Mandatory Labelling or Import Ban?: Two-Country Trade with Biotechnology Products

This paper examines trade and welfare effects of biotechnology. While biotechnology lowers production costs, it also lowers perceived quality of products. Without labelling, consumers cannot distinguish between biotechnology and conventional products. In a simple general equilibrium model of two-country trade, it is shown that when a biotechnology product is invented in one country, the importing country may lose from trade under free trade without labelling. The importing country can be better off by requiring labelling for the biotechnology product. If labelling cost is high, however, the importing country may prefer to ban the import of the biotechnology product.biotechnology, genetically modified organisms, mandatory labelling, import ban, credence goods

Strategic Use of Recycled Content Standards under International Duopoly

We examine the strategic use of recycled content standards (RCSs) under international duopoly. RCSs require firms supplying the domestic market to use a certain proportion of recycled materials as inputs. We demonstrate that, when there is no trade in recycled materials, two identical countries both set strategically stricter or more lax RCSs. However, when there is trade in recycled materials, it may be the case that one country sets a stricter RCS while the other sets a more lax RCS. When a world supply constraint on recycled materials is not binding, the main source of the asymmetric distortion in RCSs is a demand effect for recycled materials.recycling, recycled content standard, international trade, strategic trade policy

Optimal Policy for Product R&D with Endogenous Quality Ordering: Asymmetric Duopoly

We examine the optimal R&D subsidy/tax policy under a vertically differentiated duopoly. In a significant departure from the existing work, we consider the case of asymmetric costs of product R&D where there is a small technology gap between firms. In our analysis, the endogeneity of quality ordering is explicitly taken into account. We show that the optimal policy is described by a firm-specific subsidy schedule that is contingent on firms' quality choices. The subsidy schedule not only corrects the distortion in product quality but also selects the socially preferred equilibrium. Both Bertrand and Cournot cases are analyzed.asymmetric duopoly, endogenous quality ordering, product R&D, R&D policy, vertical product differentiation

An Economic Theory of the SPS Agreement

Sanitary and phytosanitary (SPS) measures are important policy instruments to regulate food safety and to protect the domestic ecosystem from biological invasions. However, these measures may also be used to protect domestic producers from international competition. The World Trade Organization's (WTO) Agreement on the Application of Sanitary and Phytosanitary Measures (the SPS Agreement) was established in 1995 to prevent member countries from using SPS measures discretionarily and arbitrarily. Whereas the SPS Agreement is mainly based on the risk analysis approach, economists have criticized it for its lacking economic considerations in regulating SPS measures. Despite these criticisms, I show that the SPS Agreement would contribute to establishing economically sound discipline for SPS measures by reducing the scope of the use of SPS measures for disguised protectionist purposes. However, it is not entirely free from protectionist use of SPS measures. Potential problems also arise from scientific uncertainty.

Illegal Extractions of Renewable Resources and International Trade with Costly Enforcement of Property Rights

Illegal extractions of renewable resources threaten sustainable use of those resources. The world community has recently paid increasing attention to the issue of illegal logging. This paper tries to explain why it is important to exclude illegally logged timber from the international market by using a stylized model in the literature of trade and renewable resources. It is shown that a fall in the price of timber may cause a switch of management regime from enforced property rights to open-access, expanding the supply of timber and reducing forest stock. When several countries export timber, an increase in illegal logging in one country due to a regime switch may also increase illegal logging in other countries. While conflicting with the GATT/WTO rules for reasons of discrimination by process and production methods (PPMs), import restrictions only on illegally logged timber will be effective to prevent the international diffusion of illegal logging.

