Regulatory Protectionism, Multinational Corporations ... · My Argument The conventional wisdom is...

Regulatory Protectionism, MultinationalCorporations’ Preferences, and the Limits of

International Cooperation

Robert Gulotty

Department of Political ScienceStanford University

IPES 2013

Puzzle Theory Government Behavior Reciprocal Trade Negotiations Conclusion

Tariffs have declined, regulatory barriers persist

year

App

lied

Tarif

fs

1995 2000 2005 2010

010

2030

4050

0500

1000

1500

Reg

ulat

ory

Bar

riers

(#)

Average Applied Tariffs (DE, US, JP)Regulatory Barriers: TBT STCs

2


Concentration of Cross-border Trade

Only 4% of firms export.

Of the firms that do export:a) ∼ 2,000 firms do 80% of trade (1% of exporters)b) ∼ 22,000 firms do 96% of trade (10% of exporters)∼ 2/3 of world trade involves multinational corporations.

In 1974, the revenue of the top 10 MNC combined to morethan 0.4% of US GNP.In 2012, the revenue of the top 10 MNC combined to morethan 24% of US GNP

3



Only 4% of firms export.Of the firms that do export:

a) ∼ 2,000 firms do 80% of trade (1% of exporters)b) ∼ 22,000 firms do 96% of trade (10% of exporters)∼ 2/3 of world trade involves multinational corporations.


3




a) ∼ 2,000 firms do 80% of trade (1% of exporters)

b) ∼ 22,000 firms do 96% of trade (10% of exporters)∼ 2/3 of world trade involves multinational corporations.


3




a) ∼ 2,000 firms do 80% of trade (1% of exporters)b) ∼ 22,000 firms do 96% of trade (10% of exporters)

∼ 2/3 of world trade involves multinational corporations.In 1974, the revenue of the top 10 MNC combined to morethan 0.4% of US GNP.In 2012, the revenue of the top 10 MNC combined to morethan 24% of US GNP

3




a) ∼ 2,000 firms do 80% of trade (1% of exporters)b) ∼ 22,000 firms do 96% of trade (10% of exporters)∼ 2/3 of world trade involves multinational corporations.


3


The Conventional Wisdom:

The institutionalization of reciprocity enables exportinterests to advance low tariffs at home.

Multinational corporations (MNCs) and marginal exportersshould prefer liberalization.Vernon (1971); Becker (1982); Milner (1988).

Governments with globalized firms will avoid protectionism.Blanchard (2007); Devereux and Lee (1999); Stockman and Dellas(1986).

Deep international cooperation should follow from globalproduction chains.Baldwin (2006); Lamy (2012).

4


The Conventional Wisdom:

The institutionalization of reciprocity enables exportinterests to advance low tariffs at home.Multinational corporations (MNCs) and marginal exportersshould prefer liberalization.Vernon (1971); Becker (1982); Milner (1988).

Governments with globalized firms will avoid protectionism.Blanchard (2007); Devereux and Lee (1999); Stockman and Dellas(1986).

Deep international cooperation should follow from globalproduction chains.Baldwin (2006); Lamy (2012).

4


My Argument

The conventional wisdom is only half right.

Multinational Corporations do oppose tariffs, but theybenefit from other forms of protection.

Regulations impose fixed costs.Fixed costs can favor the largest exporters by reducingcompetition.As large exporters are organized multinationally, their hostgovernments can benefit from non-tariff measures.

International institutions which govern trade are ill suitedfor these problems.

5


My Argument

The conventional wisdom is only half right.Multinational Corporations do oppose tariffs, but theybenefit from other forms of protection.



5


My Argument


Regulations impose fixed costs.

Fixed costs can favor the largest exporters by reducingcompetition.As large exporters are organized multinationally, their hostgovernments can benefit from non-tariff measures.


5


My Argument


Regulations impose fixed costs.Fixed costs can favor the largest exporters by reducingcompetition.

As large exporters are organized multinationally, their hostgovernments can benefit from non-tariff measures.


5


My Argument




5


Politics of Regulatory Protection

1 Puzzle: Lack of cooperation on regulatory protection2 Theory: Why multinationals benefit from regulatory

protection.3 Empirical Results:

1 Firm interests in regulatory protection2 Host Government adoption of regulatory barriers

4 Explaining the limits of the WTO5 Conclusion

6


Case of non-tariff measures: Technical Barriers

Technical barriers to trade (TBT) are non-tariff barriers thatarise from a mandatory application of a standard and theenforcement of that standard.

