Trade Liberalization in a Multinational-Dominated Industry: A Theoretical and Applied General-Equilibrium Analysis

31 Pages Posted: 26 Jul 2010

See all articles by Linda Hunter

Linda Hunter

affiliation not provided to SSRN

James R. Markusen

University of Colorado at Boulder - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Thomas F. Rutherford

Centre for Energy Policy and Economics

Date Written: April 1991

Abstract

A theoretical model is developed and applied to the North American auto industry, motivated by the possibility of US-Mexico free trade. Special features of the model include (1) significant scale economies at the plant level, (2) imperfect competition among firms, (3) joint ownership of plants and production coordination across plants by each firm, (4) an (initial) ability of firms to segment markets, (5) a separate treatment of non-resident firms in determining oligopolistic markups. Using an applied GE model, we find that (A) the gains to Mexico are significant and the effects on the US and Canada are essentially zero following North American free trade if firms can continue to segment markets: (B) Because of the way that the North American multinationals determine markups, increased imports from Mexico do not result in a rationalization of US and Canadian production in the way it should if firms were strictly national. (C) Genuinely free trade for consumers (integrated markets) results in large gains for Mexico as the Mexican industry is forced to rationalize, while losses to the US and Canada are very small.

Suggested Citation

Hunter, Linda and Markusen, James R. and Rutherford, Thomas F., Trade Liberalization in a Multinational-Dominated Industry: A Theoretical and Applied General-Equilibrium Analysis (April 1991). NBER Working Paper No. w3679. Available at SSRN: https://ssrn.com/abstract=1647513

Linda Hunter

affiliation not provided to SSRN

James R. Markusen

University of Colorado at Boulder - Department of Economics ( email )

Campus Box 256
Boulder, CO 80309
United States
303-492-0748 (Phone)
303-492-8960 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Thomas F. Rutherford

Centre for Energy Policy and Economics ( email )

ETH-Zentrum
Zurich, CH-8092
United States
+41 (0)44/632 6359 (Phone)
+41 (0)44/632 1622 (Fax)

HOME PAGE: http://www.cepe.ethz.ch/

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