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Trade warfare and sanctions in vertically related markets

Fang-Yueh Chen

Economic Modelling, 2023, vol. 121, issue C

Abstract: We examine how a tariff on imported final goods can increase the profit of a domestic upstream firm in the international input market. In vertically related markets without an input export restraint (IER), the tariff shrinks the total derived demand for inputs, and the existing literature predicts a negative relationship between the input price and tariff rate. In contrast to the literature, with IER, we show that the tariff rate is positively related to the input price and helps increase the profits of domestic upstream and downstream firms. To manipulate the trade warfare, we prove that the foreign input supplier has less incentive to raise the R&D level, but the domestic input producer has more incentive to raise the R&D level. The IER measure decreases the welfare of the home country and under some circumstances, it only improves the welfare of the rival country.

Keywords: Vertically integrated firm; Input export restraints; R&D; Strategic trade policy; Vertically related markets (search for similar items in EconPapers)
JEL-codes: F12 F13 L13 O31 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1016/j.econmod.2023.106205

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