TBTs offer an appropriate case of regulatory protection:TBT specify a specific variety and can be classified into thesame schedules as tariffs.TBT are used on products whose tariffs have been low thelongest.TBT offer a number of non-protectionist alternativeexplanations, environmental concerns, consumer safety,quality assurance etc.

7



Technical barriers to trade (TBT) are non-tariff barriers thatarise from a mandatory application of a standard and theenforcement of that standard.TBTs offer an appropriate case of regulatory protection:

TBT specify a specific variety and can be classified into thesame schedules as tariffs.TBT are used on products whose tariffs have been low thelongest.TBT offer a number of non-protectionist alternativeexplanations, environmental concerns, consumer safety,quality assurance etc.

7




TBT specify a specific variety and can be classified into thesame schedules as tariffs.

TBT are used on products whose tariffs have been low thelongest.TBT offer a number of non-protectionist alternativeexplanations, environmental concerns, consumer safety,quality assurance etc.

7




TBT specify a specific variety and can be classified into thesame schedules as tariffs.TBT are used on products whose tariffs have been low thelongest.

TBT offer a number of non-protectionist alternativeexplanations, environmental concerns, consumer safety,quality assurance etc.

7




TBT specify a specific variety and can be classified into thesame schedules as tariffs.TBT are used on products whose tariffs have been low thelongest.TBT offer a number of non-protectionist alternativeexplanations, environmental concerns, consumer safety,quality assurance etc.

7


My paper focuses on three hypotheses

H1: Large, productive MNCs can benefit from regulatoryprotection.

H2: Host governments are likely to adopt regulatoryprotection to advantage local MNC.H3: Multilateral negotiations are more difficult in the face ofregulatory protection.

8



H1: Large, productive MNCs can benefit from regulatoryprotection.H2: Host governments are likely to adopt regulatoryprotection to advantage local MNC.

H3: Multilateral negotiations are more difficult in the face ofregulatory protection.

8



H1: Large, productive MNCs can benefit from regulatoryprotection.H2: Host governments are likely to adopt regulatoryprotection to advantage local MNC.H3: Multilateral negotiations are more difficult in the face ofregulatory protection.

8


Strategy for this talk

Firm interests (H1) :Formal analysis of exporting firm interestsAmerican chemical firm preferences and outcomes underEuropean Regulation using 160,000 chemical patents.

Governments Behavior (H2) :Empirical proxies for multinational activity.Database of Technical Barriers to Trade in ∼ 900 sectors,over 16 years and 39 countries.

International Cooperation (H3):Analysis of reciprocity as enforcement of cooperation inGATT/WTO.Trade policymaking from the Uruguay Round tariffnegotiations.

9


Strategy for this talk

Firm interests (H1) :Formal analysis of exporting firm interestsAmerican chemical firm preferences and outcomes underEuropean Regulation using 160,000 chemical patents.

Governments Behavior (H2) :Empirical proxies for multinational activity.Database of Technical Barriers to Trade in ∼ 900 sectors,over 16 years and 39 countries.

International Cooperation (H3):Analysis of reciprocity as enforcement of cooperation inGATT/WTO.Trade policymaking from the Uruguay Round tariffnegotiations.

10







11


Why do Regulatory Barriers benefit leading firms?

Regulatory barriers directly harm profits, but also affectcompetition.Regulatory barriers can deter entry, raising prices(Rogerson (1986)).

An illustration: Oligopolistic Competition.Firm level differences in productivity, facing a regulatorybarrier.Cournot competition with endogenous entry.

12


Why do Regulatory Barriers benefit leading firms?

Regulatory barriers directly harm profits, but also affectcompetition.Regulatory barriers can deter entry, raising prices(Rogerson (1986)).An illustration: Oligopolistic Competition.

Firm level differences in productivity, facing a regulatorybarrier.Cournot competition with endogenous entry.

12


Profits of low cost firms facing regulatory protection.

Fixed Cost

Pro

fits

of L

ow C

ost F

irm

0 10 20

-10

010

R1 R2 R3

13


Solution Concept: Cournot Nash Equilibrium

All firms simultaneously choose entry or exit and theamount to produce in response to all other producers.

