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Profit Shifting And Trade Agreements In Imperfectly Competitive Markets

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  • Kyle Bagwell
  • Robert W. Staiger

Abstract

When markets are imperfectly competitive, trade policies can alter the terms of trade, shift profits from one country to another, and moderate or exacerbate existing distortions that are associated with the presence of monopoly power. In light of the various ways in which trade policies may influence welfare, it might be expected that new rationales for trade agreements would arise once imperfectly competitive markets are allowed. In this paper, we consider several trade models that feature imperfectly competitive markets and argue that the basic rationale for a trade agreement is, in fact, the same rationale that arises in perfectly competitive markets. In all of the models that we consider, and whether or not governments have political-economic objectives, the only rationale for a trade agreement is to remedy the inefficient terms-of-trade driven restrictions in trade volume. Having identified the problem that a trade agreement might solve, we next evaluate the form that an efficiency-enhancing trade agreement might take. Here, too, our results parallel the results established previously for models with perfectly competitive markets. In particular, we show that the principles of reciprocity and non-discrimination (MFN) are efficiency enhancing, as they serve to "undo" the terms-of-trade driven restrictions in trade volume that occur when governments pursue unilateral trade policies.
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Suggested Citation

  • Kyle Bagwell & Robert W. Staiger, 2012. "Profit Shifting And Trade Agreements In Imperfectly Competitive Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(4), pages 1067-1104, November.
  • Handle: RePEc:wly:iecrev:v:53:y:2012:i:4:p:1067-1104
    DOI: j.1468-2354.2012.00712.x
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Richard Baldwin & Frédéric Robert-Nicoud, 2015. "A simple model of the juggernaut effect of trade liberalisation," International Economics, CEPII research center, issue 143, pages 70-79.
    2. repec:eee:inecon:v:111:y:2018:i:c:p:134-142 is not listed on IDEAS
    3. Collie, David R., 2017. "A Simple Model of Brexit under Oligopoly," Cardiff Economics Working Papers E2017/17, Cardiff University, Cardiff Business School, Economics Section.
    4. Kyle Bagwell & Chad P. Bown & Robert W. Staiger, 2016. "Is the WTO Passé?," Journal of Economic Literature, American Economic Association, vol. 54(4), pages 1125-1231, December.
    5. Kyle Bagwell & Robert W. Staiger, 2009. "The WTO: Theory and Practice," NBER Working Papers 15445, National Bureau of Economic Research, Inc.
    6. Davies, Ronald B., 2013. "The silver lining of red tape," Journal of Public Economics, Elsevier, vol. 101(C), pages 68-76.
    7. Fujiwara, Kenji, 2014. "Pareto-improving tariff-tax reforms under imperfect competition," International Review of Economics & Finance, Elsevier, vol. 31(C), pages 12-20.
    8. Bagwell, Kyle & Staiger, Robert W., 2015. "Delocation and trade agreements in imperfectly competitive markets," Research in Economics, Elsevier, vol. 69(2), pages 132-156.
    9. Ara, Tomohiro & Ghosh, Arghya, 2016. "Tariffs, vertical specialization and oligopoly," European Economic Review, Elsevier, vol. 82(C), pages 1-23.
    10. repec:bla:reviec:v:25:y:2017:i:1:p:76-97 is not listed on IDEAS
    11. Bastos, Paulo & Straume, Odd Rune & Urrego, Jaime A., 2013. "Rain, agriculture, and tariffs," Journal of International Economics, Elsevier, vol. 90(2), pages 364-377.
    12. Ralph Ossa, 2014. "Trade Wars and Trade Talks with Data," American Economic Review, American Economic Association, vol. 104(12), pages 4104-4146, December.
    13. Matthew T. Cole & James Lake & Ben Zissimos, 2017. "Contesting an International Trade Agreement," Working Papers 1703, California Polytechnic State University, Department of Economics.
    14. Langot, François & Lemoine, Matthieu, 2017. "Strategic fiscal policies in Europe: Why does the labour wedge matter?," European Economic Review, Elsevier, vol. 91(C), pages 15-29.
    15. Monika Mrazova, 2009. "Trade negotiations when market access matters," Economics Series Working Papers 447, University of Oxford, Department of Economics.
    16. Koska, Onur A. & Stähler, Frank, 2016. "The myth of profit-shifting trade policies," Economics Letters, Elsevier, vol. 140(C), pages 39-41.
    17. F. Langot & M. Lemoine, 2014. "Strategic fiscal revaluation or devaluation: why does the labor wedge matter?," Working papers 516, Banque de France.
    18. Kawabata, Yasushi, 2015. "Endogenous formation of free trade agreements in vertically related markets," Research in Economics, Elsevier, vol. 69(2), pages 214-223.
    19. Maggi, Giovanni, 2014. "International Trade Agreements," Handbook of International Economics, Elsevier.
    20. Dluhosch Barbara, 2010. "The Second-Mover Advantage in International Trade Negotiations," Global Economy Journal, De Gruyter, vol. 10(1), pages 1-37, February.
    21. Mazhikeyev, Arman & Edwards, T. Huw & Rizov, Marian, 2015. "Openness and isolation: The trade performance of the former Soviet Central Asian countries," International Business Review, Elsevier, vol. 24(6), pages 935-947.

    More about this item

    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

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