Intra-Industry Trade, Intra-Industry Trade, Imperfect Competition, Imperfect Competition, Trade Integration and Trade Integration and Invasive Species Risk Invasive Species Risk

Anh T. TuAnh T. Tu and and John Beghin John Beghin

Iowa State UniversityIowa State University

IntroductionIntroduction

A new dimension in the trade and A new dimension in the trade and environment nexus.environment nexus.

Trade as a vector for invasive species (IS).Trade as a vector for invasive species (IS).

Many horror stories but limited formal Many horror stories but limited formal analysis.analysis.

Interest in the implications of trade Interest in the implications of trade integration for IS, especially in agricultural integration for IS, especially in agricultural trade.trade.

What this paper is What this paper is aboutabout Addresses the implications of trade integration Addresses the implications of trade integration

on IS in a second best setting.on IS in a second best setting.

Extends the analytical work on trade and IS Extends the analytical work on trade and IS (Costello & McAuland) in important ways.(Costello & McAuland) in important ways.

Provides some numerical illustrations of Provides some numerical illustrations of magnitudes at work on grain trade and IS risk magnitudes at work on grain trade and IS risk based on the CABI Compendium (ongoing).based on the CABI Compendium (ongoing).

Modeling two-way trade Modeling two-way trade for differentiated for differentiated

productsproducts

Modeling approachModeling approach A segmented-market model with differentiated A segmented-market model with differentiated

products, imperfect competition, and two-way products, imperfect competition, and two-way trade.trade.

Similar to the “reciprocal dumping” model with Similar to the “reciprocal dumping” model with differentiated goods and many distortions differentiated goods and many distortions added.added.

Key assumptions:Key assumptions:– 2 countries, each with one firm producing for 2 countries, each with one firm producing for

domestic and export markets.domestic and export markets.– Two markets are segmented.Two markets are segmented.– Home and Foreign goods are differentiated.Home and Foreign goods are differentiated.– Symmetrical setup for Home and Foreign.Symmetrical setup for Home and Foreign.– Governments intervene in markets.Governments intervene in markets.

Demand specificationDemand specification

Home demands for domestic good Home demands for domestic good xx & imports & imports

yy::

(Similar setup for Foreign demands x*, y*.)(Similar setup for Foreign demands x*, y*.)

( , ) and

( , ) .

x y x x x y

x y y y y x

x p p a b p kp

y p p a b p kp

Policy assumptionsPolicy assumptions

Home and Foreign governments impose ad Home and Foreign governments impose ad valorem import tariffs & production subsidies valorem import tariffs & production subsidies proportional to their firm’s unit cost.proportional to their firm’s unit cost.

These policies are exogenous to firms.These policies are exogenous to firms. Trade integration is modeled as a joint Trade integration is modeled as a joint

reduction of tariffs and domestic subsidies.reduction of tariffs and domestic subsidies.

Two firms make price Two firms make price discrimination between domestic discrimination between domestic

and export marketsand export markets

Each firm maximizes total profit in the Each firm maximizes total profit in the two markets given strategies of the two markets given strategies of the other firm wrt to prices pother firm wrt to prices pxx and p and px*x*

with tariff with tariff ττ, subsidy s, unit cost c, , subsidy s, unit cost c, prices p, fixed cost FC, demand x and x*.prices p, fixed cost FC, demand x and x*.

Nash equilibrium in price best responses Nash equilibrium in price best responses yield equilibrium quantities X, X*, Y, Y*.yield equilibrium quantities X, X*, Y, Y*.

*

* * *

. . .{ , }( , , ) (1 ) , (1 ) (1 ) * (1 *),

x xx x y x x y

w r t p pMax p s p c s x p p p c s x p p FC

Home and Foreign equilibrium Home and Foreign equilibrium quantities consumed for both quantities consumed for both