Subsidies, Fisheries Management, and International Trade

The WTO members are conducting negotiations to clarify and improve disciplines on fisheries subsidies at the Doha Round. In this paper, I investigate how worldwide subsidy reform in the fisheries sector could affect fisheries output and resource stocks in a trading equilibrium. Using a simple static model of variable labor supply, I demonstrate that the effects of a reduction in subsidies on fisheries output will differ, depending on the conditions of the economy and fisheries management in different countries. A possible outcome of a reduction in non-capacity-enhancing subsidies is that fisheries output will rise in countries where catch quotas are not enforced and remain the same in countries where catch quotas are strictly enforced, expanding the total supply of fisheries products and reducing world fisheries resource stocks. Thus, this paper suggests that reducing some types of fisheries subsidies may yield unexpected and undesirable outcomes if fisheries resources are not properly managed.

Why do people oppose foreign acquisitions? Evidence from Japanese individual-level data

This study empirically examines the determinants of individuals’ attitudes about inward foreign direct investment (FDI) using responses from questionnaire surveys that were originally designed. Individuals’ preferences for inward FDI differ between greenfield investments and mergers and acquisitions (M&A), and people are more likely to have a negative attitude toward M&A than greenfield investments. People with a negative image of the so-called “vulture fund” for foreign capital tend to oppose inward FDI, and this is more pronounced for M&A than greenfield investments. Moreover, loss aversion and high time preference rates are strongly related to opposition to inward FDI, and people with such behavioral biases tend to refuse indigenous firms to be acquired by foreign capital, even if they agree to accept greenfield investment. These results indicate that people's preferences for inward FDI depend more on non-economic attributes than economic attributes. Our results also suggest that a lack of economic literacy is associated with unconscious biases against accepting inward FDI

Deep Integration, Global Firms, and Technology Spillovers

This open access book explores the impact of deep regional economic integration on spillovers of knowledge and technology across countries. Deep integration through signing deep regional trade agreements (DRTAs), which cover various policy areas in addition to tariff reductions, may or may not facilitate technology spillovers among their signatories. To understand the mechanism of the impact of deep integration on technology spillovers, this book starts by analyzing the behavior of global firms. Factors that affect global firms’ activities, such as export, foreign direct investment (FDI), offshore outsourcing, are examined. Micro data on Japanese firms are employed for the analysis. Then, the relationships between bilateral trade patterns and technology spillovers and between types of FDI and technology spillovers are investigated in detail. Patent citation data are used to measure technology spillovers. Finally, the impact of DRTAs on international technology spillovers is analyzed. This book is highly recommended to readers who are interested in the effects of deep regional integration, including academic scholars, policymakers, and graduate students

Does the Structure of Multinational Enterprises' Activity Affect Technology Spillovers?

We examine how the structure of multinational enterprises' (MNEs') activity affects technology spillovers between MNEs and their host economies by using firm-level data of Japanese MNEs and patent citations data. We construct new measures of foreign direct investment (FDI) by exploiting information on sales and purchases of foreign affiliates of MNEs. Pure horizontal (vertical) FDI is defined as FDI with a high share of transactions (i.e., both purchases of inputs and sales of outputs) in the local market (with the home country). Partially horizontal and vertical FDI are also defined. We then estimate the effects of these types of FDI on technology spillovers captured by patent citations. Our findings reveal that when developed economies host Japanese MNEs, pure vertical FDI has significantly positive effects on technology spillovers in both directions. When developing economies host Japanese MNEs, by contrast, no form of FDI significantly facilitates technology spillovers in either direction.

Does Tobin's q Matter for Firms' Choices of Globalization Mode?

In this paper, we investigate empirically how firms' choices of globalization mode differ according to their productivity and Tobin's q using firm-level data of Japanese firms. Our findings support predictions by Helpman, Melitz, and Yeaple (2004) and by Chen, Horstmann, and Markusen (2008). That is, we find that firms with higher productivity tend to choose more foreign direct investment (FDI) and less exporting. We also find that firms with higher Tobin's q tend to choose more FDI and less foreign outsourcing of production. The difference in productivity is relatively less important for the choice between FDI and foreign outsourcing, and the difference in Tobin's q is relatively less important for the choice between exporting and FDI. Because the indexes of globalization activities have a strong negatively skewed distribution, our results indicate that quantile regression would be appropriate to analyze the relationship between firm characteristics and choice of globalization mode.