shipping costs or the costs of administrative barriers to trade. The formula is applicable to a broad class of perfect competition and monopolistic competition models and settings, including perfect competition with multi-stage production and Melitz's (Econometrica 71(6):1695–1725, 2003) model with general firm productivity distribution. We prove that the underlying mechanism is the envelope theorem. We then extend our analysis to models with non-constant markups. Finally, we carry out some empirical applications to show the user-friendliness of the formula. [ABSTRACT FROM AUTHOR]

This paper examines how a politically biased strategic export subsidy influences social welfare when an importing country imposes countervailing duties on imported goods if the subsidy is verified. Based on a simple model that integrates the political contribution provided by exporting firms and the verifiability problem of an export subsidy for the upstream firms within a vertically fragmented production process, this paper demonstrates that politically biased strategic export policies can deteriorate social welfare. Moreover, when it is more difficult to identify hidden government subsidies, welfare loss due to politically biased subsidy is increased. Interestingly, an importing country is not motivated to fully countervail the politically biased export subsidies when it is concerned about social welfare, including consumer surplus. These results provide an answer on why the conflicts over hidden subsidies are increasing with deepening fragmentation of exporting firms' production processes. In addition, the results imply that it is imperative to make further efforts to enhance the verifiability of the hidden subsidies in order to reduce the welfare deterioration caused by the politically biased strategic trade policies. [ABSTRACT FROM AUTHOR]

In a developing country, trade liberalization affects firms' production choices through different channels: intensification of foreign competition, reductions of production factor costs, and enhanced access to foreign consumers and technology. Using firm-level data from India, we investigate how firms with different characteristics adjust their domestic sales and capital accumulation to output and input tariff changes. Our findings suggest that India's trade liberalization has heterogeneous effects depending on firms' export, import, ownership status and financial constraints. Firms serving only the domestic market have experienced a contraction of domestic sales and capital accumulation due to import competition. They were not able to benefit from the access to lower costs imported inputs and capital goods. Exporting and importing firms and foreign affiliates have expanded their sales and capital investments thanks to the reduction of imported inputs and capital goods costs and thereby, they have been able to face foreign competition. Our findings also suggest that credit constraints affect the relationship between trade liberalization and firms' capital accumulation. These findings are in line with recent models of trade with heterogeneous firms. [ABSTRACT FROM AUTHOR]

We adopt the conjectural variations approach to explore the rationale for tariff escalation and de-escalation. The main findings indicate that it is a welfare maximization choice for the importing country to adopt an escalated, unified, and/or de-escalated tariff scheme; nevertheless, the escalated tariff scheme is more likely to be chosen, while a unified tariff is the least likely to be adopted. Both potential market size and market structure in the importing country play essential roles for government to make the choices. [ABSTRACT FROM AUTHOR]

This paper models the competition for a domestic market between one domestic and one foreign firm as a pricing game under incomplete cost information. As the foreign firm incurs a trade cost to serve the domestic market, it prices more aggressively, giving rise to the possibility of an inefficient allocation. In spite of asymmetric information, we can devise a contingent trade policy to correct this potential market failure. National governments, however, make excessive use of such a policy due to rent shifting motives, thus creating another inefficiency. The expected inefficiency of national policy is found to be comparatively larger (lower) at low (high) trade costs. Hence contingent trade policy conducted by national governments is preferred only when trade costs are high. [ABSTRACT FROM AUTHOR]

The traditional approach to testing the law of one price is modified to allow for product differentiation. Applying the modified framework to the US market for shrimp, the pass-through elasticity of the import price into the domestic price was found to be less than one, as predicted by theory when domestic and imported versions of a good are imperfect substitutes. Among the supply and demand shifters included in the model, the most important variables to affect the domestic price are exchange rate and the price of diesel fuel. The pass-through elasticities for diesel fuel (0.38) and exchange rate (0.55) are almost as large as for import price (0.60). This suggests changes in exchange rates and fuel prices are not to be overlooked as important drivers of the domestic price. The US market for shrimp is highly efficient, with 70% of disequilibrium caused by a demand or supply shock “corrected” within one month. [ABSTRACT FROM AUTHOR]

How do trade liberalization and changes in market size affect the strength of intellectual property rights (IPR) protection in Southern countries? We explore this question in an international oligopoly model in which a Northern firm has the option of export-platform FDI (EPF): that is, to set up an export platform in the South to serve not only the Southern market but also other export markets. EPF allows the Northern firm to take advantage of low tariffs that often exist between the South and other export markets. However, with imperfect protection of IPR in the South, the Northern firm’s technological advantage is reduced under EPF as technology spills over, at least partially, to Southern firms. We show that when trade between the South and the export market becomes more liberalized, South government weakens its optimal IPR policy to improve welfare. The opposite is true when trade is liberalized between the North and the South, or between the North and the export market. The effect of an increase in the size of the Southern market critically depends on whether the Northern firm chooses EPF over home production to increase its profit in the Southern market or in the export market. The robustness of our findings is explored in a variety of extensions including multiple export platforms, multilateral trade liberalization, and EPF by multiple Northern firms. Explicitly incorporating export markets and the possibility of EPF, this paper sheds new light on our understanding of the North–South conflict regarding IPR protection, a highly debated issue among member countries of the WTO. [ABSTRACT FROM AUTHOR]

Most trade models featuring heterogeneous firms assume a Pareto productivity distribution, on the basis that it provides a reasonable representation of the data and because of its analytical tractability. However, recent work shows that the characteristics of the productivity distribution crucially affect the estimated gains from trade. This paper thoroughly compares the gains from trade obtained under three different productivity distributions (Pareto, lognormal, and Weibull) and investigates their policy implications. We find that both the magnitude of the welfare gains and the relative importance of the fixed versus variable trade costs change significantly. Hence, relying blindly on a single distribution is dangerous when performing trade policy analysis. [ABSTRACT FROM AUTHOR]

