Most market access commitments under the WTO are in the form of bindings on applied tariff rates. We observe two important regularities in the data. First, applied tariffs are often lower than the ...bound tariffs, providing governments with substantial policy flexibility. Second, the extent of flexibility varies substantially across sectors and countries. In a sharp contrast to the prediction of standard trade agreement models, we observe a strong negative correlation between tariff commitments and measures of import market power. We model the trade-off between discipline and flexibility in the design of trade agreements, and argue that recognizing this trade-off is the key to explain the observed patterns in the tariff binding commitments and applied tariffs under the WTO.
•Applied tariffs are often lower than tariff bindings, providing governments with substantial policy flexibility.•The extent of flexibility varies substantially across sectors and countries.•There is a strong negative correlation between tariff commitments and import market power.•There is a trade-off between discipline and flexibility in the design of trade agreements.•Optimal agreement provides less policy flexibility in sectors with greater import market power.
We study the economic effects of unilateral adoption of corporate tax policies that include the choice between destination-based and source-based taxation and between cash flow and income taxes. We ...utilize a heterogeneous firm model in which monopolistically competitive North firms choose whether to outsource an intermediate good to an unrelated South firm or to produce in a subsidiary in the South. Standard pass through arguments no longer apply because of the income shifting behavior of multinationals and endogenous choice of organizational form. The high tax North country will prefer a destination-based tax over a source-based tax if it adopts a cash flow tax, but whether the cash flow tax is preferred to an income tax will depend on the volume of trade in the differentiated products sector. If the high tax country adopts a destination-based cash flow tax, the low tax country will prefer a destination-based income tax to capture rents from the foreign subsidiaries.
•Analyze unilateral adoption of border adjusted and/or cash flow taxes by a North country•Allow for heterogeneous intermediate good sourcing and transfer pricing•Partial border adjustments are optimal under income taxation.•Countries with sizable export markets will prefer income taxation to cash flow taxation.•A South country will prefer income taxation if North adopts DBCFT.
This paper develops a North-South model to evaluate the South's incentive for patent protection when a Northern firm's investment in quality-enhancing research and development (R&D) is affected by ...its patent policy. The model is used to (a) evaluate the impact of requiring the South to fulfill its key WTO obligation of instituting patent protection and (b) to address the role of two major flexibilities that WTO members enjoy with respect to their patent policies: the freedom to implement exhaustion policies of their choosing and the right to use compulsory licensing (CL) subject to certain stipulations. Two forces drive the model: how much the firm invests in R&D and whether or not selling in the South maximizes its global profit. CL improves consumer access in the South and can even raise innovation and global welfare. Provided the South implements patent protection, innovation and welfare are higher if the North follows national as opposed to international exhaustion. However, the South's incentive for patent protection is not necessarily stronger under national exhaustion. Not only is CL more likely to be used under international exhaustion, the welfare gain resulting from its application is also higher relative to that under national exhaustion.
•We analyze how key TRIPS flexibilities interact with its central obligation.•TRIPS flexibilities pertain to compulsory licensing (CL) and patent exhaustion.•CL improves consumer access and can even raise innovation and welfare.•Patent protection in the South maybe less likely under national exhaustion.•The likelihood of welfare-improving CL is higher under international exhaustion.
In a stylised model involving a developing country (called South) and a foreign patent holder, we analyse whether and how the incidence and social value of compulsory licensing (CL) depends upon the ...South's patent protection policy. If South is free to deny patent protection, CL fails to arise in equilibrium and the option to use it makes both parties worse off. If South is obliged to offer patent protection, CL can occur and even yield a Pareto improvement. The ability to control price increases the South's incentive for patent protection as well as the likelihood of CL.
