Research: Do trade restrictions actually increase exporting?

Kamal Saggi

Research: Do trade restrictions actually increase exporting?

Stock photo of a young woman shopping for electronic devicesImposing trade restrictions on parallel imports has the surprising effect of motivating a firm to export, according to a new study by economists Santanu Roy of SMU’s Dedman College and Kamal Saggi of Vanderbilt University.

Using game theory analysis, the economists found that diverse parallel importing policies among countries today make it possible to analyze for the first time how competition between firms and allowing or banning parallel imports can influence competition in foreign and domestic markets.

“Our research is the first to look at the consequence of strategic policy setting by governments in the context of competition in domestic and foreign markets,” said Roy, professor and director of graduate studies in the Department of Economics.

Most surprising among the findings, he said, is that imposing trade restrictions on parallel imports can actually motivate a firm to export – which can be the case when the market to which the firm is exporting is smaller than its own.

“So even though you are formally prohibiting the import of a product, you are actually promoting trade,” Roy said. “And that’s a new way of looking at this.”

Parallel importing occurs when a manufacturer exports its trademarked or patented products to a foreign market where demand, policies or price pressures require the goods be sold at a lower price. A third-party buyer purchases the low-priced goods and imports them back to the manufacturer’s home country, undercutting domestic prices.

The controversial practice has spawned gray market retail, where consumers buy high-value, brand-named goods at cut prices, such as electronics, video games, alcohol, books and pharmaceuticals.

Some advocates of free trade decry parallel importing, saying it infringes on manufacturers’ intellectual property rights accorded by copyright, patent and trademark laws. That, in turn, can discourage investment in new technology and products.

As a result, some countries allow parallel importing; others ban it. For example, parallel importing is allowed among the member countries of the European Union. It’s not permitted by the United States, although exceptions exist for many different products. Generally speaking, developed nations restrict parallel importing, while developing nations allow it.

The study by Roy and Saggi found there is no one-size-fits-all solution – neither a global ban nor a blanket endorsement. In fact, the authors found that policy diversity is working well because it takes into account important variables such as similarity or dissimilarity of markets, as well as competing products and government regulations.

“The only area where there may be need for intervention is where there may be major asymmetries between countries – where one country is very large and the other is very small,” Roy said.

Roy and Saggi report their findings in two articles: “Equilibrium Parallel Import Policies and International Market Structure,” a scenario in which there are quality differences in the products across countries, forthcoming in the Journal of International Economics; and “Strategic Competition and Optimal Parallel Import Policy,” a scenario in which there is asymmetrical protection of intellectual property, forthcoming in the Canadian Journal of Economics. The two economists were members of a development research group at the World Bank that researched parallel importing.

Written by Margaret Allen

> Read the full story from the SMU Research blog

May 8, 2012|Research|

Research Spotlight: Does might make right in global trade rules?

global-currencies-300.jpgThe World Trade Organization‘s rules governing the multilateral trading system may pass legal litmus tests, but from an economic standpoint, do they work?

Kamal Saggi, chairman of the Department of Economics in SMU’s Dedman College of Humanities and Sciences, has been examining international trade and the effects of multinational companies on developing countries since graduate school at the University of Pennsylvania. Lately he’s also been delving into the legal layers of trade. A recent research focus has been India’s burgeoning pharmaceutical industry.

“India has one of the most advanced pharmaceutical industries in the developing world and is poised to be a world player,” says Saggi, Dedman Distinguished Collegiate Professor of Economics and a 2003 Ford Fellowship recipient. “But pharmaceutical patents have been a big area of controversy.” Divergent approaches to intellectual property (IP) have often caused friction between Indian and global pharmaceutical companies. “In India, you could patent a process but not a product,” says Saggi, who grew up in India.

By developing alternative production procedures, Indian companies cleared their country’s legal hurdle to produce cheap, generic drugs that could meet local demand and be exported to other developing countries. In 1995, member countries of the World Trade Organization (WTO) successfully negotiated a multilateral agreement that “basically says all members have to adopt the same rules and regulations regarding patents, trademarks and copyrights,” he says. The WTO ruling protected the status quo for U.S. and European enterprises, but the benefit to firms in emerging economies was debatable, Saggi says. “Developing countries were asked to ratchet up their legal coverage of IP, but the question was: Why should they?”