goodsgoods

2

2

** * * 2 * * *

** * *

( , ) 2 (1 )( 2 ) (1 *)(1 ) ,

( , ) 2 (1 ) ( 2 )(1 *)(1 ) ,

* ( , *) 2 (1 *)( 2 ) (1 )(1 *) ,*

*( , *) 2*

xx y y x y y

yy x x x x y

xx y y x y y

yy x x

bX s a b ka c s k b b kb s

Db

Y s a b ka ckb s c k b b sD

bX s a b ka c s k b b kb s

D

bY s a b ka c

D

* 2 * *(1 *) ( 2 )(1 )(1 *) .x x ykb s c k b b s

Some useful intermediate Some useful intermediate results results

i)i) Export demand for Home goodExport demand for Home good

ii) Home domestic demandii) Home domestic demand

iii) Home total productioniii) Home total production

iv) Home imports iv) Home imports

* / 0, * / 0, * / * 0, * / * 0;X X s X X s

/ 0, / 0, / * 0, / * 0;X X s X X s ,

/ 0, / 0, / * 0, / * 0;Q Q s Q Q s

/ 0, / 0, / * 0, / * 0.Y Y s Y Y s

The comparative-statics of The comparative-statics of policy reformpolicy reform

The comparative-statics of The comparative-statics of policy reformpolicy reform

Under the URAA, WTO member countries had to Under the URAA, WTO member countries had to implement tariffication and increase market implement tariffication and increase market access.access.

Second, a reduction of distorting domestic Second, a reduction of distorting domestic support had to be implemented to limit and support had to be implemented to limit and reduce the most trade-distorting forms of reduce the most trade-distorting forms of domestic support. domestic support.

We parameterize these reforms as joint We parameterize these reforms as joint proportional reductions of tariffsproportional reductions of tariffs

and subsidiesand subsidies

*

*

d d

and * *.ds d ds d

Policy scenarios consideredPolicy scenarios considered

i)i) Pure trade regime (only trade policies are active and Pure trade regime (only trade policies are active and production subsidies = 0). Tariffs are reduced.production subsidies = 0). Tariffs are reduced.

ii)ii) Both trade and agricultural policies are active. Tariffs Both trade and agricultural policies are active. Tariffs only are reduced.only are reduced.

iii)iii) Trade policies are active, and Home government Trade policies are active, and Home government subsidizes its production. Trade and agricultural subsidizes its production. Trade and agricultural policy reforms take place. (OECD and developing policy reforms take place. (OECD and developing member).member).

iv)iv) Both trade and agricultural policies are active in both Both trade and agricultural policies are active in both countries and are both reformed (US-EU situation in countries and are both reformed (US-EU situation in the URAA).the URAA).

Modeling Invasive Species Modeling Invasive Species HazardHazard

Modeling IS hazardModeling IS hazard

We elaborate on the framework followed by We elaborate on the framework followed by Costello & McAusland but with our setup Costello & McAusland but with our setup (imperfect competition, two-way trade and (imperfect competition, two-way trade and joint reforms).joint reforms).

The arrival time of exotic species is stochastic.The arrival time of exotic species is stochastic.

The inter-arrival time between two successive The inter-arrival time between two successive introductions is an exponentially distributed introductions is an exponentially distributed random variable increasing in the volume of random variable increasing in the volume of imports Y.imports Y.

Modeling IS hazardModeling IS hazard

The expected value of type-k damage through time T as The expected value of type-k damage through time T as

where where is the probability that an introduced species is the probability that an introduced species established a viable population in Home, and established a viable population in Home, and is the is the cumulative density function for the present value of type k cumulative density function for the present value of type k damage through time T caused by the damage through time T caused by the successful successful introduction introduction , conditional on , conditional on The probability that a successful arrival at timeThe probability that a successful arrival at time has a has a present value of type-k damage by time T of less thanpresent value of type-k damage by time T of less than given the total given the total production Q.production Q.

0[ ( )] ( ) ( , )

Tk ktE D T Y E F Q dt

( , )k

tF Q

thi( )k

iD T it

it

Modeling IS hazard and policy Modeling IS hazard and policy interfaceinterface

To understand the effect of trade To understand the effect of trade liberalization on the damage from IS, we liberalization on the damage from IS, we sign the total derivative sign the total derivative dE[DdE[Dkk(T)] (T)] with with respect to the policy reform parameters.respect to the policy reform parameters.

Recall: In HO model with unilateral tariff Recall: In HO model with unilateral tariff reduction, IS damages can decrease with reduction, IS damages can decrease with trade liberalization even though imports trade liberalization even though imports increase (Costello and McAusland, 2003).increase (Costello and McAusland, 2003).

Both imports and total productions are Both imports and total productions are important determinants of the expected important determinants of the expected damages.damages.

ResultsResults

Policy reforms impact on IS Policy reforms impact on IS introduction introduction

Proposition 1Proposition 1: Given the demand : Given the demand structure as specified previously, structure as specified previously, multilateral trade liberalization multilateral trade liberalization involving joint tariff reductions but no involving joint tariff reductions but no domestic policy change increases the domestic policy change increases the rate of successful IS introduction to rate of successful IS introduction to Home. Home.

