Abstract
This paper aims at improving our understanding of the price effects of trade policies following two perspectives. First, we wish to study how the role of intermediaries in international trade affects the transmission of tariff changes to domestic prices. Second, we explore how our results are influenced by the degree of competition in the distribution-service market. In a Cournot oligopoly-oligopsony model, we show how the pass-through of tariff cuts to domestic prices is limited by the market power of intermediaries producing distribution services. Our long-run equilibrium is characterized by a larger number of firms selling at a higher mark-up. Market access barriers in distribution services determine to what extent tariff cuts are transferred to domestic consumers and foreign producers, affecting the size of their welfare effects. The benefits of trade liberalization policies can be better achieved if they are complemented by competition enhancing measures in the intermediation sector.
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Notes
Feenstra (1989) shows the equivalence between the domestic price effects of tariff and exchange rate changes. Empirical research has focused mainly on exchange rates, also because tariff changes are relatively less frequent and their specific impact is more difficult to detect in the data (Ianchovichina et al. 2000).
We assume that \( \overset{\sim }{\mathrm{c}} \)< λ, which is a necessary condition for production to be profitable.
These theoretical conclusions reveal a close analogy with the empirical results reached by Frankel et al. (2005), who show that the exchange rate pass-through decreases along the value processing chain.
Our model could easily be extended to the case in which intermediaries are located in both countries, as well as to a more general scenario, in which they are located in two different countries, separated by trade barriers in distribution services, and import an input produced in a third country.
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Iapadre, P.L., Pace, G. Trade Intermediaries and the Tariff Pass-through. J Ind Compet Trade 16, 441–454 (2016). https://doi.org/10.1007/s10842-016-0228-x
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DOI: https://doi.org/10.1007/s10842-016-0228-x