International Review of Economics and Finance 46 (2016) 27–35
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International Review of Economics and Finance journal homepage: www.elsevier.com/locate/iref
International joint venture and welfare-improving tariff-tax reforms Yuxiang Zou a, Tai-Liang Chen b,⁎,1 a b
School of Economics, Zhongnan University of Economics and Law, China Wenlan School of Business, Zhongnan University of Economics and Law, China
a r t i c l e
i n f o
Article history: Received 25 April 2016 Received in revised form 28 July 2016 Accepted 28 July 2016 Available online 09 August 2016 JEL classification: F13 F23 H20 L13
a b s t r a c t This paper examines the welfare effects of two tariff-tax reforms—point-by-point and worldprice-fixing—under an asymmetric duopoly in the presence of an international joint venture (IJV). If the host government implements a point-by-point reform, the welfare effect is highly relevant to the domestic rival's profit margin and the equity share of the host partner in the IJV. Welfare may increase based upon the extent of share threshold. If the government implements a world-price-fixing reform, together with profit-shifting effect, the reform will reduce welfare in the host country. Furthermore, an increase in the domestic rival's profit margin strengthens welfare loss. © 2016 Elsevier Inc. All rights reserved.
Keywords: Asymmetric duopoly International joint venture Excise duty Tariff-tax reforms Welfare
1. Introduction It is generally believed that trade openness is necessary to sustain rapid economic growth. For instance, India applied an import-substitution policy to reduce the growth rate of imports from 1961 to 1980, and its per-capita income grew by only 1.1%. In contrast, Korea's income grew by 6.3% when the government implemented an export-propelled industrial policy. A tariff reduction can be regarded as a way for a country to achieve trade openness by reducing trade barriers and increasing trade flows. For governments, the potential revenue loss resulting from cutting tariffs—in particular, the potential for fiscal imbalance—has always been a major concern. Consequently, a tariff reduction, combined with an appropriate rise in domestic tax, serves as a kind of reform, enabling most countries to compensate for the loss of government revenue. However, empirical evidence indicates that this kind of reform has no impact on the extent of revenue recovery in low-income countries (Baunsgaard & Keen, 2010).
⁎ Corresponding author at: Wenlan School of Business, Zhongnan University of Economics and Law, 182 Nanhu Avenue, East Lake High-tech Development Zone, Wuhan, Hubei 430073, China. E-mail addresses:
[email protected] (Y. Zou),
[email protected],
[email protected] (T.-L. Chen). 1 We are indebted to the editor-in-chief and two anonymous referees for constructive comments and helpful suggestions.
http://dx.doi.org/10.1016/j.iref.2016.07.017 1059-0560/© 2016 Elsevier Inc. All rights reserved.
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The interactions of integrated tariff-tax reforms have attracted scant attention within the literature. Studies of ad valorem taxes in the context of a small and competitive economy have shown that under certain conditions, governments can improve welfare by making adjustments in consumption tax and tariff rates (e.g., Hatzipanayotou, Michael, & Miller, 1994; Michael, Hatzipanayotou, & Miller, 1993; Tsuneki, 1995). In a similar context, Keen and Ligthart (2002) examined a case entailing the coordination of tariff reduction with an increase in domestic unit tax. They argued that the reform is unambiguously beneficial for a small, competitive economy. Keen and Ligthart (2005) further demonstrated that for an economy characterized by imperfect competition, the reform harms welfare as a result of the shift of profits from the home country to the foreign country.2 Considering economic scales, Fujiwara (2013) has shown that there is a possibility of an improvement in welfare in the case of decreasing marginal costs under conditions of imperfect competition. Singling out the welfare effect in the home country only, Fujiwara (2014) introduced a simultaneous change in tax and tariff as a way to fix the world price, showing that the effect of the terms of trade is still significant for unilateral tariff-tax reforms. He further emphasized that the world-price-fixing reform entails the advantage of avoiding trade retaliation within countries. Based on his study, he revealed that the reforms could achieve Pareto improvements for the home country under conditions of decreasing marginal costs. With the continued globalization of the world economy over the last decade or so, the world has witnessed a phenomenal increase in the volume of foreign penetration associated with commitments made by governments to trade openness. Foreign direct investment (FDI) and exports are commonly considered as manifestations of penetration within the existing literature on tariff-tax reforms. In general, foreign penetration