In equilibrium, each firm conjectures correctly, and all firmschoose their best response, entering and producing:q∗H ,q

∗L,N

∗.The low cost firm is larger q∗H < q

∗L and will generally

receive positive profits.

14



All firms simultaneously choose entry or exit and theamount to produce in response to all other producers.In equilibrium, each firm conjectures correctly, and all firmschoose their best response, entering and producing:q∗H ,q

∗L,N

∗.

The low cost firm is larger q∗H < q∗L and will generally


14



All firms simultaneously choose entry or exit and theamount to produce in response to all other producers.In equilibrium, each firm conjectures correctly, and all firmschoose their best response, entering and producing:q∗H ,q

∗L,N

∗.The low cost firm is larger q∗H < q

∗L and will generally


14


Zero Profit Condition generates N∗

Firms enter if they earn profit from doing so.

In equilibrium, the number of high cost firms in the market(N) is determined by a Zero Profit Condition.N∗ is a decreasing (stepwise) function of the regulatorybarrier.

15


Zero Profit Condition generates N∗

Firms enter if they earn profit from doing so.In equilibrium, the number of high cost firms in the market(N) is determined by a Zero Profit Condition.N∗ is a decreasing (stepwise) function of the regulatorybarrier.

15


16


17


18


0 5 10 15 20

05

1015

Regulatory Barrier

Num

ber o

f Ent

rant

s/P

rofit

s of

Low

Cos

t Firm

R1 R2 R3

19


Regulatory Barriers in Oligopolistic Competition

When firms vary in marginal cost, regulatory barriers havecompetitive benefits for some firms.(1) Regulatory barriers drive out entrants.(2) All surviving firms increase production,→ higher sales for

every surviving firm.*

⇒ (1) is more important for quantity than (2),→ lower netquantities and higher prices.

Higher prices and higher production lead to higher profitsfor the low cost firm.

20


Regulatory Barriers in Oligopolistic Competition

When firms vary in marginal cost, regulatory barriers havecompetitive benefits for some firms.(1) Regulatory barriers drive out entrants.(2) All surviving firms increase production,→ higher sales for

every surviving firm.*⇒ (1) is more important for quantity than (2),→ lower net

quantities and higher prices.

Higher prices and higher production lead to higher profitsfor the low cost firm.

20


Regulatory Barriers do not always lower trade volume

0 5 10 15 20

2223

2425

Regulatory Barrier

Trad

e V

olum

e (P

(Q)*

Q)

21


Implications of formal analysis

Raising costly regulatory barriers in the destination marketbenefits the lowest cost exporters.

⇒ Productive firms join the protectionist coalition in thedestination market.These distortions are potentially orthogonal to overall tradeactivity.

⇒ The current emphasis on trade volume in scholarship andpractice is insufficient for regulatory protection.

22




⇒ Productive firms join the protectionist coalition in thedestination market.

These distortions are potentially orthogonal to overall tradeactivity.


22




⇒ Productive firms join the protectionist coalition in thedestination market.These distortions are potentially orthogonal to overall tradeactivity.


22


Application to contemporary trade context

Assuming differences in marginal cost, the lowest costsfirms export and to organize as Multinational Corporations(MNCs).

⇒ MNCs join the protectionist coalition.The model confirms the conventional wisdom for tariffs:MNCs are hurt by higher marginal costs.

∴ H1: Regulatory barriers, unlike tariffs, can benefit low costfirms, especially MNCs.

23




⇒ MNCs join the protectionist coalition.

The model confirms the conventional wisdom for tariffs:MNCs are hurt by higher marginal costs.


23




⇒ MNCs join the protectionist coalition.The model confirms the conventional wisdom for tariffs:MNCs are hurt by higher marginal costs.


23


Evidence from EU Chemical Regulation

“... REACH often works to the advantage of largecompanies who have the resources to establish and runcompliance programs. Smaller companies must often gooutside and pay for the resources to comply. Ironically,REACH has succeeded in doing what the anti-trustlaws were designed to prevent — giving a competitiveadvantage to large companies.” - Senior lobbyist of a largechemical firm.

24


Summary of case study of regulatory protection

Consistent with H1, changes in the EU chemical sectorbenefited the low cost, US MNCs, at the expense ofsmaller, more marginal exporters.

