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Protection and International Sourcing

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  • Ornelas, Emanuel
  • Turner, John L.

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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8070.

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Date of creation: Oct 2010
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Handle: RePEc:cpr:ceprdp:8070

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Keywords: hold-up problem; international trade; organizational form; sourcing; tariffs;

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References

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Cited by:
  1. Staiger, Robert W. & Antras, Pol, 2008. "Offshoring and the Role of Trade Agreements," Scholarly Articles 3374525, Harvard University Department of Economics.
  2. Ana Fernandes & Heiwai Tang, 2010. "The Determinants of Vertical Integration in Export Processing: Theory and Evidence from China," Development Working Papers 289, Centro Studi Luca d\'Agliano, University of Milano, revised 30 Apr 2010.
  3. Friberg, R & Tinn, K, 2013. "Holdup and Comparative Advantage," Working Papers 12193, Imperial College, London, Imperial College Business School.
  4. Paola Conconi & Patrick Legros & Andrew F. Newman, 2008. "Trade Liberalization and Organizational Change," Development Working Papers 262, Centro Studi Luca d\'Agliano, University of Milano.
  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.

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