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Market presence, contestability, and the terms-of-trade effects of regional integration

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  • Schiff, Maurice
  • Chang, Won

Abstract

How firms react to a given shock may depend on the degree to which rivals are present and on whether potentially viable entrants to that market exist. The authors try to measure these effects internationally by examining the price behavior of the United States in Brazil's market when MERCOSUR trade liberalization and most-favored-nation (MFN) trade liberalization take place. Using detailed panel data on trade and tariff rates, they find that both the market presence of a preferred supplier and expected entry lessen the U.S. price reaction to MFN trade liberalization and increase the U.S. price reaction to preferential trade liberalization. Argentina's presence in Brazil's market results in a smaller U.S. price response to Brazil's MFN tariff change and in a larger response to a preferential tariff change. More surprisingly, the quantitative effects of market presence and expected entry (contestability) are not significantly different from each other. Contestability plays no significant role when Argentina's is absent from Brazil's market, contestability lessens the U.S. response to changes in the MFN tariff and increases it in response to changes in the preferential tariff. It follows from these results that presence in, as well as threat of entry into, partners'markets implies lower optimal external tariffs and suggests that regional agreements can have pro-competitive effects in the presence of contestability. The authors also examine the hypothesis of"symmetry"between the effect of tariffs and that of exchange rates.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2532.

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Date of creation: 31 Jan 2001
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Handle: RePEc:wbk:wbrwps:2532

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Keywords: Access to Markets; Markets and Market Access; TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT; Trade and Regional Integration; Environmental Economics&Policies;

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  1. Pinelopi K. Goldberg & Michael M. Knetter, 1996. "Goods Prices and Exchange Rates: What Have We Learned?," NBER Working Papers 5862, National Bureau of Economic Research, Inc.
  2. Olarreaga, Marcelo & Soloaga, Isidro, 1998. "Endogenous Tariff Formation: The Case of Mercosur," CEPR Discussion Papers 1848, C.E.P.R. Discussion Papers.
  3. Feenstra, R.C., 1995. "Estimating the Effects of Trade Policy," Department of Economics 95-10, California Davis - Department of Economics.
  4. Robert C. Feenstra, 1987. "Symmetric Pass-Through of Tariffs and Exchange Rates Under Imperfect Competition: An Empirical Test," NBER Working Papers 2453, National Bureau of Economic Research, Inc.
  5. Chang, Won & Winters, L. Alan, 1999. "How Regional Blocs Affect Excluded Countries: The Price Effects of MERCOSUR," CEPR Discussion Papers 2179, C.E.P.R. Discussion Papers.
  6. Winters, L. Alan, 1996. "Regionalism and the Rest of the World: The Irrelevance of the Kemp-Wan Theorem," CEPR Discussion Papers 1316, C.E.P.R. Discussion Papers.
  7. Winters, L. Alan & Chang, Won, 2000. "Regional integration and import prices: an empirical investigation," Journal of International Economics, Elsevier, vol. 51(2), pages 363-377, August.
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Cited by:
  1. Mattoo, Aaditya & Fink, Carsten, 2002. "Regional agreements and trade services - policy issues," Policy Research Working Paper Series 2852, The World Bank.
  2. Céline Carrère & Maurice Schiff, 2005. "On the Geography of Trade. Distance is Alive and Well," Revue économique, Presses de Sciences-Po, vol. 56(6), pages 1249-1274.
  3. Céline CARRERE, 2011. "A new measure of tariff preference margins adjusted for import and domestic competition," Working Papers P19, FERDI.

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