Protection and International Sourcing

Authors


  • Corresponding author: Emanuel Ornelas, Managerial Economics and Strategy Group, London School of Economics, Houghton Street, London WC2A 2AE, UK. E-mail: e.a.ornelas@lse.ac.uk.

  • We thank Kyle Bagwell, Paola Conconi, Luis Garicano, Alberto Trejos and especially Bob Staiger and two anonymous referees for comments and suggestions. We also thank seminar participants at ECARES, Erasmus University, Norwegian School of Economics, Tübingen, Nottingham, the 2008 CEP Annual Conference, the 2008 ELSNIT Conference and the 2008 Conference on Trade and Institutions at Seoul National University for their comments. Nathan Converse provided helpful research assistance. Ornelas gratefully acknowledges support from the SCIFI-GLOW project.

Abstract

We study how import protection affects relationship-specific investments, sourcing, organisational choice and welfare. In a property rights model, we show that a tariff on intermediate inputs that discriminates in favour of investing firms increases their bargaining surplus and their marginal returns on investment. Thus, a tariff may improve social welfare by mitigating hold-up problems facing domestic firms. However, a tariff may prompt inefficient organisational choices if foreign suppliers are more productive than domestic suppliers, or if integration costs are low. Tariff revenue, which is external to firms, drives a wedge between the private and social gains to offshoring and integration.

Ancillary