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Trade Liberalization in a Multinational-Dominated Industry: A Theoretical and Applied General-Equilibrium Analysis

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  • Linda Hunter
  • James R. Markusen
  • Thomas F. Rutherford

Abstract

A theoretical model is developed and applied to the North American auto industry, motivated by the possibility of US-Mexico free trade. Special features of the model include (1) significant scale economies at the plant level, (2) imperfect competition among firms, (3) joint ownership of plants and production coordination across plants by each firm, (4) an (initial) ability of firms to segment markets, (5) a separate treatment of non-resident firms in determining oligopolistic markups. Using an applied GE model, we find that (A) the gains to Mexico are significant and the effects on the US and Canada are essentially zero following North American free trade if firms can continue to segment markets: (B) Because of the way that the North American multinationals determine markups, increased imports from Mexico do not result in a rationalization of US and Canadian production in the way it should if firms were strictly national. (C) Genuinely free trade for consumers (integrated markets) results in large gains for Mexico as the Mexican industry is forced to rationalize, while losses to the US and Canada are very small.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3679.

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Date of creation: Apr 1991
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Publication status: published as James R. Markusen, Thomas F. Rutherford, Linda Hunter, "Trade Liberalization in a Multinational-Dominated Industry," Journal of International Economics, volume 38, no. 1-2, February 1995, pp. 95-117.
Handle: RePEc:nbr:nberwo:3679

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  1. Markusen, James R & Wigle, Randall M, 1989. "Nash Equilibrium Tariffs for the United States and Canada: The Roles of Country Size, Scale Economies, and Capital Mobility," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 368-86, April.
  2. Venables, Anthony J., 1988. "International Capacity Choice and National Market Games," CEPR Discussion Papers 277, C.E.P.R. Discussion Papers.
  3. Norman, Victor D., 1990. "Assessing trade and welfare effects of trade liberalization : A comparison of alternative approaches to CGE modelling with imperfect competition," European Economic Review, Elsevier, vol. 34(4), pages 725-745, June.
  4. Markusen, James R., 1984. "Multinationals, multi-plant economies, and the gains from trade," Journal of International Economics, Elsevier, vol. 16(3-4), pages 205-226, May.
  5. Richard Harris, 1983. "Applied General Equilibrium Analysis of Small Open Economies with Scale Economies and Imperfect Competition," Working Papers 524, Queen's University, Department of Economics.
  6. Randall Wigle, 1988. "General Equilibrium Evaluation of Canada-U.S. Trade Liberalization in a Global Context," Canadian Journal of Economics, Canadian Economics Association, vol. 21(3), pages 539-64, August.
  7. Brown, D.K., 1989. "Market Structure, The Exchange Rate, And Pricing Behavior By Firms: Some Evidence From Computable General Equilibrium Trade Model," Working Papers 251, Research Seminar in International Economics, University of Michigan.
  8. Smith, Alasdair & Venables, Anthony J., 1988. "Completing the Internal Market in the European Community: Some Industry Simulations," CEPR Discussion Papers 233, C.E.P.R. Discussion Papers.
  9. Venables, Anthony J., 1990. "The economic integration of oligopolistic markets," European Economic Review, Elsevier, vol. 34(4), pages 753-769, June.
  10. Markusen, James R. & Venables, Anthony J., 1986. "Trade Policy with Increasing Returns and Imperfect Competition: Contradictory Results from Competing Assumptions," CEPR Discussion Papers 120, C.E.P.R. Discussion Papers.
  11. repec:fth:michin:251 is not listed on IDEAS
  12. Venables, Anthony J., 1985. "Trade and trade policy with imperfect competition: The case of identical products and free entry," Journal of International Economics, Elsevier, vol. 19(1-2), pages 1-19, August.
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Cited by:
  1. Mercenier, Jean, 1995. "Nonuniqueness of Solutions in Applied General Equilibrium Models with Scale Economies and Imperfect Competition," Economic Theory, Springer, vol. 6(1), pages 161-77, June.
  2. Johannes Bröcker & Martin Schneider, 2002. "How Does Economic Development in Eastern Europe Affect Austria's Regions? A Multiregional General Equilibrium Framework," Journal of Regional Science, Wiley Blackwell, vol. 42(2), pages 257-285.
  3. J. David Richardson, 1992. ""New" Trade Theory and Policy a Decade Old: Assessment in a Pacific Context," NBER Working Papers 4042, National Bureau of Economic Research, Inc.
  4. Joseph F. Francois & Douglas Nelson, 1998. "A Geometry of Specialization," Tinbergen Institute Discussion Papers 98-006/2, Tinbergen Institute.
  5. Steven Berry & Vittorio Grilli & F. Lopez-de-Silanes, 1992. "The Automobile Industry and The Mexico-Us Free Trade Agreement," NBER Working Papers 4152, National Bureau of Economic Research, Inc.

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