Vertical Specialization, Tariff Shirking and Trade

31 Pages Posted: 12 Aug 2014

See all articles by Alyson C. Ma

Alyson C. Ma

University of San Diego School of Business

Ari Van Assche

HEC Montreal; Center for Interuniversity Research and Analysis on Organization (CIRANO)

Date Written: February 2014

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

JEL Classification: F12, F13, F14

Suggested Citation

Ma, Alyson C. and Van Assche, Ari, Vertical Specialization, Tariff Shirking and Trade (February 2014). Asian Development Bank Economics Working Paper Series No. 390, Available at SSRN: https://ssrn.com/abstract=2479220 or http://dx.doi.org/10.2139/ssrn.2479220

Alyson C. Ma (Contact Author)

University of San Diego School of Business ( email )

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Ari Van Assche

HEC Montreal ( email )

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Montreal, Quebec H2X 2L3
Canada

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

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