→ Findings are also consistent with French firm response toSPS (Fontagné, Orefice, Piermartini and Rocha (2012)).

The conventional political coalitions are reversed, marginalexporters favor of regulatory liberalization.Large, low cost firms are aware of, and act on theircompetitive interest in foreign regulations.

25




→ Findings are also consistent with French firm response toSPS (Fontagné, Orefice, Piermartini and Rocha (2012)).The conventional political coalitions are reversed, marginalexporters favor of regulatory liberalization.

Large, low cost firms are aware of, and act on theircompetitive interest in foreign regulations.

25




→ Findings are also consistent with French firm response toSPS (Fontagné, Orefice, Piermartini and Rocha (2012)).The conventional political coalitions are reversed, marginalexporters favor of regulatory liberalization.Large, low cost firms are aware of, and act on theircompetitive interest in foreign regulations.

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protection3 Empirical Results:



26


Government adoption of Regulatory Protection

In theory import volumes may rise after host governmentsadopt regulatory barriers to trade.This pattern also arises in data of SPS measures (Crivelliand Gröschl (2012)).

I offer an explanation: Regulatory barriers promote localmultinational corporation profits.

∴ H2: Host governments will be more likely to adoptregulatory barriers to trade in sectors with moremultinational activity.

27


Government adoption of Regulatory Protection

In theory import volumes may rise after host governmentsadopt regulatory barriers to trade.This pattern also arises in data of SPS measures (Crivelliand Gröschl (2012)).I offer an explanation: Regulatory barriers promote localmultinational corporation profits.

∴ H2: Host governments will be more likely to adoptregulatory barriers to trade in sectors with moremultinational activity.

27


Evidence for Government Adoption of RegulatoryBarriers

Data: Specific Trade Concerns regarding TechnicalBarriers to Trade.Examine whether those sectors associated with MNCactivity in the host state are more likely to elicit complaintsat the WTO.

28


Contract Intensity as a proxy for multinationals

Low cost firms organize as multinational corporations ifthere is an ownership advantage.

Ownership alleviates contractual problems across thesupply chain.Industries that are more contract intensive will requireorganization as a multinational corporation.Contract Intensity ∈ [0,1] measures the extent ofrelationship-specific investments in production. Eachproduct is coded as being sold on an exchange, referencepriced, or neither (Rauch 1999).

29



Low cost firms organize as multinational corporations ifthere is an ownership advantage.Ownership alleviates contractual problems across thesupply chain.

Industries that are more contract intensive will requireorganization as a multinational corporation.Contract Intensity ∈ [0,1] measures the extent ofrelationship-specific investments in production. Eachproduct is coded as being sold on an exchange, referencepriced, or neither (Rauch 1999).

29



Low cost firms organize as multinational corporations ifthere is an ownership advantage.Ownership alleviates contractual problems across thesupply chain.Industries that are more contract intensive will requireorganization as a multinational corporation.

Contract Intensity ∈ [0,1] measures the extent ofrelationship-specific investments in production. Eachproduct is coded as being sold on an exchange, referencepriced, or neither (Rauch 1999).

29



Low cost firms organize as multinational corporations ifthere is an ownership advantage.Ownership alleviates contractual problems across thesupply chain.Industries that are more contract intensive will requireorganization as a multinational corporation.Contract Intensity ∈ [0,1] measures the extent ofrelationship-specific investments in production. Eachproduct is coded as being sold on an exchange, referencepriced, or neither (Rauch 1999).

29


Contract Intensity as a measure of globalizedproduction

Contract IntensityLow High

.024 Poultry processing .980 Automobile manuf.

.024 Flour milling .977 Heavy-duty truck manuf.

.036 Petroleum refineries .956 Computers

.036 Wet corn milling .904 Audio & Video equipment.

.053 Aluminum manuf. .901 Computer peripheralsfrom Rauch measure, reported in Nunn (2007)

Supply Chain PositionUpstream Downstream

4.651 Petrochemicals 1.000 Automobile4.355 Copper smelting 1.001 Light trucks4.064 Aluminum smelting 1.007 Furniture3.853 Organic chemicals 1.007 Footwarefrom 2002 IO tables Antràs, Chor, Fally, and Hillberry (2012)

30


Data on Technical Barriers to Trade

Contract Intensity: from Rauch (1999)Royalty Receipts : Balance of Payments proxy for localshare of multinational profits (IMF).DV: Technical barriers to trade (TBT) ∈ {0,1} submitted toWTO Committee on Technical Barriers to Trade andclassified at the HS 4 level.

