Technical Papers (17)

Alternative Approaches to Measuring the Cost of Protection

Read paper (Prepared for presentation at the invited AEA session "Feuds over Free Trade," Jan 6, 2002.) I make two broad points in the paper. First, the view that traditional models based on increasing opportunity costs imply low costs of protection has resulted from estimates derived for cases with low levels of protection. If the level of protection itself is high, traditional models can readily lead to costs ranging from 5 to 10 percent of the GDP. The cost of autarky can be even higher. Second, low protection can also lead to high costs provided we allow for economies of scale in production, fixed costs of entering a market, directly unproductive profit-seeking (DUP) activities or X-efficiency. I also provide a summary of the literature on the relationship between openness on the one hand and growth and productivity on the other.

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Injury Investigations in Anti-dumping and the Super-Additivity Effect: A Theoretical Explanation

Read paper (Unpublished) (with Poonam Gupta). The empirical literature on anti-dumping shows that ceteris paribus the probability of a positive finding in injury investigations is higher when defendants are many and small than when they are few and large. Stated precisely, holding the market share of defendant firms constant, “cumulation,” defined as the practice of aggregating over the exports of several countries, has a positive effect on the probability of an affirmative injury determination. In this paper, we offer a theoretical explanation of this finding. We show that the presence of many small exporters exacerbates the free-rider problem that accompanies multiple defendants. Unlike the dumping margin, which must be determined separately for each defendant firm, the injury determination is common to all defendant firms: either all defendants are found guilty of causing injury to the domestic firm or all are acquitted. To the extent that defense may be costly, this fact inevitably gives rise to a free-rider problem.

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The “Gains” from Preferential Trade Liberalization in the CGE Models: Where do they Come From?

Read paper (Published in Sajal Lahiri, Regionalism and Globalization, London and New York: Routledge, chapter 3) (with Rupa Duttagupta). In a series of papers, Bhagwati and Panagariya (1996), Bhagwati, Greenaway and Panagariya (1998) and Panagariya (1996, 1997a, 1998) have argued forcefully that a tariff preference by a country is likely to hurt itself and benefit its union partner. On the other hand, Robinson and Thierfelder (1999) argue, “The results from a large number of model-based empirical studies strongly support a few robust conclusions about RTAs [Regional Trade Agreements]: (1) they increase welfare of participating countries; (2) aggregate trade creation is much larger than aggregate trade diversion…” In this paper, we subject the CGE models, based on conventional theory, to a critical examination. We argue that when these models generate benefits to a country from its own preferential liberalization, they do so by recourse to models characterized by internally inconsistent assumptions. And even within the wrong model structure, the gains are generated by choosing questionable values of some key parameters.

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On Necessarily Welfare-Enhancing Free Trade Areas

Read paper (JIE 57(2), August 2002, 353-367) (With Pravin Krishna) The well-known Kemp-Vanek-Ohyama-Wan proposition establishes that if two or more countries form a customs union (CU) by freezing their net external trade vector through a common external tariff and eliminating internal trade barriers, the union as a whole and the rest of the world cannot be worse off than before. Owing to the fact that a Free Trade Area (whose member countries impose country specific external tariff vectors) does not equalize marginal rates of substitution across its member countries (in contrast to a CU), the literature has been unable to provide a parallel demonstration regarding welfare improving Free Trade Areas (FTAs). The present paper eliminates this gap. In extending the result to the case with intermediate inputs, the paper also sheds new light on the rules of origin required to support such necessarily welfare enhancing FTAs. We show here that provided no trade deflection is permitted, all that is required by way of rules of origin is that the goods produced within the union —whether final or intermediate — be…

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Free Trade Areas and Rules of Origin: Economics and Politics

Read paper (with Rupa Duttagupta) We incorporate intermediate inputs into a small-union general-equilibrium model and develop the welfare economics of preferential trading under the rules of origin. Combining this analysis with the Grossman-Helpman political-economy model, we demonstrate that the rules of origin can improve the political viability of free trade areas (FTAs). Two interesting outcomes are derived. First, an FTA that lowered joint welfare of the union and was voted down in the absence of the rules of origin may become feasible in the presence of these rules. Second, an FTA that increased joint welfare of the union but was voted down in the absence of the rules of origin may become acceptable in the presence of these rules but it may also turn welfare inferior to status quo.

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