assumes several possible forms within a market. Apart from FDI and exports, an international joint venture (IJV) is another possibility. In this case, a foreign firm may remain in its home country and serve other countries' markets by purchasing equity shares in domestic firms. Within the literature, a few studies have examined the impacts of industrial taxes on the formation of IJVs in detail (e.g., Al-Saadon & Das, 1996; Chowdhury & Chowdhury, 2002; Das & Katayama, 2003; Zhong & Lahiri, 2009). Home country governments often engage in discriminatory policies3 toward foreign investments, including international joint ventures. IJVs accordingly may be subject to excise duty or tariffs on the import of a specialized input necessary for the specific technology used in production.4 Specifically, Beladi, Marjit, and Chakrabarti (2009) have shown that liberal trade policies may attract foreign investments through the establishment of joint ventures. Focusing on the case of IJVs launched within a market, we address two questions that arise when a government implements a tariff-tax reform: (1) Could an increase in the share of the host domestic partner lessen the profit-shifting effect relating to a tariff-tax reform implemented under conditions of an imperfect market? (2) Will national welfare in the host country increase with certainty? We address these questions by investigating the welfare effects of two tariff-tax reforms—point-by-point and world-pricefixing—under an asymmetric duopoly in the presence of an IJV. We show that when a host government implements the policy reform, a decrease in the profit-shifting effect raises the producer surplus. Interestingly, when the host government chooses a point-by-point policy reform, the welfare effect becomes highly relevant to the domestic rival's profit margin and to the equity share of the host partner in the IJV. We show that a welfare-improving reform is achieved if the host partner's share of the joint profit is larger than the share threshold. On the other hand, when the host government implements simultaneous changes in the tax and tariff so as to fix the world price, the reform deteriorates welfare in the host country. We further show that the greater is the profit margin of the domestic rival, the greater is the welfare losses that are realized in the host country. Furthermore, the point-by-point reform raises the government revenue while the world-price-fixing reform reduces the revenue under certain conditions. The remainder of this paper is organized as follows. We begin by presenting the basic framework in Section 2, followed by a discussion of our investigation of the welfare effects of both the point-by-point and the world-price-fixing tariff-tax reforms in Section 3. The final section offers concluding remarks. 2. The model Suppose that two firms, A and B, compete for a homogeneous good in the host country. Both firms have identical technology as denoted by the cost function, Ci = cqi + F, i = A,B, in which F stands for the fixed cost, and cqi is the variable cost. As no free entry is considered in this study, we postulate that F = 0 for the sake of simplicity. Let the inverse market demand facing the firms be p = p(Q), where price p is a function of the total outputs Q, p′(Q) ≡ ∂p/∂ Q b 0 and p″(Q) ≡ ∂2p/∂Q2 = 0. The host 2 Keen and Lahiri (1993) demonstrated potential welfare improvements under reforms by considering commodity tax harmonization in an international Cournot oligopoly. In trade, tax harmonization usually involves making taxes identical or similar within a region, an area or a trading bloc (See, e.g., Lockwood, 1997; Eggert & Genser, 2001; Baldwin & Krugman, 2004; Conconi, Perroni, & Riezman, 2008). Usually, it includes cases wherein low-tax countries raise taxes, high-tax countries reduce taxes, or a combination of both. For example, The European Union has a value added tax of at least 15% within all member states. Unlike a term of tax harmonization, the tariff-tax reform in the paper is a strategic policy choice in a country. It enables the country to compensate for the loss of government revenue when conducting trade liberalization. 3 These policies may be formulated to ensure tariff protection for the final product, tariff reduction on equipment and components, and provision of infrastructure investment. 4 An excise or excise tax (sometimes a specific excise duty) is considered as an indirect tax on the sale, or production for sale, of specific goods or a tax on a good produced for sale, or sold, within a country or licenses for specific activities (See https://en.wikipedia.org/wiki/Excise; see, also, Caves, 1982; Al-Saadon & Das, 1996). For example, “Her Majesty's Customs and Excise” (often abbreviated to HMCE) in the UK was, until April 2005, responsible for the collection of value-added tax, customs duties, excise duties, and other indirect taxes. In U.S., excise taxes are collected by producers and retailers and paid to the Internal Revenue Service or other state and/or local government tax collection agencies.
