Tariff effects on MNC decisions to engage in intra‐firm and arm's‐length trade

Abstract

Using confidential firm-level data from the Bureau of Economic Analysis (BEA) on activities of U.S. multinational corporations (MNCs) and their Canadian affiliates, we study the dramatic growth of intra-firm and arm's-length U.S.-Canada trade over the 1984-95 period. We find that decisions to engage in intra-firm and arm's-length trade are essentially unrelated to tariff and transport cost reductions over this sample period. Thus, we find that the increase in trade occurred almost entirely on the intensive rather than the extensive margin. This is consistent with case study evidence in Keane and Feinberg (2006), where MNC executives consistently indicate that the modest tariff reductions of the 1984-95 period were not sufficient to justify fixed costs of overhauling international supply chains. Our results have important implications for recent influential models of international trade that rely on sensitivity of intra-firm trade to tariffs at the extensive margin to explain how small tariff declines could have led to the explosion of intra-firm trade since the 1980s. We also find that initial conditions (i.e., 1983 tariffs) are uncorrelated with whether firms engaged in intra-firm or arm's-length trade activity at the start of the sample period. This result is surprising as it implies that firms/industries with a greater propensity to engage in trade were not, in general, successful at lobbying for more favourable tariff treatment.Les effets des tarifs sur les décisions des firmes plurinationales de s'engager dans le commerce intra-firme et dans le commerceà bout de bras. A l'aide de données confidentielles au niveau de la firme du Bureau of Economic Analysis (BEA)à propos des activités des firmes plurinationales (FPN) américaines et de leurs succursales canadiennes, onétudie la croissance dramatique du commerce USA-Canada tant intra-firme qu'à bout de bras Tariff effects on MNC decisions 901 pour la période 1984-95. Il appert que les décisions de s'engager dans l'un et l'autre commerce sont fondamentalement non-reliées aux réductions des coûts de transport et des tarifs au cours de cette période. On découvre que l'accroissement du commerce s'est produit presqu'entièrementà la marge intensive plutôt qu'à la marge extensive. C'est en ligne avec les résultats de l'étude de cas de Keane et Feinberg (2006) où les cadres des FPN ont systématiquement indiqué que les modestes réductions de tarifs entre 1984 et 1995 n'étaient pas suffisantes pour justifier les coûts fixes impliqués par la modification de leurs chaines de production internationales. Ces résultats ont des implications importantes pour certains modèles influents de commerce international qui sont ancrés dans une sensibilité du commerce intra-firme aux tarifsà la marge extensive pour expliquer comment de faibles chutes de tarifs ont pu engendrer une explosion du commerce intra-firme depuis les années 80. On montre aussi que les conditions initiales (e.g., les tarifs de 1983) ne sont pas coreliées avec le fait que la firme est engagée ou non dans l'un ou l'a...

Trade liberalization, outsourcing, and the hold-up problem

“…The contributions of Feinberg and Keane (2006a,b) highlight this point. Feinberg and Keane (2006b) find that United States-Canada tariff reductions from 1984 to 1995 did not induce a significant increase in intra-firm trade at the extensive margin. This suggests that the jump in trade from zero to a positive level illustrated in Fig.…”

Do tariffs matter for the extensive margin of international trade? An empirical analysis

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“…Econometric and anecdotal evidence, from Keane (2006, 2009) and Keane and Feinberg (2007), points in the same direction. In particular, Feinberg and Keane (2009) find that firms' decisions to engage in either intra-firm trade in intermediates or arm's-length trade are unrelated to reductions in tariffs, so that tariff reductions do not matter at all for the increase of trade along the extensive margin. Instead, Keane and Feinberg (2007) argue that technical change in the form of better logistics management, such as just-in-time management, is primarily driving the increase in intra-firm trade.…”

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