Frontiers in Research on Offshoring (Summary)

On August 2, 2019, the "Frontiers in Research on Offshoring" workshop was held as a part of the Analyses of Offshoring project led by Jota Ishikawa (RIETI Faculty Fellow). In the workshop, four distinguished scholars in the field of international trade— Keith Maskus (University of Colorado), Monika Mrazova (University of Geneva), Amber Li (Hong Kong University of Science and Technology), Carsten Eckel (University of Munich)—and two project members presented and discussed their papers.

Keith Maskus presented the paper entitled "Intellectual Property Related Preferential Trade Agreements and the Composition of Trade." This paper investigates the effect of preferential trade agreements (PTAs) associated with intellectual property rights protection (IPP) on trade. Because PTAs with the US and EU often entail IPP and IPP rules are demanded by the US or EU, IPP induced by PTAs is exogenous to partner countries. Hence, the identification strategy is to use countries whose partners are US, EU or European Free Trade Association (EFTA). The effects are investigated by the income level of countries and IP-sensitive sectors. Empirical results show that high-IP goods export rise after PTAs and the export by non-member countries also rise in high-IP sectors, which suggest that IPP has a positive effect on trade when IP matters.

Jota Ishikawa presented the paper entitled "Tax Havens and Cross-border Licensing." Taking advantage of the differences in tax systems among countries, multinational enterprises (MNEs) try to save tax payments. To cope with the tax avoidance, OECD proposed the arm's length principle (ALP). The paper deals with multinational enterprise's (MNE's) transfer pricing of intangible assets which is licensed by means of ad valorem royalties and investigates how the ALP affects MNE's licensing strategy and welfare in the presence of a tax haven. It is pointed out that the ALP may distort MNE's licensing decisions and hence welfare may deteriorate. This analysis sheds new light on how to apply the ALP to transfer pricing.

Monika Mrazova presented the paper entitled "Trade agreements when profits matter." The paper focuses on the fact that trade policies in oligopolistic markets give rise to not only the terms-of-trade externality but also the profit-shifting externality among trading countries. The paper considers import tariff and export subsidy as trade policies in the repeated-game framework, and finds that the above two externalities make import tariff more self-enforcing than export subsidy. The novelty of the paper is to identify a new role of oligopolistic markets in understanding the reality that WTO member countries negotiate on import tariff and ban export subsidy.

Toshihiro Okubo presented the paper entitled "Individual Preferences on Trade Liberalization: Evidence from a Japanese Household Survey." In recent years, developed countries have seen offshoring of manufacturing firms and uncertainty of international trade. It is important to investigate individual's preference toward trade liberalization such as TPP. Using a series of questions on trade liberalization in KHPS (Keio Household Panel Survey), this paper conducts econometric analysis. It is found that individual's preference on trade liberalization depends not only on income and education as traditional trade theories have suggested but also on non-economic factors and non-cognitive factors such as happiness, risk attitudes, social stance, and morality. As globalization proceeds, it is important to study more about individual's trade preferences.

Amber Li presented the paper entitled "Processing Trade, Productivity and Prices: Evidence from a Chinese Production Survey." This paper examines the productivity differences between exporters and domestic firms in China. In particular, this study compares the productivity of processing trade, ordinary trade, hybrid (both processing and ordinary), and domestic firms. Because the output quantity data is available, not only revenue based productivity, but also physical productivity is estimated. Empirical analysis shows that while exporters' productivity is not higher than domestic firms when using revenue based measure, the productivity of processing trade is higher than otherwise using physical productivity. This implies that the price of processing trade firms is lower, which results from the low input prices.

Carsten Eckel presented the paper entitled "CATs and DOGs." This paper theoretically analyzed Carry-Along Trade (CAT), by which manufacturing firm exports final goods fabricated by other manufacturing firms when it exports its own final goods. Although there have been a few papers analyzing CAT, this paper is distinct in that it compares CAT with the case where firms directly export their goods (Delivery of Own Good, DOG) and uses an oligopoly model to take strategic interaction between firms into account. The results suggest that firms may choose CAT over DOG even if transportation cost is higher for CAT, regardless that goods are substitutes or complements. Besides that, the shift from DOG to CAT may increase prices and hurt consumers when goods are substitutes. Given that CAT accounts for a certain fraction of the real-world exports, these new welfare results provide useful policy implications.