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Protection and International Sourcing

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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.

Suggested Citation

  • Ornelas, Emanuel & ,, 2010. "Protection and International Sourcing," CEPR Discussion Papers 8070, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:8070
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    Cited by:

    1. Xin Du & Xiaoxia Shi, 2024. "Import competition and domestic vertical integration: Theory and Evidence from Chinese firms," Papers 2408.13706, arXiv.org.
    2. Pol Antràs & Robert W. Staiger, 2012. "Offshoring and the Role of Trade Agreements," American Economic Review, American Economic Association, vol. 102(7), pages 3140-3183, December.
    3. Maya Cohen-Meidan, "undated". "Vertical Integration and Trade Protection: The Case of Antidumping Duties," Discussion Papers 08-034, Stanford Institute for Economic Policy Research.
    4. Celik, Levent & Karabay, Bilgehan & McLaren, John, 2020. "Fast-track authority: A hold-up interpretation," Journal of International Economics, Elsevier, vol. 127(C).
    5. Ornelas, Emanuel & Turner, John L. & Bickwit, Grant, 2021. "Preferential trade agreements and global sourcing," Journal of International Economics, Elsevier, vol. 128(C).
    6. Ornelas, Emanuel & Turner, John L., 2024. "The costs and benefits of rules of origin in modern free trade agreements," Journal of International Economics, Elsevier, vol. 147(C).
    7. Conconi, Paola & Legros, Patrick & Newman, Andrew F., 2012. "Trade liberalization and organizational change," Journal of International Economics, Elsevier, vol. 86(2), pages 197-208.
    8. Yi Zhang & Hein Roelfsema, 2013. "Dual And Common Agency Issues In International Joint Ventures: Evidence From China," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 58(03), pages 1-25.
    9. Bown, Chad P. & Erbahar, Aksel & Zanardi, Maurizio, 2021. "Global value chains and the removal of trade protection," European Economic Review, Elsevier, vol. 140(C).
    10. Díez, Federico J., 2014. "The asymmetric effects of tariffs on intra-firm trade and offshoring decisions," Journal of International Economics, Elsevier, vol. 93(1), pages 76-91.
    11. Bosker, Maarten & Westbrock, Bastian, 2024. "The network origins of the gains from trade," Journal of Economic Theory, Elsevier, vol. 216(C).
    12. Kohler, Wilhelm & Smolka, Marcel, 2021. "Productivity and firm boundaries," European Economic Review, Elsevier, vol. 135(C).
    13. Ara, Tomohiro & Ghosh, Arghya, 2016. "Tariffs, vertical specialization and oligopoly," European Economic Review, Elsevier, vol. 82(C), pages 1-23.
    14. Fernandes, Ana P. & Tang, Heiwai, 2012. "Determinants of vertical integration in export processing: Theory and evidence from China," Journal of Development Economics, Elsevier, vol. 99(2), pages 396-414.
    15. Karabay, Bilgehan, 2022. "A new dimension in global value chains: Control vs. delegation in input procurement," Journal of International Economics, Elsevier, vol. 137(C).
    16. Antrà s, Pol & Chor, Davin, 2021. "Global Value Chains," CEPR Discussion Papers 15908, C.E.P.R. Discussion Papers.
    17. Fischer-Thöne, Christian & Egger, Hartmut, 2021. "Institutional Reform and Global Value Chains," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242442, Verein für Socialpolitik / German Economic Association.
    18. Liu, Qing & Qiu, Larry D. & Zhan, Chaoqun, 2019. "Trade liberalization and domestic vertical integration: Evidence from China," Journal of International Economics, Elsevier, vol. 121(C).
    19. Xie, Dan, 2023. "Tariff cost and cross-border M&A affiliate sales: Evidence from China," Journal of Asian Economics, Elsevier, vol. 87(C).
    20. Kanglin Chen & Xin Wang & Baozhuang Niu & Ying‐Ju Chen, 2022. "The impact of tariffs and price premiums of locally manufactured products on global manufacturers' sourcing strategies," Production and Operations Management, Production and Operations Management Society, vol. 31(9), pages 3474-3490, September.
    21. Friberg, R & Tinn, K, 2012. "Holdup and Comparative Advantage," Working Papers 12193, Imperial College, London, Imperial College Business School.
    22. Stefano Federico, 2010. "Outsourcing versus Integration at Home or Abroad," Temi di discussione (Economic working papers) 742, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    International trade; Tariffs; Hold-up problem; Sourcing; Organizational form;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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