His study of that complex issue appears in the paper “Intellectual Property Rights, Imitation, and Foreign Direct Investment: Theory and Evidence” (National Bureau of Economic Research, 2007). Saggi built a mathematical model that captured the essence of the problem – was it economically worthwhile for developing country members of the WTO to adopt its new rules regarding IP?

He and three co-authors – Lee Branstetter, Carnegie Mellon University; Raymond Fisman, Columbia University School of Business; and C. Fritz Foley, Harvard Business School – then plugged firm-level data on U.S. multinational companies collected by the Bureau of Economic Analysis into the model to “theoretically and empirically analyze the effect of strengthening intellectual property rights in developing countries.”

The economists determined that there were more gains than risks to the budding economies. “In some instances, it may be a case of trading apples for oranges. For example, a developing country may say, ‘If we reform our IPR, then you’ll open up agricultural trade to us,'” Saggi says. Or, as in the case of Indian pharmaceuticals, it may be an apples-for-apples exchange.

“We found IPR reform in developing countries had a pretty substantial effect,” he says. “Where the IP laws have been strengthened, there has been a measurable increase in multinational investment.” For example, some multinationals split aspects of research and development, such as clinical trials, into separate operations in collaboration with Indian companies.

Read more from the 2009 SMU Research magazine
Find more of Kamal Saggi’s research at his faculty homepage

October 13, 2009|Research|

For the Record: Summer 2009

Linda Eads, Dedman School of Law, received the 2009 Lola Wright Foundation Award from the Texas Bar Foundation in June, which included $5,000 to donate to the charity of her choice. The award recognizes “outstanding public service in advancing and enhancing legal ethics in Texas.” Past recipients include Berry Crowley, James Holmes III, Lloyd P. Lochridge, Jim Sales, Louise Raggio, Guy Harrison, Richard C. Hile, Justice Douglas S. Lan and Scott J. Atlas.

John Attanasio, Dean, Dedman School of Law, participated in a panel of law deans moderated by ESPN legal analyst Roger Cossack at the 2009 State Bar of Texas annual meeting June 25-26 in Dallas. Other speakers at this year’s meeting included historian Doris Kearns Goodwin, former FBI director William S. Sessions, Southern Poverty Law Center founder Morris Dees and U.S. Supreme Court Justice Antonin Scalia.

Anthony Cortese, Sociology, Dedman College, served as a panelist to evaluate proposals in sociology, anthropology, American studies, ethnic studies and psychology for the 2009 National Endowment for the Humanities Fellowships competition in Washington, D.C. He also served as commentator in a special session, “Racial Minorities in Popular Media,” at the annual meetings of the Association of Black Sociologists in New Orleans. In addition, he presented “Affirmative Action: Who’s Benefitting from it and Why” at the annual meetings of the American Sociological Association Aug. 8-11 in San Francisco.

Mary Vernon, Art, Meadows School of the Arts, will present a solo exhibition, Mary Vernon: Still Lifes and Tables, Aug. 28-Sept. 26, 2009, at the Valley House Gallery in Dallas. The show features work inspired by her recent trip to China.

Kamal Saggi, Economics, Dedman College, gave a keynote speech at the Valuing International Trade Rules Conference June 17-19, 2009, near Zurich, Switzerland. The conference was organized by the Swiss National Science Foundation and The World Bank. In addition, he was an invited discussant in the American Law Institute World Trade Organization Case Law Project, which met June 8 at the WTO in Geneva.

Members of SMU's student AAPG chapterSMU finished 10th nationally and first in Texas in the Excellence in Management Cup presented by Texas A&M’s Laboratory for the Study of Intercollegiate Athletics. The Cup determines which athletic departments win the most conference and national championships while having the lowest expenses. SMU won five conference championships in 2008-09, including cross country, men’s and women’s swimming and diving, women’s tennis and women’s basketball. Read more.