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government levies a destination-based consumption tax t on each firm.5 It follows that the profit functions of two firms are, respectively, πA = pqA − CA − tqA and πB = pqB − CB − tqB.6 Suppose that there is a multinational firm with a superior technology, c⁎ b c, located in a foreign country. This firm considers entering the market by setting up a joint venture (JV) with one of the two host firms, given that the technology possessed by the JV would be different from that of the partner firm. Suppose an international joint venture company (IJV) consists of the multinational firm and firm A. Thus, the profit function of the joint firm is expressed as: π j ¼ pq j −C j −tq j − τq j ;
ð1Þ
where qj is the output of the joint firm and Cj stands for the total cost, Cj = cjqj. Because of duality, based on joint costs, it is equivalent for the foreign firm and its host partner to bargain for either profit-maximizing or cost-minimizing. Accordingly, the marginal cost of the IJV is a convex combination of the two partner firms, that is, cj = θc + (1 − θ)c⁎, where θ ∈ (0,1) is exogenous. For the equity shares of the joint firm, we assume that the profits accruing to firm A and the foreign firm are sπj and (1− s)πj, respectively, where s ∈ (0,1).7 In addition to a destination-based consumption tax, the host country may levy excise duty on the import of a specialized input necessary for the technology of the IJV used in production. As a result, such a restriction levied by the host government will influence the equity share of the IJV. (Al-Saadon & Das, 1996; Caves, 1982). Suppose an IJV's input-output production follows Leontief one-to-one fashion. Let an excise tax, τ, be imposed on the IJV. The excise tax could be alternatively viewed as a specific tariff on imported inputs used in the IJV. To examine the policy effects, we consider that the host government implements the policies given the distribution of negotiated shares in this one-shot Nash game. Based on the aforementioned assumptions, both the joint firm and host firm B choose their output simultaneously to maximize their own profit. The first-order conditions are: 0
p qB þ p−c−t ¼ 0; 0 p q j þ p−c j −t−τ ¼ 0:
ð2Þ
We can obtain that qB = qB(t,τ;c,cj) and qj = qj(t,τ;c,cj). Notice that c N cj. From Eq. (2), we obtain p′(qB − qj) = (c − cj) − τ. It follows that for a positive excise tax, τ, if c − cj N τ, qB will be smaller than qj at optimum. On the other hand, if c − cj b τ, qB will be greater than qj at an optimum level. The following lemma characterizes the finding: Lemma 1. At optimum, if c − cj N τ, qB b qj; contrarily, if c − cj b τ, qB N qj. By totally differentiating Eq. (2), we obtain:
0
qB p″ þ 2p 0 q j p″ þ p
0
qB p″ þ p 0 q j p″ þ 2p
dqB dq j
¼
1 0 dt þ dτ; 1 1
ð3Þ
where qp″ + p′ b 0 and qp″ + 2p′ b 0 satisfy second-order conditions.8 Since p″ = 0 by assumption, the comparative static outcomes are: ∂q j ∂q j ∂qB 1 1 ∂q −1 2 ¼ 0 b 0; ¼ 0 b 0; B ¼ 0 N 0; ¼ 0 b 0: 3p 3p 3p 3p ∂t ∂t ∂τ ∂τ
ð4Þ
¼ 3p2 0 b 0 and ∂Q ¼ 3p1 0 b 0, where Q = qB + qj. It follows that ∂Q ∂t ∂τ Q Given that qB = qB(t,τ;c,cj) and qj = qj(t,τ;c,cj), consumer surplus is given by CS ¼ ∫ 0 p ðXÞ dX−ðqB þ q j Þ p ðQÞ; Q ¼ qB þ q j , and the producer surplus in the host country is PS = πB + sπj. Together with government revenue, T ≡ t(qB + qj) + τqj, the welfare function in the host country is thus: w ðt; τÞ ¼ CS þ PS þ T:
ð5Þ
5 In general, indirect taxes can be classified as either origin-based or destination-based taxes. An origin-based tax (also known as production tax) is levied where goods or services are produced. On the other hand, a destination-based tax (consumption tax) defines the source of the transaction to be the destination at which the product will eventually be used, or the address to which the product is shipped. 6 Notice that p denotes a market price. If the government imposes a consumption tax t, then p = pp + t, where pp is a producer price. It follows that firm's profit function will be π = ppq−C = pq−C−tq. 7 The objective function of the joint company follows Nash's axiomatic bargaining:maxs(sπj)γ1[(1−s)πj]γ2, which is equivalent to maxsγ1 ln(sπj) + γ2 ln(1−s)πj. It follows that an increase in γ1 increases the share of joint profits of the host partner, while an increase in γ2 decreases the share of joint profits of the host partner. Notice that the axiomatic approach has to follow the invariance, symmetry, independence of irrelevant alternatives, and Pareto efficiency axioms. The axioms also require that the players never agree on inferior outcomes. See, for example, Osborne and Rubinstein (1990) for more details. 8 For a unique Cournot equilibrium, Kolstad and Mathiesen (1987) found that the sign of the determinant of the Jacobian matrix of the marginal profit must be positive. See Kolstad and Mathiesen (1987, p. 684) for further details.