While China was reducing tariffs as part of the WTO accession process, it was also effectively restricting exports in some sectors by reducing the rebates of the value added tax (VAT) for exporters. ...We use a multi-country multi-sector Ricardian model to examine the extent to which these de facto export tax changes have benefited China and nullified the benefits to the rest of the world of China's trade liberalization. We show that trade liberalization benefited China's trading partners both through an improvement in their terms of trade and through a reallocation of resources from protected imported sectors to exportable sectors. We find that the partial rebate policy of VAT on exports provided a small effect overall on the welfare of China and its trading partners, although some countries lost as much as 2/3 of their gains from China's trade liberalization based on tariffs alone. By solving for China's optimal export taxes, we demonstrate that while certain sectors experienced a movement towards the optimal level of export taxes, others deviated from it. This differential adjustment contributed to the limited welfare effect on China. Interestingly, our results indicate that the export tax policies favored downstream sectors within China.
We analyze the incentives for an individual country to deviate from destination-based cash flow taxation (DBCFT) in a two-country model in which both countries have adopted DBCFT. A change in a ...country’s corporate tax rate, degree of taxation of capital income, and/or level of border adjustment generates welfare effects through fiscal effects, a price level effect, and relative price effects. We establish that at least one country will have an incentive to deviate from universal DBCFT by reducing the deduction for capital investments, even with asymmetric countries. For a deviation involving a reduction in border adjustments, we show that both countries will have an incentive to deviate in the symmetric case. Universal DBCFT will not be incentive compatible in a one-shot tax setting game, so commitment mechanisms will be required to sustain it as an equilibrium.
We study bargaining between a country and a multinational firm over the firm's entry to sell a patented product when the firm has private information about its profits and the country has the threat ...of issuing a compulsory license (CL). We assume the CL expands the surplus for some firm types, so that efficiency calls for all firms with sufficiently high valuations to enter immediately and those with lower valuations to wait for a CL. We establish the existence of two types of equilibria, depending on the maximum initial valuation: a bargaining pause equilibrium in which negotiations lie dormant for a finite period before the deadline and a licensing delay equilibrium in which bargaining continues for a finite time beyond the deadline. Two types of inefficiency arise—too many firms wait for the license and some firms who do not wait for the license are forced to delay agreements.
Relative to their counterparts in high-income regions, entrepreneurs in developing countries face less efficient financial markets, more volatile macroeconomic conditions, and higher entry costs. ...This article develops a dynamic empirical model that links these features of the business environment to cross-firm productivity distributions, entrepreneurs' welfare, and patterns of industrial evolution. Fit to panel data on Colombian apparel producers, the model yields estimates of a credit market imperfection index, the sunk costs of creating a new business, and various technology parameters. Model-based counterfactual experiments suggest that improved intermediation could dramatically increase the return on assets for entrepreneurial households with modest wealth.
The China–Rare Earths decision of the Appellate Body addressed two main issues: (i) whether China's obligations not to impose export duties under its accession protocol are subject to exceptions ...under Article XX of GATT, and (ii) the scope of the exception for China's export quota measures relating to conservation under Article XX(g) of GATT. In accord with its China–Raw Materials decision, the Appellate Body found that there is no textual basis for the application of the Article XX exception to China's export duty obligations. This interpretation exalted a narrow contextual approach over an approach to interpretation that would focus on broader context, object, and purpose. The Appellate Body also approved the Panel's overall approach to determining the availability of the Article XX(g) exception. This approach focused on the design and structure of China's quota measure, but left unresolved important issues, including the extent to which non-conservation purposes may prevent use of the exception and the role of empirical evidence of effects in these determinations. While the Appellate Body found that there is no ‘even-handedness’ requirement in Article XX(g) itself, we argue that the chapeau's requirement of non-discrimination is an appropriate additional criterion for determining whether a policy with a target of reducing extraction of a natural resource satisfies the requirements of Article XX.
We analyze how a price control and the threat of compulsory licensing (CL) affect consumer access in a developing country (South) to a patented foreign product. In the model, the Southern government ...sets the level of the price control on a Northern patent-holder who chooses between entry and voluntary licensing (VL). While entry incurs a higher fixed cost, licensed production is of lower quality. If the patent-holder does not work its patent locally, the South is free to use CL. The threat of CL: ensures that consumers have access to (a lower quality version of) the patented good when the patent-holder chooses not to work its patent locally; improves the terms at which VL occurs; can cause the patent-holder to switch from VL to entry; and can delay consumer access when CL replaces VL or entry. We also show that a price control and CL are mutually reinforcing instruments.
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