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Trade Agreements with Cross-Border Unbundling

In: Globalization and Welfare Impacts of International Trade

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  • Ayako Obashi

Abstract

Does cross-border unbundling of production process introduce a new reason for trade policy intervention and change the role of trade agreements? This paper revisits the purpose and design of trade agreements in a theoretical framework that considers the firm’s global production operations with cross-border sourcing of intermediate inputs subject to trade costs, inclusive of trade policy interventions by governments. The paper highlights an interrelationship among market-clearing prices of final goods and the associated domestic and imported intermediate inputs due to their dependence on trade policies through production linkage, which gives a novel feature to the purpose and design of trade agreements beyond the conventional market-access argument associated with the terms-of-trade theory. Specifically, local price externality arises in the sense that a government uses a combination of trade policies to manipulate the local price for domestically-sourced intermediate inputs in the trading partner country. To achieve globally efficient outcomes through trade agreements, we propose to specify market access using the trade-weighted version of terms of trade so that governments effectively coordinate in changing value-added created from trade within the production chain in a reciprocal manner.
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Suggested Citation

  • Ayako Obashi, 2018. "Trade Agreements with Cross-Border Unbundling," NBER Chapters, in: Globalization and Welfare Impacts of International Trade, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:14330
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    1. Giancarlo Corsetti & Meredith Crowley & Lu Han & Huasheng Song, 2018. "Markets and Markups: A New Empirical Framework and Evidence on Exporters from China," Discussion Papers 1803, Centre for Macroeconomics (CFM).
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    11. Bagwell, Kyle & Staiger, Robert W., 2001. "Reciprocity, non-discrimination and preferential agreements in the multilateral trading system," European Journal of Political Economy, Elsevier, vol. 17(2), pages 281-325, June.
    12. Kyle Bagwell & Robert W. Staiger, 2016. "The Design of Trade Agreements," NBER Working Papers 22087, National Bureau of Economic Research, Inc.
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