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3. The tariff-tax reforms and welfare In this section, we examine the effects of policy reforms on the host country's welfare, government's revenue, and market access. The policy reform suggested by Keen and Ligthart (2005) is defined by dτ = − dt N 0. Thus, one unit of tariff reduction is accompanied by a rise in one unit of consumption tax. The reform defined above is for a simultaneous change in tariff and consumption tax. 3.1. Point-by-point reform and welfare We commence with the point-by-point reform and its welfare effect. Differentiating Eq. (5) with respect to t and τ, we derive the following: n h o ∂q ∂q i ∂w ðt; τÞ 0 0 j B ¼ ð1−sÞ q j þ − ð1−sÞ q j þ qB p þ t þ −q j p þ t þ τ ; ∂t ∂t ∂t n h o ∂q ∂q i ∂w ðt; τÞ 0 0 j B ¼ ð1−sÞ q j þ − ð1−sÞ q j þ qB p þ t þ −q j p þ t þ τ : ∂τ ∂τ ∂τ Thus, the welfare effect can be expressed as follows: i o ∂w ðt; τÞ ∂w ðt; τÞ n h 0 − ¼ − ð1−sÞq j þ qB p þ t ∂t ∂τ
0 0 0 2p − −q j p þ t þ τ p
ð6Þ
The effect of a point-by-point tariff-tax reform on welfare relates to the share of the joint firm, s ∈ (0,1). Incorporating the firstorder conditions, we can derive the right-hand side of Eq. (6): ð7Þ In Eq. (7), 2p′ b 0 and then ð8Þ Let s be a critical threshold of the share of the host partner in joint venture. From Eq. (8), it follows that the sign of Eq. (6) is . To justify s, we start with the first order conditions. Due to c N cj, p − cj N p − c. From Eq. (2), we can closely associated with classify four cases associated with firms' profit margins: (a) p − cj N t + τ N 2(p − c) N p − c; (b) p − cj N 2(p − c) N t + τ N p − c; (c) p − cj N 2(p − c) N p − c N t + τ; and (d) 2(p − c) N p − cj N p − c N t + τ. Table 1 presents a summary of the main results which are proven in Appendix: Therefore, we can characterize the following proposition: Proposition 1. The reform increases (resp. decreases) social welfare if and only if s Ns (resp. sbs). If s ¼ s, the reform has no effect on social welfare. Specifically, if sN1 for any state, the reform decreases social welfare. Proof. See also Appendix. In order to enable them to be easily comprehended, Fig. 1 illustrates the welfare effect as shown in Proposition 1 in the dimension of the share thresholds s and the share of host partner s: The strategy of coordinated tariff-tax reform refers to a small tariff reduction combined with an increase in consumption tax of the same absolute magnitude. Keen and Ligthart (2002) demonstrated that this reform brings about an improvement in welfare in a perfect competition economy. Conversely, Keen and Ligthart (2005) have argued that this causes a reduction in welfare in an Table 1 Summary of the welfare effects.