SMU’s student chapter of the American Association of Petroleum Geologists has received the national organization’s highest honor: the Domestic Student Chapter of the Year. The recognition includes a $1,000 scholarship from oil and gas industry supplier Schlumberger. SMU’s was the first AAPG student chapter in the nation; Hamilton Chair in Earth Sciences David Blackwell, Dedman College, is its faculty sponsor. Read more. (Left, student chapter members Jason Bell, Andrés Ruzo and Philip Klintmalm at a Barnett Shale drilling site.)

August 18, 2009|For the Record|

For the Record: Summer 2008

Kamal Saggi, Economics, has been appointed to the World Bank’s Steering Committee of the Global Trade and Financial Architecture Project (Phase II): Meeting the Challenges of Economic Integration for Poor Countries. The project is supported by the Department for International Development, a part of the UK Government that manages Britain’s aid to poor countries and works to get rid of poverty. The project will identify priorities of international cooperation that can help support the process of globalization by enhancing its inclusiveness and sustainability. The Committee will be chaired by the former President of Mexico, Ernesto Zedillo.

Alice Kendrick, Advertising, was named the 2008 Distinguished Advertising Educator by the American Advertising Federation (AAF). The award recognizes “the best advertising professors in the country.”

C. Michael Hawn, Sacred Music, was named a Fellow of the Hymn Society in the United States and Canada at its annual meeting July 13-17, 2008, in Berkeley, CA. The honor recognized “his international work as a troubadour of congregational song and his significant contributions to The Society.”

Santanu Roy, Economics, organized a two-day conference on economic theory July 19-20, 2008, at Cornell University in Ithaca, NY. He presented a paper on problems of trading over time in markets for durable goods where buyers are less informed than sellers about the quality of goods to be traded.

Roy also delivered a lecture, “Non-classical Economic Growth Theory: Some Lessons,” to social and environmental scientists in the research division of the Environmental Defense Fund on Aug. 11, 2008, in New York. In addition, he presented a paper at the annual meeting of the Canadian Economic Association, June 6-8, 2008, at the University of British Columbia in Vancouver. The paper analyzed questions related to inferring product quality from prices and the effect of strategic competition between firms.

Ali Alibhai, a graduate student in medieval studies, has received a Fulbright Scholarship to study art and architectural history in Morocco in 2009. He will study religious lamps and the evolution of lighting in medieval Islamic societies. He hopes to examine and catalog the few surviving church bells captured by Muslims during the Middle Ages and transformed into lamps for mosques, where they still hang. Read more from SMU News.

Brittney Titus, a junior corporate communications and public affairs major, was named 2008 Intern of the Year as part of the ExxonMobil Community Summer Jobs Program for her work as the junior volunteer coordinator at Methodist Dallas Medical Center. During her internship, Titus supervised 65 high school volunteers, planning all aspects of their placements from training to activities, fundraisers and educational field trips.

August 29, 2008|For the Record|

For the Record: May 1, 2008

Paige Ware, Education, has been selected to receive a 2008 Spencer Postdoctoral Fellowship from the National Academy of Education (NAE). The fellowship, underwritten by the Spencer Foundation, is the largest and most prestigious in postdoctoral educational research and supports outstanding researchers in the pursuit of critical education research projects that are expected to make significant scholarly contributions to the field. Read more.

Anthony Cortese, Sociology, presented a paper, “Racial Profiling and Ethnic Stereotyping: Muslim Terrorists and Illegal Aliens,” at the Racial Profiling at Borders Conference hosted by Kwantlen University College in Surrey, British Columbia, April 25, 2008.

Kamal Saggi, Economics, presented his research on the relative merits of bilateralism and multilateralism as alternative routes to global trade liberalization in an invited lecture at the University of Missouri in Columbia April 25, 2008. His research shows that the relationship between the two types of trade liberalization might be more complementary than is generally recognized.

SMU Panhellenic raised more than $113,000 for cancer research with its 2008 Relay For Life in April.

May 1, 2008|For the Record|
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