Market Presence, Contestability, and the Terms-of-Trade Effects of Regional Integration
How firms react to a given shock may depend on the degree to which rivals are present and on whether potentially viable entrants to that market exist. The authors try to measure these effects internationally by examining the price behavior of the U...
| Main Authors: | , |
|---|---|
| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2013
|
| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2001/01/1000458/market-presence-contestability-terms-of-trade-effects-regional-integration http://hdl.handle.net/10986/15740 |
| Summary: | How firms react to a given shock may
depend on the degree to which rivals are present and on
whether potentially viable entrants to that market exist.
The authors try to measure these effects internationally by
examining the price behavior of the United States in
Brazil's market when MERCOSUR trade liberalization and
most-favored-nation (MFN) trade liberalization take place.
Using detailed panel data on trade and tariff rates, they
find that both the market presence of a preferred supplier
and expected entry lessen the U.S. price reaction to MFN
trade liberalization and increase the U.S. price reaction to
preferential trade liberalization. Argentina's presence
in Brazil's market results in a smaller U.S. price
response to Brazil's MFN tariff change and in a larger
response to a preferential tariff change. More surprisingly,
the quantitative effects of market presence and expected
entry (contestability) are not significantly different from
each other. Contestability plays no significant role when
Argentina's is absent from Brazil's market,
contestability lessens the U.S. response to changes in the
MFN tariff and increases it in response to changes in the
preferential tariff. It follows from these results that
presence in, as well as threat of entry into, partners'
markets implies lower optimal external tariffs and suggests
that regional agreements can have pro-competitive effects in
the presence of contestability. The authors also examine the
hypothesis of "symmetry" between the effect of
tariffs and that of exchange rates. |
|---|