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Fig. 1. The welfare effect of the point-by-point policy reform.
imperfect competition setting. Profit-shifting from the host country to the foreign country is the key to obtaining this outcome of reduced welfare.9 A joint venture, as discussed here, naturally shifts profits to the foreign partner. Let RCB and RCj be reaction functions of firms. As shown in Fig. 2, intuitively, for a point-by-point tariff-tax reform, the reaction function of IJV will not shift while the reaction function of domestic firm B will shift downwards. Notice that, as shown in Lemma 1, if c − cj N τ, qB will be smaller than qj at optimum; and if c − cj b τ, qB will be larger than qj at an optimum level. We illustrate the former case in Fig. 2, and the mechanism works the same for the latter case. From comparative statics, we can find that the reform decreases qB and in∂q ∂q B B − ∂q b 0, ∂tj − ∂τj N0. Evidently, the equilibrium point moves from the pre-reform equilibrium E to the postcreases qj; ∂q ∂t ∂τ reform equilibrium E′. It follows that the reform decreases πB and increases πj. An increase in a destination-based consumption tax relating to the policy reform lessens the domestic firm's revenue. The share of the host partner's earnings in the joint profit can compensate for the loss of profit of domestic firm B. Therefore, s plays the key role in determining the impacts of the reform on welfare. We argue that in the case of constant returns to scale, if the host partner earns a share of the joint profit lower than a certain threshold s, the reform deteriorates welfare. However, if the host partner's share is sufficiently large, sNs, the reform improves welfare under certain conditions. In contrast with Keen and Ligthart (2005), we argue that the distribution of the IJV profit shares lessens the profit-shifting effect from the host country to the foreign country. Specifically, although domestic firm B has a cost disadvantage in this asymmetric duopoly, the profit compensation from IJV offsets this cost loss. Furthermore, if the domestic firm's profit margin is greater (resp. smaller) than the cost difference, the share threshold will be small (resp. large). Together with profit shifting, welfare increases if the host partner's share extent is larger than the share threshold; otherwise, welfare decreases. Furthermore, the reform increases the government revenue: ∂T ∂T ðt þ τÞ N0: − ¼ 2qB − 3p0 ∂t ∂τ
ð9Þ
Before the government conducts the policy reform, if c − cj b τ, qB is larger than qj, we could imagine the equilibrium point will be located at the right-hand side of 45-degree line. When the reform goes into effect, τ may be larger than, equal to, or smaller than c − cj. It follows that the post-reform qB will be larger than, equal to, or smaller than the post-reform qj, respectively. In gen∂q ∂q B B − ∂q b 0 and ∂tj − ∂τj N 0. The reform therefore eral, the mechanism is the same as the case of c − cj N τ and we can obtain that ∂q ∂t ∂τ decreases πB and increases πj. According to Lemma 1 and Proposition 1, the following Corollary characterizes the findings: Corollary 1. The effect of a point-by-point tariff-tax reform on welfare is relevant to the share of the host partner, s, in the joint venture, firms' profit margins, and the extent of the cost difference. The foreign welfare is measured by the foreign partner's profit. The tariff-tax reform affects π⁎(t,τ) = (1− s)πj(t,τ) as shown below: ∂π ðt; τÞ ∂π ðt; τÞ ∂ ð1−sÞ π j ðt; τÞ ∂ ð1−sÞπ j ðt; τ Þ 2 − ¼ − ¼ ð1−sÞ q j N0: 3 ∂t ∂τ ∂t ∂τ
ð10Þ
We thus characterize this result as follows: Lemma 2. The point-by point tariff-tax reform improves foreign welfare.
9 Fujiwara (2013) has shown that the influence of the shape of the marginal cost function may offset the profit-shifting effect derived from the policy reform. He showed that there is a possibility of an improvement in welfare in the case of decreasing marginal costs.
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Fig. 2. The equilibrium configuration of the effect of the point-by-point policy reform: The case of c−cj N τ.