31


Theoretical expectations

Predictions for adoption of Technical Barriers to trade

Low Royalty Receipts High Royalty ReceiptsLow Contract Low-end Manufactures High-end Manufactures

IntensityHigh Contract Subsidiary w/ Bargaining Headquarter w/ Bargaining

Intensity

32





IntensityHigh Contract Subsidiary w/ Bargaining Headquarter w/ Bargaining

Intensity

33





Intensity Low TBTHigh Contract Subsidiary w/ Bargaining Headquarter w/ Bargaining

Intensity

34





Intensity Low TBTHigh Contract Subsidiary w/ Bargaining Headquarter w/ Bargaining

Intensity High TBT

35


Effect of Contract Intensity conditional on HeadquarterActivity

% of Country-Products with TBT in 2001 (%)

Low Royalty Receipts High Royalty ReceiptsLow Contract 3 11

IntensityHigh Contract 1 25

Intensity

2 sample difference of proportions test: χ2df=1 = 1702

36


Host governments enact Technical Barriers inglobalized industries

TBT adoption consistent with H2: Governments useregulatory barriers in sectors with some retention ofmultinational profits.

Results are robust to industry and country fixed effects, aswell as correcting for rare events.Regulatory protection is a consequence of collusionbetween host governments and multinational corporations:International regulatory capture.Marginal exporters, consumers and home governmentslose from this regulatory capture.

37



TBT adoption consistent with H2: Governments useregulatory barriers in sectors with some retention ofmultinational profits.Results are robust to industry and country fixed effects, aswell as correcting for rare events.

Regulatory protection is a consequence of collusionbetween host governments and multinational corporations:International regulatory capture.Marginal exporters, consumers and home governmentslose from this regulatory capture.

37



TBT adoption consistent with H2: Governments useregulatory barriers in sectors with some retention ofmultinational profits.Results are robust to industry and country fixed effects, aswell as correcting for rare events.Regulatory protection is a consequence of collusionbetween host governments and multinational corporations:International regulatory capture.

Marginal exporters, consumers and home governmentslose from this regulatory capture.

37



TBT adoption consistent with H2: Governments useregulatory barriers in sectors with some retention ofmultinational profits.Results are robust to industry and country fixed effects, aswell as correcting for rare events.Regulatory protection is a consequence of collusionbetween host governments and multinational corporations:International regulatory capture.Marginal exporters, consumers and home governmentslose from this regulatory capture.

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38


Multilateral Trade Rules

Havana 1947 Geneva 2012

39


GATT/WTO rules cover market access

Non-discrimination- Article III National Treatment : regulations should not be

applied so as to afford protection to domestic production.Reciprocity

- Article XXVIII Nullification or Impairment : if benefits of theGATT are nullified or impaired, members may beauthorized to withdraw concessions.Bhagwati (1991), Bagwell and Staiger (1999).These two rules limit the use of regulatory protection as asubstitute for tariffs, appear to be insufficient today.

40


Enforcement and Regulatory Barriers in the WTO

In the GATT/WTO, enforcement of obligations is measuredby the level of “Market Access.”At the WTO, market access is generally measured asoverall trade volume.1

If regulatory barriers don’t reduce trade volume,governments lack grounds for remuneration (ArticleXXVIII).

1Trade volume is an aggregate trade value measure adjusted for inflationand exchange rate movements.

41


Reciprocity Rules during the Uruguay Round

To what extent are WTO negotiations frustrated by the lackof enforcement?

I examine US tariff concessions by product in sectorsacross levels of multinational organization and existingregulatory barriers.I show that reciprocal reductions in tariffs are lowest inthose sectors with multinational activity, reversing theconventional wisdom.

42



To what extent are WTO negotiations frustrated by the lackof enforcement?I examine US tariff concessions by product in sectorsacross levels of multinational organization and existingregulatory barriers.

I show that reciprocal reductions in tariffs are lowest inthose sectors with multinational activity, reversing theconventional wisdom.

