The Fourth European Research Workshop in International Trade (ERWIT) was held in Thessaloniki during 6-11 September. The programme was organized by Richard Baldwin (Graduate Institute for International Studies and CEPR) and Konstantine Gatsios (Athens University of Economics & Business and CEPR and received financial support from the European Commission under the Euroconference component of its Human Capital and Mobility programme. Additional support was provided by the Ministry and the Bank of Macedonia and Thrace.
Larry Karp (University of California, Berkeley and CEPR) presented `International Trade in Exhaustible Resources: A Cartel Competitive Fringe Model' written with Olli Tahvonen. The paper uses a model that characterizes the open loop and the Markov perfect Stackelberg equilibria for a differential game in which a cartel and a fringe extract a non-renewable resource. Both agents have stock dependent costs. The comparison of initial market shares, across different equilibria, depends on which firm has the cost advantage. The cartel's steady state market share is larger in the open loop equilibrium and smallest in the competitive equilibrium. The initial price may be larger in the initial equilibria, so a decrease in market power may make the equilibrium appear less competitive. The benefit to cartelization increases with market share. Peter Neary (University College Dublin and CEPR) pointed out that in the analysis parallels a (Stackelberg) differential game between a small and a large firm. Alistar Smith (University of Sussex and CEPR) noted that an underlying assumption of this framework is that the cartel acts cohesively, not allowing for deviations in the behaviour of its members. Ulrich Kohli (University of Geneva) inquired whether it is always beneficial for a firm to be a member of the cartel. Such would be the case under an open loop equilibrium, but it may not be so under alternative specification (e.g., a competitive equilibrium).
Célia Costa Cabral (Universidade Nova de Lisboa), Praveen Kujal and Emman Petrakis (Universidad Carlos III) presented their paper on `Incentives for Cost Reducing Innovations Under Import Restraints'. They use a two-stage Bertrand duopoly game, where R&D spending is decided in the first stage and prices in the second stage of the game, to analyze how firms to invest in R&D when an import quota is imposed on the foreign firm. It is shown that with the imposition with an import quota the domestic firm will face less competition that under free trade and will choose to invest less in R&D while the foreign firm chooses to invest more. It is also shown that as the quota becomes more restrictive the domestic firm increases and the foreign firm decreases its expenditure on R&D. These results differ from the Cournot duopoly case as studied by Rietzes (1993) in which incentives for innovation decrease for both the foreign and the domestic firm with the introduction of a quota. There is a unique mixed strategies equilibrium under price competition and with quotas. Hylke Vandenbussche (University of Cambridge) inquired about the implications of the model when import tariffs, instead of quantitative restraints, are imposed. Jean Marie Viane (Erasmus University, Rotterdam) discussed the empirical evidence of R&D slipovers. Peter Neary pointed out that the whole analysis is an argument more suitable for exploiting strategic advantages rather than a welfare argument for protection.
In many European countries public opinion seems to be worried about the effect of the delocation of production plants towards countries where workers' protection does not meet home standards and labour costs are thus significantly lower. This phenomenon is often labelled as `social dumping'. Tito Cordella (International Monetary Fund) and Isabel Grilo (CORE, Louvain-La-Neuve) presented the paper `Social Dumping and Delocalization: is there a case for imposing a social clause?' which investigates the negative effects of social dumping on unemployment, European labour unions propose the adoption of a `social clause' in international trade agreements. This clause could be thought as the imposition of a minimal wage that the domestic firm has to pay the foreign workers if it decides to serve the domestic market via foreign plants. Using a model of Bertrand duopoly with vertically differentiated products, it is shown that -although a social clause policy cannot be discussed on welfare grounds- the absence of such a social clause is more likely to be optimal for low-wage countries. Massimo Motta (Universitat Pompeu Fabra) noted that the paper considers an industry with two domestic firms producing a vertically differentiated product sold only in the domestic market. Raquel Fernandez (New York University) asked how the results would differ in the presence of a third foreign firm.
In his paper `The Location Dynamics of Protection' Gianmarco Ottaviano (Università di Bologna) studies the effects of unilateral protection when production exhibits increasing returns to scale and international trade mobility can lead to agglomeration. Using a forward model of forward looking location decisions it shows how unilateral protection affects the transitional dynamics, the number and the stability of stationary states. Although the dynamics of the model are highly non-linear, considerable insight can be gained through geometrical perturbation techniques. The main finding is that when returns to scale are weak, unilateral protection will attract firms. On the contrary, when returns to scale are strong, unilateral protection will have `perverse' effects on the location of firms that, facing higher costs of local inputs, will be forced to leave the unilaterally protected country.
Giorgia Giovannetti presented the paper `Hysteresis in Exports' written with Hossein Samiei. An econometric model of export determination is developed where the presence of sunk costs causes discontinuous behaviour and hysteresis so that individual exporter's decision to stay in or out of the market depends on the current value of the exchange rate as well as on its past history. The aggregate level of exports is then determined by the proportion of exporters that stay in the market. The resulting non-linear model is estimated using data on manufacturing exports of the United States, Germany and Japan. The paper finds strong evidence in favour of the presence of pricing-to-market and hysteresis only in the case of Japanese exports. Larry Karp asked how the results would differ if the formation of exchange rate expectations were taken into account, or scale variables (e.g., GNP, stock of capital, etc.) were included into the benchmark model (a structural supply of and demand for exports model).
