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VERs under imperfect competition and foreign direct investment: A case study of the US–Japan auto VER

In: Modeling Developing Countries' Policies in General Equilibrium

Author

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  • Jaime de Melo
  • David Tarr

Abstract

This paper first assesses the costs of the US–Japan auto VER in a general equilibrium constant returns to scale (CRTS) model at about $10 billion. It then sequentially introduces important features of the auto VER: endogenous rent premium determination, wage distortions in autos, the US capturing some of the rents of the VER, US monopsony power in autos, increasing returns to scale, pure profits and entry, foreign direct investment, and endogenous conjectures. In the preferred monopolistic competition, initial profit model, the estimated costs are about 10% less than under the assumption of CRTS, but costs remain high at over $200 000 per job protected in autos. Compared with exogenous rent determination, endogenous rent determination results in significantly lower estimated costs of the VER because domestic entry reduces the rent premium. Foreign direct investment with initial profits is shown to lower the costs of the VER if, and only if, the rent premium is endogenous.

Suggested Citation

  • Jaime de Melo & David Tarr, 2015. "VERs under imperfect competition and foreign direct investment: A case study of the US–Japan auto VER," World Scientific Book Chapters, in: Modeling Developing Countries' Policies in General Equilibrium, chapter 22, pages 461-483, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814494816_0022
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    Cited by:

    1. Robert C. Feenstra, 1992. "How Costly Is Protectionism?," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 159-178, Summer.
    2. Bown, Chad P. & McCulloch, Rachel, 2009. "U.S.-Japan and U.S.-China trade conflict: Export growth, reciprocity, and the international trading system," Journal of Asian Economics, Elsevier, vol. 20(6), pages 669-687, November.
    3. Zhou, Dongsheng & Vertinsky, Ilan, 2002. "Can protectionist trade measures make a country better off? A study of VERs and minimum quality standards," Journal of Business Research, Elsevier, vol. 55(3), pages 227-236, March.

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    More about this item

    Keywords

    Applied General Equilibrium Models; Trade Policy; Computable General Equilibrium; Archetypes;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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