42



To what extent are WTO negotiations frustrated by the lackof enforcement?I examine US tariff concessions by product in sectorsacross levels of multinational organization and existingregulatory barriers.I show that reciprocal reductions in tariffs are lowest inthose sectors with multinational activity, reversing theconventional wisdom.

42


Data

Dependent variable: 5386 US tariff lines, ad valorembound rate.Average tariff concessions by each of the top 5 foreignexporters of each product.Proxies for effective enforcement (threat to enactreciprocity).

Regulatory Protection: NTM measure from TRAINSdataset.Proxy for Multinational Activity: Contract Intensity fromRauch.

43


Statistical Model of Reciprocity during Uruguay Round

∆τi,US = ∆Tariff Concessionsi +NTMi +∆Tariff Concessionsi×NTMi +. . .

∆Tariff Concessionsi =∑

k ski (∑

j ∆τkj w

kj )

−∆τ kj is the percentage tariff reduction by country k ongood j.wkj is the share of good j in all of country k’s imports.ski is the share of exports of good i from country k sent tothe US.

→ Sectors with NTMs should suffer from a lack of institutionalmechanisms to enforce obligations.

→ endogeneity

44


Reciprocity is negative in Contract Intense products

Source: Coefficient estimates from 2SLS, data from Limão (2006),Nunn (2007), WTO (2012)

45


Reciprocity is negative in Contract Intense products

Regression Estimates of Reciprocity-0.08 -0.06 -0.04 -0.02 0.00 0.02 0.04

(4) TC+TCxNTB

(3) TC+TCxCon.

(2) TC+TCxNTB

(1) TC+TCxNTB

Source: Coefficient estimates from 2SLS, data from Limão (2006),Nunn (2007), WTO (2012)

46


International Cooperation was undermined by lack ofenforcement

The rules of the international system are ill-suited toaddress intra-industry competition.

The US has an incentive to engage in regulatory protectionto shift imports toward local multinationals.US partners responded by refusing to grant reciprocalconcessions in tariffs.

This is because the rules that enforce these agreementsare least efficacious for the most globalized products.This bodes poorly for the GATT/WTO as productioncontinues to become more globalized.

47







48


Summary of Findings

While opposed to tariffs, the largest and most productivefirms can benefit from regulatory protection.Protectionist host governments can serve these firms byenacting regulatory barriers.The rules and concepts of the multilateral system are illequipped to handle these challenges.

49


Broader Implications

Market participation does not necessarily imply an interestin market openness.Complementarity between host government regulatoryautonomy and the competitive interests of MNCs.Regulatory liberalization is likely to require newinstruments beyond the WTO.

50

Thank you.


Broader Book Project

Chapter 1 The Role of Global Supply Chains in InternationalTrade.

Chapter 2 The Governance of Trade and Investment.Chapter 3 Regulatory protectionism, MNC profits, and the lim-

its of international cooperation.Chapter 4 Global Production Diversion and the Depth of Trade

Agreements.Chapter 5 Optimal Delegation in Multilateral Standards Agree-

ments.Appendix

52


Take away points

Reexamined the interests that underly liberalization:Multinationals can benefit from the indirect consequencesof regulatory protection.Host governments may have collusive interests with thesefirms, their interest are not represented by trade volume.

Reexamining international cooperation:The trade regime may work for tariffs, but these aren’t thechallenges today.Rather than being evidence for the generality of reciprocityand cooperation, the GATT/WTO trade regime may be aspecial case.

53


US Tariff Concessions during Uruguay Round

OLS IV IV IV OLS

Tariff Concessions -0.001 0.018* 0.037* 0.052* 0.034*( 0.005) ( 0.006) ( 0.015) ( 0.016) ( 0.013)

NTM -0.571 -3.246* - -2.487* -0.404( 0.405) ( 0.526) ( 0.656) ( 0.515)

NTM X Concessions -0.001 -0.054* - -0.046* -0.006( 0.008) ( 0.01) ( 0.013) ( 0.01)

Contract Intense - - -3.861* -3.924* -3.727*( 1.697) ( 1.701) ( 1.365)

Contract X Concessions - - -0.084* -0.086* -0.081*( 0.032) ( 0.032) ( 0.025)

PTA 1.127* 1.167* 0.952* 0.967* 0.949*( 0.14) ( 0.141) ( 0.163) ( 0.164) ( 0.164)

Bargaining Power 0.009* 0.01* 0.007* 0.008* 0.007*( 0.002) ( 0.002) ( 0.002) ( 0.002) ( 0.002)

I(Multi HS8) -0.81* -0.848* -0.741* -0.778* -0.758*( 0.205) ( 0.206) ( 0.246) ( 0.247) ( 0.246)

(Intercept) -3.498* -2.516* -1.812* -0.991 -1.966*( 0.304) ( 0.347) ( 0.852) ( 0.884) ( 0.731)

N 5386 5386 3890 3890 3890

* p ≤ 0.05 Data from Limão (2006), Nunn (2007), WTO (2012)


Was there a U-turn?