Trade liberalization can imply slow and long adjustment processes. Taking account of these adjustment processes can change the evaluation of trade policy, especially when policymakers care more about the next couple of years than the infinite future. In this paper, I analyze the setting of tariffs in a two-country model taking account of adjustment processes with special emphasis on the effects of nominal price rigidity and monetary policy. I show that nominal price rigidity induces policymakers with a short planning horizon to set lower tariffs because it enhances the short-run drop in consumption following an increase in tariffs. Monetary policy that aggressively fights deviations from its inflation target implies even lower optimal tariffs. [ABSTRACT FROM AUTHOR]

We set up an oligopolistic model with two exporting firms selling to a third market to investigate the welfare implications of trade liberalization when the exporting firms are forward-looking. The results show that with cost asymmetry trade liberalization encourages the exporting firms to engage in tacit collusion, which may not only be detrimental to the domestic welfare, but also to the consumer surplus of the importing country. Moreover, we find that tacit collusion is less sustainable if the government of the importing country imposes a lower (higher) tariff on the more (less) efficient exporting firm. If a nonforward-looking or a forward-looking cost-efficient domestic firm exists in the importing country, then trade liberalization also encourages tacit collusion. [ABSTRACT FROM AUTHOR]

This paper investigates the welfare effect of forming a free trade agreement (FTA). To receive tariff-free treatment, firms must comply with the rules of origin (ROO). Outside firms could undertake either market-oriented or export-platform foreign direct investments (FDIs). ROO have the following effects: (i) An infeasible FTA may become feasible by deterring outside firms' FDIs, (ii) an FDI of a less efficient firm could replace that of an efficient firm, or (iii) FDIs made before the FTA is concluded might be eliminated. These potential effects complicate the welfare effect of the FTA and could decrease the consumer surplus. [ABSTRACT FROM AUTHOR]

With strategic trade policies, we consider first- and second-mover advantages in a vertical structure given the two-part tariff contract (composed of the input price and the fixed fee) of an upstream firm, where a home and a foreign final-good firms export to a third-country market. We find that the upstream firms’ and governments’ preference orderings over sequential versus simultaneous play and over free trade versus a regime of subsidies contrast with early results in the strategic trade policy. Thus, the endogenous market structure is that (i) the potential leader chooses the Leader role with quantity strategies, and the equilibrium trade regime is unilateral subsidy regardless of the nature of goods; (ii) with price strategies, the potential leader chooses the simultaneous timing, and the equilibrium trade regime is bilateral taxes (free trade) when goods are substitutes (complements). [ABSTRACT FROM PUBLISHER]

We consider strategic trade policy for information and communication technology (ICT) product markets with international rivalry. Usually, ICT products exhibit network externalities and product compatibility (i.e., network compatibility). We demonstrate that the optimal strategic trade policy depends on the degree of network compatibility of ICT products. Furthermore, using an endogenous decision game for strategic variables (i.e., quantity and price), we consider the relationship between the optimal strategic trade policies and the endogenous mode of competition. [ABSTRACT FROM AUTHOR]

Do small countries have higher proportions of firms that export in manufacturing industries than large ones? As small countries are well known to be more open than large ones, it may appear uncontroversial to claim that the answer is yes. Nevertheless, this contradicts predictions from many standard trade models positing a home-market effect in the number of manufacturing firms and exporters. In this article, I present a theoretical model where a home-market effect in the number of firms coexists with a reverse home-market effect in the number of exporters: as in standard models, the number of firms in a small country relative to that in a large one is lower than relative income, but, in contrast to standard models, the relative number of exporters is larger. As a consequence, small countries will have higher proportions firms that export in manufacturing industries-a claim I support empirically. [ABSTRACT FROM AUTHOR]

This paper provides a comprehensive analysis of the productivity effects of antidumping (AD) measures on Chinese industries. Industry‐year panel data and generalized method of moments estimators are used in the empirical analysis. Productivity indicators are calculated using data envelope analysis. The empirical results show that China's industrial total factor productivity has improved under the pressure of AD measures taken by developed countries, and the mechanism inspires technological progress but hurts technological efficiency. Developing countries' AD measures have no significant productivity effects on China's targeted industries, except for slightly positive effects on technological efficiency. These results indicate that China should pay more attention to technological innovation and take different counter‐measures for different cases of AD measures. [ABSTRACT FROM AUTHOR]

This paper analyses the role that quality standards and innovation play on trade volume, by using a gravity model. The role of innovative activity and quality standards in enhancing trade performance is widely accepted in the literature. However, in this paper, we argue that the net effect of quality standards on trade is affected by the exporter's ability to innovate and comply with these requirements. In particular, by using a sample of 60 exporting countries and 57 importing countries, for a wide range of 26 manufacturing industries over the period 1995-2000, we show that the most innovative industries are more likely to enhance the overall quality of exports, and then gain a competitive advantage. We also find that this effect depends on the level of technology intensity at industry-level and on the level of economic development of exporting country. [ABSTRACT FROM AUTHOR]

ABSTRACT The stability of international trade networks has been investigated using the pairwise stability concept. This concept is suitable to study the formation of bilateral agreements. However, it cannot be used to determine the stability of global trade agreements. This article proposes an alternative stability concept that can be adopted to determine the stability of global agreements such as the Doha agreement. This concept is named in this paper Global Treaty Stability. [ABSTRACT FROM AUTHOR]