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Vertical Specialization, Tariff Shirking, and Trade

Author

Listed:
  • Ma, Alyson C.

    () (University of San Diego)

  • Van Assche, Ari

    () (HEC Montréal; CIRANO; Institute for Research on Public Policy)

Abstract

The core idea behind the paper is that trade policy matters for the organization of global value chains, a notion largely neglected by economists but which has important implications for our understanding of trade and the international transmission of trade policy shocks. We develop a theoretical model in which a firm’s ability to spatially separate manufacturing from headquarter services gives them the flexibility to circumvent economy-specific tariff changes by switching their assembly location abroad. We show that tariff shirking increases the elasticity of bilateral trade to economy-specific tariff hikes due to an extra extensive margin effect. Furthermore, we show that tariff shirking affects the vulnerability of headquarter services and manufacturing to trade policy shocks in opposite ways. While tariff shirking dampens the vulnerability of headquarter services to trade policy shocks, it amplifies the vulnerability of manufacturing to trade policy shocks. Using firm-level and province-level export data from the People’s Republic of China, we provide evidence in line with the theoretical model.

Suggested Citation

  • Ma, Alyson C. & Van Assche, Ari, 2014. "Vertical Specialization, Tariff Shirking, and Trade," ADB Economics Working Paper Series 390, Asian Development Bank.
  • Handle: RePEc:ris:adbewp:0390
    as

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    References listed on IDEAS

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    1. repec:eee:chieco:v:46:y:2017:i:c:p:87-96 is not listed on IDEAS
    2. Pyrgou, Andri & Kylili, Angeliki & Fokaides, Paris A., 2016. "The future of the Feed-in Tariff (FiT) scheme in Europe: The case of photovoltaics," Energy Policy, Elsevier, vol. 95(C), pages 94-102.

    More about this item

    Keywords

    vertical specialization; extensive margin; antidumping; tariff shirking; People’s Republic of China;

    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
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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