In pre-announcement lobbying, presumption was that thechemical industry was trying to derail REACH.“BASF welcomed REACH already in 2006 when it wasadopted and has not changed its position on REACH sincethen.. it is misleading to speak of a ’U turn’ in ourcommunication on REACH,” - senior manager at BASF.2

Note the absence of a claim prior to announcement.Why would early lobbying be so heavy?

2EurActiv 2011


Lobbying on REACH prior to announcement

I read leading firm lobbying statements and found severalpoints of contention.

Large firms oppose requirements to re-register someexisting products because of their inputs.

+ Large firms instead propose that "each manufacturer in thechain should have the responsibility."Large firms oppose bans on some ‘high concern’ productsbecause of their inputs.

+ Large firms instead propose a 2% threshold of hazardousinputs before a ban.The maximum fine of 10% of the annual world-wideturnover was taken from EU competition law.

+ “Fines should be capped at fixed amounts (for example ate100,000 or less per offence).” - Dow.





+ Large firms instead propose that "each manufacturer in thechain should have the responsibility."

Large firms oppose bans on some ‘high concern’ productsbecause of their inputs.








+ Large firms instead propose a 2% threshold of hazardousinputs before a ban.

The maximum fine of 10% of the annual world-wideturnover was taken from EU competition law.



Changes to REACH prior to 2006

Fines went unspecified.Rather than banning substances of ‘high concern’ the finallegislation only required a proposal to search forsubstitutes (Vogel 2012)An overall adoption of the ‘precautionary principle’, or a lowthreshold for regulatory intervention.

Appendix


Welfare

If trade volume can go up, why do governments complainabout these measures?

Marginal exporters are forced to exit. 98% of exporters aresmall businesses, with voice.Regulatory barriers may advantage main targets, but haveexternalities on third countries.Home governments do not internalize all profits of homeMNCs, motivating host governments.

Appendix


Welfare


Marginal exporters are forced to exit. 98% of exporters aresmall businesses, with voice.

Regulatory barriers may advantage main targets, but haveexternalities on third countries.Home governments do not internalize all profits of homeMNCs, motivating host governments.

Appendix


Welfare


Marginal exporters are forced to exit. 98% of exporters aresmall businesses, with voice.Regulatory barriers may advantage main targets, but haveexternalities on third countries.

Home governments do not internalize all profits of homeMNCs, motivating host governments.

Appendix


Welfare


Marginal exporters are forced to exit. 98% of exporters aresmall businesses, with voice.Regulatory barriers may advantage main targets, but haveexternalities on third countries.Home governments do not internalize all profits of homeMNCs, motivating host governments.

Appendix


Profits of leader facing regulatory protection.

Fixed Cost

Pro

fits

of L

eade

r

0 10 20 30

-30

-10

010

R1 R2 R3

→ Comparative Statics


Diagram of Leader/Fringe Model

Leader

ql

Entrant

Enter

qe

p(Q) = α− (ql + qe)

...

Exit

p(Q) = α− ql


Regulatory Barriers with sequential entry

One leader (l) with a competitive fringe (e), competing viaquantity q.All firms have the same cost function, with variable (c) andfixed cost regulatory barrier (F ):

C(qi) = c ∗ qi + F

Aggregate demand is a decreasing function of the totalquantity produced Q =

∑i qi .

p(Q) = α−Q

Firm profits depend on endogenous price p(Q) and thechoice of quantity qi .

πi = p(Q) ∗ qi − C(qi)


What quantity (ql) would deter entry?