The effects on government revenue and market access induced by our model are the same as those described by Fujiwara (2013), because the share s does not influence government revenue and market access.10 The reform will essentially increase market access. 3.2. World-price-fixing reform and welfare Fujiwara (2014) has shown that policy reform may result in Pareto improvement in the host country by leaving the foreign country's welfare unchanged. In this subsection, we investigate whether the existence of a joint venture still causes Pareto improvement when the government decides to implement a simultaneous change in tax and tariff to fix the world price. This study aims to single out the effects of the current reform on the host country. Specifically, the actions of which do not affect world prices if the host country is small11 in this section. Note that in this model, the foreign welfare is measured by the foreign partner's profit. Suppose that the world price is a function of t and τ, pW = p− t − τ, where p ≡ p(qB + qj). We can then obtain the effect of a simultaneous change in t and τ on the world price as: 2 W
dp
0 ¼ 4p
∂
qB þ q j ∂t
3
2
0 −15dt þ 4p
∂
qB þ q j ∂τ
3 −15dτ:
ð11Þ
A fixed world price implies that dpW = 0 and dt = − 2dτ. Applying Eq. (4) into Eq. (11), we have:
−2
1 0 −2 dτ þ dτ ¼ dτ: 1 1 −1
ð12Þ
Replacing the right-hand side of Eq. (3) with the right-hand side of Eq. (12), we derive the comparative statics under the condition dpW = 0 as follows: ∂ ∂qB 1 ∂q j dpW ¼0 ¼ − 0 ; W ¼ 0; p ∂τ dp ¼0 ∂τ
10
qB þ q j 1 dpW ¼0 ¼ − 0 : p ∂τ
ð13Þ
In a perfect competition, Kreickemeier and Raimondos-Møller (2008) have shown that point-by-point reform does not increase market access. Notice that in trade theory, a small country is an economy that is small enough compared to its trading partners so that its commercial policies do not influence world prices. Thus, the countries with small open economies are price takers. This is unlike a large open economy, the actions of which do affect world prices and income. 11
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33
The reform thus amplifies total outputs. Differentiating consumer surplus, producer surplus, and government revenue with respect to τ, respectively, we obtain: ∂ qB þ q j ∂CS 0 W ¼ − qB þ q j p dpW ¼0 ¼ qB þ q j N 0; ∂τ ∂τ dp ¼0
ð14Þ
∂PS ∂t ∂t dpW ¼0 ¼ −qB dpW ¼0 −sq j 2 þ W ¼ 2qB N 0; ∂τ ∂τ ∂τ dp ¼0
ð15Þ
∂t ∂ qB þ q j ∂T t W ¼ qB þ q j W þt dpW ¼0 þ q j ¼ −2qB −q j − 0 : p ∂τ ∂τ dp ¼0 ∂τ dp ¼0
ð16Þ ∂sπ
∂ð1−sÞπ
From Eq. (15), the policy reform evidently shows no impact on the IJV profit, because ∂τ j jdpW ¼0 ¼ 0 and ∂τ j jdpW ¼0 ¼ 0. Subsequently, the impact of the reform on the producer surplus is equivalent to the impact on the domestic firm's profit. Intuitively, we surmise that the host country's government uses the reform to achieve a unilateral welfare effect. In other words, as the host country's government contemplates its own welfare effect, at an optimum level, foreign welfare remains unchanged under this reform. On observing this policy change, firms strategically compete via Cournot in a market based on the host country's intention of achieving an unchanged foreign welfare outcome. As a result, the reform does not change the IJV profit at an optimum level in this one-shot Nash game. Furthermore, the government revenue tapers off if −[2(p − c) + (p − cj)] + 4t + τ N 0, as shown in Eq. (16). In contrast with the point-by-point reform, the effect on the government revenue is not increasing with certainty as Eq. (9). We thus express this finding in the following proposition: Proposition 2. The world-price-fixing reform has no impact on the profit of the international joint venture at optimum. Furthermore, in contrast with the point-by-point reform, the policy effect of world-price-fixing reform on the government revenue is not increasing with certainty. Summing up Eqs. (14)–(16), the overall welfare effect is: ∂w 1 1 W ¼ qB − 0 ¼ − 0 ðp−cÞ N 0: p p ∂τ dp ¼0
ð17Þ
Consequently, as Δτ b 0, we obtain the following proposition: Proposition 3. The world-price-fixing policy reform deteriorates welfare in the host country. The greater is the domestic rival's profit margin, the greater is the welfare effect. Fig. 3 reveals the reasoning behind the proposition. Similarly, we illustrate the case of c − cj N τ in the figure, and the mechanism works for the case of c − cj ≤ τ as well. In Fig. 3, the pre-reform Cournot-Nash equilibrium is labeled E. For a
Fig. 3. The equilibrium configuration of the effect of the world-price-fixing policy reform: The case of c−cj N τ.
