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Protection and International Sourcing

Emanuel Ornelas and John Turner ()

No 8070, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the impact of import protection on relationship-specific investments, organizational choice and welfare. We show that a tariff on intermediate inputs can improve social welfare through mitigating hold-up problems. It does so if it discriminates in favor of the investing parties, which the tariff achieves by making trade with outsiders more costly. On the other hand, a tariff can prompt inefficient organizational choices if it discriminates in favor of less productive domestic suppliers or if integration costs are low. Protection distorts organizational choices because tariff revenue, which is external to the firms, drives a wedge between the private and social gains to offshoring and integration. Since contract incompleteness affects investment and production decisions differently depending on the organization form, the intensity of this externality varies with organization form. Hence, protection mitigates domestic hold-up problems but inefficiently curbs offshoring. This suggests a role for moderate protection of inputs trade for firms outsourcing domestically, if the protection is coupled with incentives for offshoring activities.

Keywords: hold-up problem; international trade; organizational form; sourcing; tariffs (search for similar items in EconPapers)
JEL-codes: D23 F13 L22 L23 (search for similar items in EconPapers)
Date: 2010-10
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Journal Article: Protection and International Sourcing (2012) Downloads
Working Paper: Protection and International Sourcing (2008) Downloads
Working Paper: Protection and international sourcing (2008) Downloads
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