In her paper `Twin Cases. Cartels and European Antidumping Policy' Hylke Vandenbussche develops a partial equilibrium model to analyze the effects of European antidumping policy in the case of a European monopoly and a foreign entrant. Recently, it has been suggested that there is a link between a poorly functioning competition policy and the filing of an antidumping complaint (Messerlin, 1990). The assumptions of the model are embedded in the institutional and legal framework. The results suggest that irrespective of European market structure, antidumping measures are an effective tool to deter the foreign firm from engaging in predatory dumping. Instead, the foreign entrant will break the domestic monopoly and lead to an increase in welfare. However, the failure of the European Commission to analyze market structure can lead to an antidumping complaint being filed even in the absence of predation. When rents in the industry are sufficiently high, an antidumping duty will be used as an instrument of strategic trade policy in order to increase European welfare at the expense of foreign profits. From a policy point of view, the results of the model discourage the use of price-undertakings as antidumping measures, because they result in an international cartel in the European market. Larry Karp inquired about the European Commission's actual policy towards price-undertakings. Other inquiries were made regarding the robustness of the results in cases of alternative structural specifications of the model e.g., asymmetric (marginal) costs between the European monopoly and the foreign entrant or endogenous prices in foreign markets.
Praveen Kujal (Universidad Carlos III) and Emman Petrakis (Universidad Carlos III) presented `Endogenous Quality, Market Power and `Leapfrogging' Provoking Trade Policies', written with I Herguera. This paper shows that in a vertically differentiated industry with one domestic and one foreign firm the imposition of sufficiently binding quota (or tariff) on the foreign firm can completely alter the quality configuration in the market. When the firms choose either qualities and then compete in quantities, the imposition of the quantity restraint (or tariff) provides an incentive to one, or both, firm(s) to leapfrog its rival. The firms by strategically changing their qualities can make the quotas, or tariffs, less binding on the foreign firm. The paper examines the levels of quotas and tariffs that generate such a response from the firms. Further, it defines the new equilibrium where the positioning on the quality ladder are reversed. It is shown that such a response is observed, for quotas, only for the case where under free trade the domestic firm produces the low quality and the domestic firm the high quality good. Leapfrogging can also be an outcome of government policies such as subsidies on quality, or two dimensional policies involving a mixture of quotas and quality subsidies. The discussion that followed, focused on the relevance of such results for the U.S.-Japan trade relations, and specifically, how restrictive quotas by the U.S. have affected the quality of U.S. products vis a vis Japanese substitutes.
Diego Puga (London School of Economics) presented `Preferential Trading Agreement and Industrial Location' written with Anthony Venables. This paper considers the location effects of geographically-discriminatory trade policy. A preferential move towards a customs union attracts industry to the integrating countries. When internal barriers fall below some critical level, input-output links between imperfectly competitive firms lead some customs union countries to gain industry at the expense of others. Closer integration can bring converging industrial development to the union. A hub-and-spoke arrangement favours location in the hub, with better reciprocal access to spoke nations than to each other. Further liberalization induces agglomeration in the hub and may trigger disparities between the spoke. A general discussion followed regarding the implications of certain analytical modifications of the presented framework, e.g., mobile vs. immobile labour, adjustments in costs.
Raquel Fernandez presented a paper on `Sovereign Debt Buybacks'. Daniel Seidmann (Newcastle University) and Eyal Winter (Hebrew University, Jerusalem) presented their paper on `The Endogenous Growth of Customs Unions'
Jean-Marie Viane (Erasmus University) presented `Preferences, Country Bias and International Trade' written with Santanu Roy (Erasmus University). The paper analyzes international trade in a Ricardian world where consumer preferences exhibit a country bias. In particular, consumers differentiate among identical physical goods by country of manufacture. Unlike the classical Ricardian model, the pattern of international specialization in production depends on the preference structure. Possible equilibrium configurations include ones where both countries specialize incompletely and trade in both commodities, as well as situations where specialization is complete, but exactly the reverse of that in the classical Ricardian world. Both inter-industry and intra-industry trade can occur and in fact, may occur simultaneously though there is no market imperfection. Ulrich Kohli suggested that the analysis should also be applied to a trade model with a `richer' structure, e.g., Hecksher-Ohlin, and that testable hypotheses should be constructed to derive empirical results.
In their paper `Country Asymmetries, Endogenous Product Choice and the Speed of Trade Liberalization' Antonio Cabrales (University College London) and Massimo Motta analyze the effects of trade liberalization on firms' decisions and profits, and on consumer's welfare, in a product differentiation model with countries which have different size. Firms decide product specifications at the beginning of the game, in which autarky is followed by trade liberalization (whose date is anticipated). Despite the heterogeneity, the earlier trade opens the higher the total welfare for both countries. However, the impact on firm's profits can differ. Small country's firms benefit form larger market size but are disadvantaged when the scale of the home market affects the product choice decision. The opposite is true for the firm located in the large country. David Collie (Cardiff Business School) pointed out that transportation costs and tariffs could have similar effects in delaying trade liberalization.