1. Stefan Rouenhoff & Carsten Eckel, University of BambergPreferential Trade Agreements and Multi-Product Firms Stefan Rouenhoff & Carsten Eckel University of Bamberg 11th Annual Conference of the European Trade Study Group Rome, September 10, 2009

2. Stefan Rouenhoff & Carsten Eckel, University of BambergPreferential Trade Agreements and Multi-Product Firms Literature Preferential trade agreements and FDI Horizontal FDI as tariff jumping motive and the intention to exploit the proximity to larger regional markets E.g., Motta & Norman (1996), Puga & Venables (1997) Multi-product firms High importance of multi-product firms (MPFs) Horizontal FDI causes multiple way trade in differentiated final products “Cannibalization” of own sales E.g., Baldwin & Ottaviano (2001), Eckel & Neary (2009)

3. Stefan Rouenhoff & Carsten Eckel, University of BambergPreferential Trade Agreements and Multi-Product Firms Theoretical Framework Partial equilibrium analysis One monopolistic MPF, located in a third country (C)  wants to supply two identical countries (j=A,B)  produces two product varieties (i=1,2), which are substitutable, 0<b<1 Each variety is produced in a separate production plant under constant variable costs c Each production plant is associated with fixed costs F Unit tariff costs t are identical between all three countries

4. Stefan Rouenhoff & Carsten Eckel, University of BambergPreferential Trade Agreements and Multi-Product Firms Theoretical Framework Comparison of two economic settings No preferential trade agreement between country A & B (non-integrated markets (NIM)) A preferential trade agreement between country A & B (integrated markets (IM))  No tariff costs between country A & B

5. Stefan Rouenhoff & Carsten Eckel, University of BambergPreferential Trade Agreements and Multi-Product Firms Consumers in non-integrated and integrated markets Utility function: Demand function Variety 2: Variety 1:

6. Stefan Rouenhoff & Carsten Eckel, University of BambergPreferential Trade Agreements and Multi-Product Firms Manufacturing in non-integrated markets Market supply strategies A1 - A4 П A2 П A4 П A3 П A1 Trade costs Investment costs Objective functions

7. Stefan Rouenhoff & Carsten Eckel, University of BambergPreferential Trade Agreements and Multi-Product Firms Manufacturing in non-integrated markets Market supply strategies A1 - A4 П A2 П A4 П A3 П A1 Trade costs Investment costs Objective functions

8. Stefan Rouenhoff & Carsten Eckel, University of BambergPreferential Trade Agreements and Multi-Product Firms Manufacturing in non-integrated markets Country A Country B Country C Production plant variety 2 Market supply strategy A4 Production plant variety 1

9. Stefan Rouenhoff & Carsten Eckel, University of BambergPreferential Trade Agreements and Multi-Product Firms Manufacturing in non-integrated markets Critical tariff rate: Profit conditions:

10. Stefan Rouenhoff & Carsten Eckel, University of BambergPreferential Trade Agreements and Multi-Product Firms Manufacturing in non-integrated markets Profits of market supply strategies

11. Stefan Rouenhoff & Carsten Eckel, University of BambergPreferential Trade Agreements and Multi-Product Firms Manufacturing in integrated markets Market supply strategies A5 – A7 П A5 П A6 П A7 Trade costs Investment costs Objective functions

12. Stefan Rouenhoff & Carsten Eckel, University of BambergPreferential Trade Agreements and Multi-Product Firms Manufacturing in integrated markets Market supply strategies A5 – A7 П A5 П A6 П A7 Trade costs Investment costs Objective functions

13. Stefan Rouenhoff & Carsten Eckel, University of BambergPreferential Trade Agreements and Multi-Product Firms Manufacturing in integrated markets Country A Country B Country C Market supply strategy A6 Production plant variety 1 Production plant variety 2

14. Stefan Rouenhoff & Carsten Eckel, University of BambergPreferential Trade Agreements and Multi-Product Firms Manufacturing in integrated markets Critical tariff rates: Profit conditions:

15. Stefan Rouenhoff & Carsten Eckel, University of BambergPreferential Trade Agreements and Multi-Product Firms Manufacturing in integrated markets Profits of market supply strategies

16. Stefan Rouenhoff & Carsten Eckel, University of BambergPreferential Trade Agreements and Multi-Product Firms Comparative Static Analysis Investment location

17. Stefan Rouenhoff & Carsten Eckel, University of BambergPreferential Trade Agreements and Multi-Product Firms Comparative Static Analysis Welfare (Extension I: transportation costs ), if

18. Stefan Rouenhoff & Carsten Eckel, University of BambergPreferential Trade Agreements and Multi-Product Firms Results and Outlook  Relocation of production possible  Both, “tariff jumping motive” and “cannibalization reduction motive” are decisive for market supply stragegy  Welfare decrease possible  Extension II: varying country size  Extension III: varying tariff costs