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Subcontracting and International Trade Policy

Author

Listed:
  • Liang, Wen-Jung

    (Tamkang University)

  • Chen, Ho-Chyuan

    (National Kaohsiung First University of Science & Technology)

Abstract

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.

Suggested Citation

  • Liang, Wen-Jung & Chen, Ho-Chyuan, 2003. "Subcontracting and International Trade Policy," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 18, pages 372-390.
    • Handle: RePEc:ris:integr:0239
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    Cited by:

    1. Fang‐yueh Chen & Tsai‐chen Shen, 2010. "International Original Equipment Manufacturing And Original Design Manufacturing Contracts With Quality‐Differentiated Products," Pacific Economic Review, Wiley Blackwell, vol. 15(3), pages 305-323, August.

    More about this item

    Keywords

    International subcontracting; Optimal trade policy; Nash bargaining;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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