Policy reforms impact on Policy reforms impact on damages from IS introductiondamages from IS introduction

Proposition 2:Proposition 2: Under our assumptions, Under our assumptions, multilateral trade reforms involving joint multilateral trade reforms involving joint tariff reductions buttariff reductions but

no domestic policy change no domestic policy change the the

expected damages if and only if [the expected damages if and only if [the absolute value of] the elasticity of imports to absolute value of] the elasticity of imports to tariff is higher than (equal to or lower than) tariff is higher than (equal to or lower than) (See paper for the expression of .) (See paper for the expression of .)

*.

increases

doesnot affect

decreases

*

Policy reforms impact on IS Policy reforms impact on IS damagesdamages

Corollary 2Corollary 2: If it were the one-way trade : If it were the one-way trade context, context,

then trade liberalization thethen trade liberalization the

expected damages if and only if [the absolute expected damages if and only if [the absolute value of] the elasticity of imports to tariff is value of] the elasticity of imports to tariff is higher than (equal to or lower than) higher than (equal to or lower than) (See paper for the expression of ) (See paper for the expression of )

increases

doesnot affect

decreases

** .**.

Policy reforms impact on IS Policy reforms impact on IS damagesdamages

Assuming damages are augmented, by Assuming damages are augmented, by proposition 2 and corollary 2, and proposition 2 and corollary 2, and

one sees that it is less likely for trade one sees that it is less likely for trade liberalization to decrease the expected liberalization to decrease the expected damages in the two-way-trade cum damages in the two-way-trade cum multilateral-reform context than in a multilateral-reform context than in a one-way-trade cum unilateral reform one-way-trade cum unilateral reform case. case.

** * ,

Policy reforms impact on Policy reforms impact on damages from exotic species damages from exotic species

introductionintroduction

Corollary 3Corollary 3: Given our assumptions, and : Given our assumptions, and assuming demand symmetry , , assuming demand symmetry , ,

joint tariff reductions always increase expected joint tariff reductions always increase expected damages if i) Home pre-reform tariff is lower damages if i) Home pre-reform tariff is lower than foreign pre-reform tariff;than foreign pre-reform tariff;

Or if ii) Home pre-reform tariff is higher than Or if ii) Home pre-reform tariff is higher than Foreign pre-reform tariff but not substantially Foreign pre-reform tariff but not substantially (see paper for condition(see paper for condition ))> Under a wide range of initial tariffs, IS > Under a wide range of initial tariffs, IS damages would increase with trade integration.damages would increase with trade integration.

*x yb b b * *x yb b b

1 .

<*

Policy reforms impact on IS Policy reforms impact on IS Introduction Introduction

Proposition 3Proposition 3: Given the demand structure as : Given the demand structure as specified previously, and assuming both specified previously, and assuming both trade and agricultural policies active, then trade and agricultural policies active, then trade and domestic reforms trade and domestic reforms

increase the rate of successful IS introduction increase the rate of successful IS introduction

to Home. to Home.

*, and * *

*

d dds d ds d

Policy reforms impact on Policy reforms impact on damages from IS introductiondamages from IS introduction

Proposition 4: Proposition 4: Given our assumptions, and Given our assumptions, and if both trade and agricultural policies exist,if both trade and agricultural policies exist,then the reform then the reform

the expected damages if and only if [the the expected damages if and only if [the absolute value of] the elasticity of imports absolute value of] the elasticity of imports to tariff is higher than (equal to or lower to tariff is higher than (equal to or lower than) (See paper for the expression of than) (See paper for the expression of .) .)

*, and * *

*

d dds d ds d

increases

doesnot affect

decreases

***.

***

Ongoing simulation workOngoing simulation work

Current illustration based on wheat Current illustration based on wheat trade.trade.

The CABI Compendium data to model The CABI Compendium data to model IS and damages (expected reductions IS and damages (expected reductions in yield).in yield).

Calibration procedure (12 equations Calibration procedure (12 equations example for 2 countries).example for 2 countries).

Tentative conclusionsTentative conclusions

When accounting for two-way trade and When accounting for two-way trade and joint distortion reductions, IS damages joint distortion reductions, IS damages are more likely with trade integration are more likely with trade integration because production does not have to fall because production does not have to fall as imports increase.as imports increase.

Production subsidies and their reform Production subsidies and their reform increase the complexity of the effects; increase the complexity of the effects; their relative impacts on production and their relative impacts on production and imports determine the impact on IS.imports determine the impact on IS.