Abstract
This chapter examines the effects of the cost asymmetry of final goods production and the cost difference in intermediate goods production on the import tariffs on both goods imposed by two countries’ governments in a model with vertically related markets characterized by Cournot duopolies. It is shown that the country with the highest-cost final (intermediate) goods firm may levy the lowest import tariff on the final (intermediate) goods.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
- 2.
- 3.
Kawabata (2012) examined how the conventional result in de Meza (1986) and Neary (1994) changes in a model of vertically related markets characterized by Cournot competition and showed that the country where the sums of the costs of final goods production and intermediate goods production are the lowest provides the largest production subsidies to the final goods and the intermediate goods.
- 4.
- 5.
The markets in the two countries are assumed to be segmented.
- 6.
This setting implies that downstream firms have no market power as buyers of the intermediate goods even though they have market power as sellers of the final goods. This setting is often adopted in the literature on vertical trade (e.g., Bernhofen, 1995, 1997; Ishikawa and Lee 1997; Ishikawa and Spencer, 1999; Hwang et al., 2007; Kawabata, 2010). In particular, Ishikawa and Spencer (1999) discussed the justification for this setting in detail.
- 7.
We can also assume that one unit of the intermediate goods together with one unit of a second input is required to produce one unit of the final goods and that, in the home (foreign) country, the second input is supplied to the downstream firm at an exogenously given price c 1 (c 2).
- 8.
In the subsequent analysis, we assume that all upstream and downstream firms sell positive quantities in the home and foreign markets (i.e., x ij  > 0 and y ij  > 0, i, j = 1, 2).
- 9.
In this subsection, we assume that the import tariff on the intermediate goods is zero (i.e., t 1 = t 2 = 0).
- 10.
From \(\partial \pi _{1i}^{U}\left /\right. \partial T_{i} + \partial \pi _{2i}^{U}\left /\right. \partial T_{i} = -x_{ji}\left /\right. 3 <0\), the negative effect of the home downstream tariff T 1 on the export profits of the home upstream firm outweighs the positive effect on its local profits; consequently, an increase in T 1 reduces the home upstream firm’s profits.
- 11.
In this subsection, we assume that the import tariff on the final goods is zero (i.e., T 1 = T 2 = 0).
- 12.
From \(\partial \pi _{1i}^{U}\left /\right. \partial t_{i} + \partial \pi _{2i}^{U}\left /\right. \partial t_{i} = 2x_{ii}\left /\right. 3> 0\), the positive effect of the home upstream tariff t 1 on the local profits of the home upstream firm outweighs the negative effect on its export profits; therefore, an increase in t 1 increases the home upstream firm’s profits.
- 13.
The Nash equilibrium import tariff on the intermediate goods can be negative (an import subsidy) for one of the two countries.
References
Bandyopadhyay, S. 1997. Demand elasticities, asymmetry and strategic trade policy. Journal of International Economics 42: 167–177.
Bernhofen, D.M. 1995. Price dumping in the intermediate good markets. Journal of International Economics 39: 159–173.
Bernhofen, D.M. 1997. Strategic trade policy in a vertically related industry. Review of International Economics 5: 429–433.
Brander, J.A., and B.J. Spencer. 1984. Tariff protection and imperfect competition. In Monopolistic competition and international trade, ed. H. Kierzkowski, 194–206. Oxford: Clarendon Press.
Brander, J.A., and B.J. Spencer. 1985. Export subsidies and international market share rivalry. Journal of International Economics 18: 83–100.
Chang, W.W., and H. Sugeta. 2004. Conjectural variations, market power, and optimal trade policy in a vertically related industry. Review of International Economics 12: 12–26.
Clarke, R., and D.R. Collie. 2006. Export taxes under Bertrand duopoly. Economics Bulletin 6: 1–8.
Collie, D.R. 1991. Export subsidies and countervailing tariffs. Journal of International Economics 31: 309–324.
Collie, D.R. 1994. Endogenous timing in trade policy games: Should governments use countervailing duties? Weltwirschaftliches Archiv 130: 191–209.
de Meza, D. 1986. Export subsidies and high productivity: Cause or effect? Canadian Journal of Economics 19: 347–350.
Eaton, J., and G.M. Grossman. 1986. Optimal trade and industrial policy under oligopoly. Quarterly Journal of Economics 101: 383–406.
Escaith, H., and S. Inomata (eds.). 2011. Trade patterns and global value chains in East Asia: From trade in goods to trade in tasks. Geneva: IDE-JETRO and World Trade Organization.
Hwang, H., Y.-S. Lin, and Y.-P. Yang. 2007. Optimal trade policies and production technology in vertically related markets. Review of International Economics 15: 823–835.
Ishikawa, J., and K.-D. Lee. 1997. Backfiring tariffs in vertically related markets. Journal of International Economics 42: 395–423.
Ishikawa, J., and B.J. Spencer. 1999. Rent-shifting export subsidies with an imported intermediate product. Journal of International Economics 48: 199–232.
Kawabata, Y. 2010. Strategic export policy in vertically related markets. Bulletin of Economic Research 62: 109–131.
Kawabata, Y. 2012. Cost asymmetries and industrial policy in vertically related markets. The Manchester School 80: 633–649.
Neary, J.P. 1994. Cost asymmetries in international subsidy games: Should governments help winners or losers? Journal of International Economics 37: 197–218.
Acknowledgements
This work has been financially supported by a Grant-in-Aid for Scientific Research (B) (No. 25285079).
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Appendix
Appendix
1.1 Cournot Duopoly Model Without an Intermediate Goods Sector
Consider a Cournot duopoly model without an intermediate goods sector. The profits of home and foreign firms are given by \(\pi _{i} = \left (p_{i} - c_{i}\right )y_{ii} + \left (p_{j} - c_{i} - T_{j}\right )y_{ji}\) (i, j = 1, 2, i ≠j), where c 1 and c 2 are home and foreign firms’ marginal costs, respectively. The welfare of each country is given by the sum of the firm’s profits, consumer surplus, and tariff revenue: W i  = π i + CS i + TR i (i = 1, 2), where TR i  ≡ T i y ij .
The equilibrium values in the Cournot duopoly case without a vertical industry structure are given by
When home and foreign governments simultaneously and independently choose their import tariffs to maximize national welfare, the Nash equilibrium import tariffs are
Comparing the Nash equilibrium import tariffs of the two countries yields
If the home firm has the highest costs, c 1 > c 2, then the home country will impose the highest tariff, T 1 > T 2. This leads to the following proposition.
Proposition A9.1
The country with the highest-cost firm imposes the largest import tariff.
Rights and permissions
Copyright information
© 2016 Springer Japan
About this chapter
Cite this chapter
Kawabata, Y. (2016). Cost Asymmetries and Import Tariff Policy in a Vertically Related Industry. In: Ohkawa, T., Tawada, M., Okamura, M., Nomura, R. (eds) Regional Free Trade Areas and Strategic Trade Policies. New Frontiers in Regional Science: Asian Perspectives, vol 10. Springer, Tokyo. https://doi.org/10.1007/978-4-431-55621-3_9
Download citation
DOI: https://doi.org/10.1007/978-4-431-55621-3_9
Published:
Publisher Name: Springer, Tokyo
Print ISBN: 978-4-431-55620-6
Online ISBN: 978-4-431-55621-3
eBook Packages: Economics and FinanceEconomics and Finance (R0)