Vertical Specialization, Tariff Shirking, and Trade

Alyson C. Ma () and Ari Van Assche ()
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Alyson C. Ma: University of San Diego
Ari Van Assche: HEC Montréal; CIRANO; Institute for Research on Public Policy

No 390, ADB Economics Working Paper Series from Asian Development Bank

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.

Keywords: vertical specialization; extensive margin; antidumping; tariff shirking; People’s Republic of China (search for similar items in EconPapers)
JEL-codes: F12 F13 F14 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2014-02-01
New Economics Papers: this item is included in nep-cna, nep-int and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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