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Protection and International Sourcing

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  • Emanuel Ornelas
  • John L. Turner

Abstract

We study the impact of import protection on relationship-specific investments, organizational choice and welfare. We show that a tariff on intermediate inputs can improve social welfare through mitigating hold-up problems. It does so if it discriminates in favor of the investing parties, which the tariff achieves by making trade with outsiders more costly. On the other hand, a tariff can prompt inefficient organizational choices if it discriminates in favor of less productive domestic suppliers or if integration costs are low. Protection distorts organizational choices because tariff revenue, which is external to the firms, drives a wedge between the private and social gains to offshoring and integration. Since contract incompleteness affects investment and production decisions differently depending on the organization form, the intensity of this externality varies with organization form. Hence, protection mitigates domestic hold-up problems but inefficiently curbs offshoring. This suggests a role for moderate protection of inputs trade for firms outsourcing domestically, if the protection is coupled with incentives for offshoring activities.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 122 (2012)
Issue (Month): 559 (03)
Pages: 26-63

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Handle: RePEc:ecj:econjl:v:122:y:2012:i:559:p:26-63

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References

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Citations

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Cited by:
  1. Ana Fernandes & Heiwai Tang, 2010. "The Determinants of Vertical Integration in Export Processing: Theory and Evidence from China," CEP Discussion Papers dp0980, Centre for Economic Performance, LSE.
  2. Conconi, Paola & Legros, Patrick & Newman, Andrew F., 2012. "Trade liberalization and organizational change," Journal of International Economics, Elsevier, vol. 86(2), pages 197-208.
  3. Pol Antràs & Robert W. Staiger, 2008. "Offshoring and the Role of Trade Agreements," NBER Working Papers 14285, National Bureau of Economic Research, Inc.
  4. Díez, Federico J., 2014. "The asymmetric effects of tariffs on intra-firm trade and offshoring decisions," Journal of International Economics, Elsevier, vol. 93(1), pages 76-91.
  5. Maya Cohen-Meidan, 2009. "Vertical Integration and Trade Protection: The Case of Antidumping Duties," Discussion Papers 08-034, Stanford Institute for Economic Policy Research.
  6. Fernandes, Ana P. & Tang, Heiwai, 2012. "Determinants of vertical integration in export processing: Theory and evidence from China," Journal of Development Economics, Elsevier, vol. 99(2), pages 396-414.
  7. Friberg, R & Tinn, K, 2013. "Holdup and Comparative Advantage," Working Papers 12193, Imperial College, London, Imperial College Business School.

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