Halis Murat Yildiz

Bilateral Trade Agreements and the Feasibility of Multilateral Free Trade

We studied how the pursuit of bilateral free-trade agreements (FTAs) affects the likelihood of achieving multilateral free trade. We derive and compare the stable Nash equilibria of two games of trade liberalization: in the FTA game, each country can either form an FTA with one of its trading partners or both of them or none of them, whereas in the (restricted) No FTA game, purely bilateral FTAs are not permitted. The major result is that there exist circumstances under which the freedom to pursue (discriminatory) bilateral FTAs is necessary for achieving multilateral free trade.

On the International Linkages between Trade and Merger Policies

In a three-country model, this paper investigates linkages between merger incentives of exporting firms and the trade policy of an importing country. When exporting firms come from only one country, the tariff response of the importing country reverses the welfare effects of a merger in the exporting country. If there exist two exporting countries, a merger creates two types of conflicting international externalities. First, a merger in one exporting country increases profits of all firms. Secondly, non-merged firms lose if the importing country is free to raise its tariff in response to a merger of foreign exporters.

National Versus International Mergers and Trade Liberalization

This paper uses an endogenous merger formation approach in a concentrated international oligopoly to examine the effects of trade liberalization on the nature of merger incentives (national vs. international). The effects of unilateral trade liberalization on a country’s industry structure are found to be depending on the other country’s trade policy regime. If the other country practices free trade, unilateral liberalization by a country yields international mergers whereas if it practices a restrictive trade policy, national mergers arise. As trade gets bilaterally liberalized, the resulting equilibrium market structure is the one with international mergers. These results fit well with the fact that global trade liberalization has been accompanied by an increase in international merger activity. Among equilibrium market structures, international ones are found to be preferable from a welfare point of view. As a result, social and private incentives become aligned together as trade gets liberalized.

Pollution havens, endogenous environmental policy, and foreign direct investment

In an increasingly integrated world economy, countries may have greater incentives to weaken environmental policy as disguised protection intended to give a competitive edge to local firms. This may generate pollution havens as firms relocate in response to different environmental policies. Foreign direct investment (FDI) weakens profit-shifting policy considerations while increasing environmental damages but, at the same time, may provide external benefits. We derive conditions under which the FDI-recipient country has an incentive to manipulate its environmental standard to prevent or attract FDI, potentially eliminating or creating pollution havens, in addition to examining the impact of FDI on the equilibrium state of the environment.

International Productivity Differences and the Roles of Domestic Investment, FDI and Trade

This paper calculates Theils entropy index to measure the extent of productivity differences across 92 countries for the period from 1970 to 2003. While there is evidence of increasing differences in productivity across these countries, we observe different patterns when we group the countries by income levels. These differences seem to be decreasing among middle income developing and developed countries, whereas they seem to be widening among low and high income developing countries. The results of our multivariate time series analysis also suggest that FDI increases productivity differences among low and high income developing countries, whereas GDI reduces these differences among low income countries in the long-run. Granger causality test results indicate that while an increase in GDI leads to a decline in growth of trade, a higher growth of trade appears to be important for attracting FDI to middle income countries. Furthermore, a reduction in productivity differences and a higher FDI growth lead to higher growth of trade in developed countries.

Optimal tariffs of preferential trade agreements and the tariff complementarity effect

Purpose - The purpose of this paper is to evaluate and contrast the welfare effects of free trade agreements (FTAs) and customs unions (CUs) on member and non-member countries when tariffs of both members and non-members are endogenously determined. It also aims to provide sufficient conditions under which both types of preferential trade agreement (PTA) are likely to lower tariffs on non-members relative to that under most favored nation (MFN). Design/methodology/approach - The paper employs a three country Cournot oligopoly model of trade with segmented markets. Findings - It is shown that under symmetry CU members enjoy higher welfare relative to that under an FTA or MFN. Furthermore, the non-member country gains from the formation of a PTA so long as the PTAs external tariff falls below a certain threshold. However, for FTA members to necessarily gain, their external tariff needs to be greater than this threshold but smaller than twice their MFN tariffs. Outside this tariff range, welfare effects of FTAs are ambiguous in the absence of further assumptions. The paper also isolates sufficient conditions under which a PTA member is less likely to impose a positive tariff on the non-member relative to that under MFN. Originality/value - Unlike existing literature, we do no assume demand linearity to obtain our main welfare results and use this assumption only for illustrative purposes. Another contribution of the paper is to provide sufficient conditions under which a PTA member is less likely to impose a positive tariff on the non-member relative to that under MFN.