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world-price-fixing tariff-tax reform, dt = − 2dτ N 0. It follows, then, that the reaction functions of both the IJV and domestic firm B shift downwards in response to the reform. The post-reform equilibrium E″ indicates that the reform has no effect on πj but decreases πB. Hence, the producer surplus as shown in Eq. (15) decreases. Furthermore, the reform decreases consumer surplus since total outputs decrease. However, the government revenue tapers off under certain conditions. In light of these effects, we find that the effect of the world-price-fixing tariff-tax reform essentially reduces welfare under an asymmetric duopoly. Moreover, in Eq. (17), an increase in (p − c) further strengthens the welfare loss. It shows that the greater the profit margin of the domestic rival, the greater the welfare loss in the host country.12 4. Concluding remarks This study has examined the welfare effects of two tariff-tax reforms under an asymmetric duopoly in the presence of an IJV. The following conclusions can be drawn. First, if the host government implements a point-by-point policy reform, the welfare effect is highly relevant to the domestic rival's profit margin and the equity share of the host partner in the IJV. A welfareimproving reform is achieved if the host partner's share of the joint profit is larger than the share threshold. Second, if the host government implements a simultaneous change in tax and tariff so as to fix the world price, the reform cannot impact the joint venture's profit and then reduce both producer surplus and consumer surplus. Together with profit-shifting effect, the reform reduces welfare in the host country, and an increase in the domestic rival's profit margin strengthens welfare loss. Furthermore, the point-by-point reform raises the government revenue while the world-price-fixing reform reduces the revenue under certain conditions. Appendix A Proof of Table 1 and Proposition 1. The effect of a point-by-point tariff-tax reform on welfare relates to the share of the joint , where s denotes a critical firm, s ∈ (0,1). From Eq. (8), we know that the sign of welfare effect is closely associated with threshold of the share of the host partner of joint venture. We further classify four cases involving firms' profit margins: (a) p −cj N t + τ N 2(p− c) N p −c; (b) p −cj N 2(p −c) N t + τ N p −c; (c) p −cj N 2(p− c) N p −c N t + τ; and (d) 2(p− c) N p − cj N p − c N t + τ. Along with p − cj = − qjp′ + t + τ, we can rewrite (a) as −qjp′ + t + τ N t + τ N 2(p − c) N p − c. It follows that13 1 p−c− ðt þ τ Þ 1 1 2 N− : N0N 0 2 2 −q j p
We can obtain 0 b s b 12, which implies that p −c N c − cj.14 That is, under the condition, p − c N c − cj, s b 12. Hence, in case (a), , where s ∈ð0; 12Þ. In a similar manner, we can prove that in cases (b) and (c), result, we can establish the following in cases (b) and (c): 1 2 ðt
þ τÞ,
p−c−12ðtþτÞ ð−q j p0 Þ
p−c−12ðtþτÞ ð−q j p0 Þ
1 2
N
p−c−12ðtþτÞ ð−q j p0 Þ
N0. It follows that 1Ns N
1 2
and p − c b c − cj. As a
, where s∈ð12 ; 1Þ. Finally, in case (d), if c−c j b
N1 and s b s. Accordingly, ∂w ∂tðt;τÞ − ∂w ∂τðt;τÞ in Eq. (6) will be smaller than zero. On the other hand, if c−c j N 12 ðt þ τÞ,
b 1. Then, s b s if sN1;
if s b 1. It implies that the policy reform reduces welfare if s N1.
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Recall that, in trade theory, a small country's commercial trade policies have no effect on foreign welfare. (p − c) + 2(−qjp′) N 0 ⇔ (p − c) + 2(p − cj) N 2(t + τ) ⇔ 2(p − cj − t − τ) N − (p − c). Together with Eq. (2), we can obtain that 2ðp−c j −t−τÞN p−c−2ðtþτÞ N− 12 : ð−q j p0 Þ p−c−12ðtþτÞ 1 ð−q j p0 Þ N − 2 ⇔2ðp−cÞ Np−c j ⇔p−c N c−c j :
q j p0 −t−τ⇔ 14
0N
1
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