A fringe entrant will choose its quantity (qe) taking the leader’squantity (ql ) as given to maximize profits πe(qe,ql).

q∗e =α− c

2− ql

2

At the first stage, the leader will remove the incentive to enterπe(q∗e) = 0:

q∗l = (α− c)−√

4F

q∗e = 0


Regulatory Barriers and the profits of the leading firm

Consider the profits of the leading firm πl(q∗l ,q∗e = 0)

Direct effect of F

πl =√

4F ∗ (α− c) − 5F

Indirect effects of F

Leader profits can be an increasing function of the regulatorybarrier:

dπldF

> 0 ⇐⇒ F < (a− c)2

25�


0.0 0.5 1.0 1.5 2.0 2.5 3.0

-10

12

3

Leader Profits, a=5, c=1

Fixed Cost

Profits


Robustness of Leader/Fringe Model

In general, regulatory barriers affect competition bydeterring entry.The sequential entry model assumes that the first movercan credibly commit to painful punishments off theequilibrium path (limit price upon entry).

In the Melitz (2003) framework, firms differ in marginal cost(productivity) and enter simultaneously.

← Appendix


Robustness of Leader/Fringe Model

In general, regulatory barriers affect competition bydeterring entry.The sequential entry model assumes that the first movercan credibly commit to painful punishments off theequilibrium path (limit price upon entry).In the Melitz (2003) framework, firms differ in marginal cost(productivity) and enter simultaneously.

← Appendix


Identification Strategy

Reciprocity implies that some cuts in tariffs by US respondto choices by the United States.To deal with endogeneity, total partner tariff reductions areinstrumented using unilateral [non-reciprocal] tariffreductions during the stalled negotiations between 1986and 1992 (Limão (2006)).This strategy assumes that unilateral concessions areexogenous to the eventual offers by the United Statestoward the latter part of the negotiations.

∆τ kj = ∆τunilateral + NTMunilateral + . . .

→ statistical model


Simplification of Profits Under Linear Demand

πH(q∗H ,N) = q∗H(α− cH − N ∗ q∗H − q∗L)− F

= q∗H

(α− cH − N ∗ q∗H −

(α− cL − N ∗ q∗H

2

))− F

= q∗H

(α + cL − 2cH

2−

N ∗ q∗H2

)− F

= q∗H

(q∗H ∗

N + 22−

N ∗ q∗H2

)− F

= q∗H ∗ q∗H − F→ model


Alternative explanations: Firm Interests

Firms may patent to avoid regulation.

→ Porter Hypothesis : Regulations produce innovation/patent activityPatent patterns may reflect broader trends in EU.



Firms may patent to avoid regulation.→ Porter Hypothesis : Regulations produce innovation/

patent activity

Patent patterns may reflect broader trends in EU.



Firms may patent to avoid regulation.→ Porter Hypothesis : Regulations produce innovation/

patent activityPatent patterns may reflect broader trends in EU.


Aggregate Activity

1996 1998 2000 2002 2004 2006 2008

010000

20000

30000

40000

50000

60000

70000

year

Tota

l EP

O p

aten

ts

Total Patents in EPO

1998 2000 2002 2004 2006 2008

02000

4000

6000

8000

10000

Year

US

Che

mic

al P

aten

ts in

EP

O

Total American ChemicalPatents


Aggregate Activity

0.0 0.5 1.0 1.5 2.0 2.5 3.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

% of EPO patents in 2000

% o

f EP

O p

aten

ts in

200

9

Patents before and afterREACH

0.0 0.1 0.2 0.3 0.4 0.5

0.0

0.1

0.2

0.3

0.4

0.5

% of EPO patents in 2000

% o

f EP

O p

aten

ts in

200

9

Zoomed in.→ Appendix


Alternative explanations: Government Choices

Regulatory demand may drive observed correlationbetween TBT and having both high royalty receipts andcontract intense products.

No observed correlation between adoption of ISO 9000standards and TBT Specific Trade Concerns.No particular reason to think regulatory demand haschanged in main TBT users.

Specific Trade Concerns suffer from selection effects.Foreign Governments may choose to complain when theyfeel they can succeed at low cost.Foreign Governments may choose to complain whenstakes are high.

→ Appendix


Appendix

Rogerson (1986)

Welfare

Pre-Implementation REACH

Patent Data

TBT Data

Plot of Low Cost Profits

Book Project Conclusion

PuzzleTheoryGovernment BehaviorReciprocal Trade NegotiationsConclusion

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