Trade liberalization, nature of mergers and employment

This paper develops a simple two-country model in which each economy consists of two sectors: a competitive non-tradable sector and an oligopolistic tradable sector. We investigate two related issues that arise in response to trade liberalization. First, we examine the linkage between trade liberalization and the nature of merger incentives in the oligopolistic tradable sector. We find that trade liberalization changes the industry structure leading to cross border mergers. Next, we explore the impact of this change on the labour market of the competitive non-tradable sector. It is found that the employment and wage impacts of the fall in the price of tradable goods depend on the price elasticity of demand for tradable goods and non-tradable goods, and the share of the tradable intermediate goods in the total cost of production of non-tradables. As a result, the positive employment impact is certain only if the demand for tradable goods is inelastic, while labour and tradable intermediate goods are complements.

Foreign direct investment and customs union: Incentives for multilateral tariff cooperation over free trade

The present article examines the implications of a customs union (CU) on the pattern of tariffs, welfare and the prospects for free trade when the non-member firm has an incentive to engage in foreign direct investment (FDI). First, I show that upon the formation of a bilateral CU, the non-member firm has greater incentives to engage in FDI. However, when FDI becomes a feasible entry option for the non- member firm under a CU, member countries have incentives to strategically induce export over FDI by lowering their joint external tariff. When fixed set-up cost of FDI is sufficiently low, this tariff falls below Kemp–Wan tariff and CU leads to a Pareto improvement relative to no agreement. Moreover, using an infinite repetition of the one-shot tariff game under a CU, I show that the presence of FDI incentive of the non-member firm makes the member countries more willing to cooperate multilaterally over free trade while the opposite is true for the non-member country. Finally, I find that, unless fixed cost of having an additional plant is sufficiently low, multilateral cooperation over free trade is easier to sustain when FDI incentive is present.

Foreign Direct Investment and Inequality in Productivity across Countries

Using data for 93 countries for a period from 1970 to 2000, this paper examines the effects of foreign direct investment (FDI) on cross-country differences in productivity. We construct a spatial Gini coefficient of labor productivity across countries, and weighted indices of FDI and gross domestic investment (GDI). We then examine their time series properties to explore the relations of FDI and GDI with productivity. Although we find little evidence of FDI flows – which have increased manifold in last three decades – reducing inequality in productivity for the entire sample, our analysis shows that these three variables are cointegrated for developed, high and middle income developing countries, indicating existence of a long-run equilibrium relationships between FDI, GDI and productivity. FDI seems to reduce inequality in productivity among high and middle income developing countries while it widens productivity gaps among developed countries in the long-run though these effects are statistically significant only for high income developing countries. In middle income developing countries, higher GDI seems to have significant effect in reducing productivity differences. Granger causality tests further suggest that FDI causes productivity differences among petroleum exporting countries. Furthermore, GDI granger causes FDI in high income countries and productivity differences Granger cause FDI into the middle income developing countries.

Hub and spoke trade agreements under oligopoly with asymmetric costs

Using an oligopoly model of trade with asymmetric costs, we study the individual and world welfare implications of a hub and spoke trade agreement where the hub country is more efficient than spoke countries. Under a hub and spoke trade regime, the hub country can benefit at the expense of the spokes relative to free trade. Furthermore, if the hub is sufficiently efficient compared to the spokes, such a regime can yield higher global welfare than free trade. Preferential treatment of the efficient hub country in its export markets improves world welfare because it helps allocate a larger share of the world’s output to a low cost location.