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Journal of Economic Integration 2003 June;18(2) :372-390.
Subcontracting and International Trade Policy

Wen-Jung Liang Ho-Chyuan Chen Mau-Shan Shi 

Tamkang University
National Kaohsiung First University of Science & Technology
Institute of Economics, Academia Sinica.
Copyright ©2003 Journal of Economic Integration
This paper examines the optimal trade policies when international subcontracting occurs between two competing firms. It shows that if the strategic substitutes effect dominates the cost saving transfer effect, then the exporting country will impose a different policy on each export. In contrast, if the cost saving transfer effect dominates the strategic substitutes effect, then the exporting country will impose a tax policy on both exports. However, there has never existed an optimal policy to subsidize the export of both the subcontracted product and final product. Even though the exporting firm assumes away its export of the final good, to subsidize the export of the subcontracted good is not necessarily an optimal policy for the exporting country. For the importing country, if the price elasticity of demand is sufficiently small and the marketing cost of the final product is large enough, then it is optimal to set a negative tariff. JEL Classifications: F13, L13
Keywords: I
1. Brander, J.A., and B.J. Spencer, 1984b, "Tariff Protection and Imperfect Competition," in Henry Kierzkowski, ed., Monopolistic Competition and International Trade (Oxford University Press, Oxford).
2. Brander, J.A., and B.J. Spencer, 1985, "Export Subsidies and International Market Share Rivalry," Journal of International Economics 18, 83-100.
3. Bulow, J.I., Geanakoplos, J.D., and P.D., Klemperer, 1985, "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy 93, 488-511.
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