Culture, Society & Family Economics & Statistics

Imposing trade restrictions on parallel imports can motivate a firm to export, study finds

Game theoretic analysis indicates that strategic policies to allow or ban parallel imports are often based on motivating domestic firms to succeed in competitive foreign markets.

Imposing trade restrictions on parallel imports has the surprising effect of motivating a firm to export, according to a new study using game theory economic analysis.

That’s the finding of economists Santanu Roy, Southern Methodist University, Dallas, and Kamal Saggi, Vanderbilt University, Nashville.

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,” Roy said.

Most surprising among the findings, he said, is that imposing trade restrictions on parallel imports can actually motivate a firm to export.

That 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.”

Click this link to hear Santanu Roy discuss how parallel import policies impact global free trade.

Parallel importing: When a firm competes with itself
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.

Parallel importing and gray market retail are growing worldwide
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.

Only need for intervention could be countries with major asymmetries
In fact, the study’s 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 found that there’s strategic interdependence in the policymaking across governments, as well as a lot of strategic dependence in the decisions of firms. For that reason, the degree of asymmetry of demand across countries is going to be a very important part of the picture, Roy said.

Impact of parallel importing varies, depending on the markets
By modeling the impact of parallel importing under various scenarios, Roy and Saggi discovered that parallel importing typically works in favor of a domestic manufacturer whose export market is similar in size to its domestic market, and where intellectual property rights and parallel trade policies are similar to its own. In that case, a competitor is unlikely to cut prices, and prices remain stable and profitable both at home and abroad.

However, where markets are dissimilar, they found that parallel importing led to price slashing both at home and abroad, which in turn drove manufacturers to abandon exporting to prevent prices being slashed at home.

“One of the consequences of parallel import policy is that when it’s allowed, firms will actually take steps to alter their pricing in such a way that parallel imports don’t occur,” Roy said. “So the fact we don’t actually observe parallel imports in data doesn’t mean that parallel import policy does not have a very important impact on the way firms price their goods across the markets.”

Parallel importing policies should be set on a case-by-case basis
Because the impact of parallel importing varies on a case-by-case basis, policies governing parallel imports should be determined country by country and product by product. Roy and Saggi warn against uniform global standards to restrict or allow parallel imports, such as could be imposed by the international trade governing body, the World Trade Organization, or through its agreements, such as the TRIPS agreement on trade-related intellectual property rights.

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’s asymmetrical protection of intellectual property, forthcoming in the Canadian Journal of Economics. Roy and Saggi were members of a development research group at the World Bank that researched parallel importing.

Roy is professor and director of graduate studies in the SMU Department of Economics. Saggi is professor and director of the graduate program in economic development in the Vanderbilt Department of Economics. — Margaret Allen

SMU is a nationally ranked private university in Dallas founded 100 years ago. Today, SMU enrolls nearly 11,000 students who benefit from the academic opportunities and international reach of seven degree-granting schools. For more information see

SMU has an uplink facility located on campus for live TV, radio, or online interviews. To speak with an SMU expert or book an SMU guest in the studio, call SMU News & Communications at 214-768-7650.

Economics & Statistics Plants & Animals

New analysis weighs lost trade, costs to control invasive species against economic damages

How should a country respond to a biological invader that reaches its shores via cargo shipped as international trade?

Pesky invaders like Zebra mussels, Asian Longhorned Beetles, Kudzu, Triffid weed and others have wreaked billions of dollars in economic damage, destroying agriculture, harming human health and threatening biodiversity.

The answer: Policymakers must balance concerns about the damage and cost of controlling invaders against the economic necessity of free trade, say economists Santanu Roy, Southern Methodist University, and Lars J. Olson, University of Maryland.

In their article “Dynamic Sanitary and Phytosanitary Trade Policy,” Roy and Olson examine the various conditions policymakers must evaluate to determine the best policies governing invasive species based on sound economics.

The article was published in July in the Journal of Environmental Economics and Management.

Growing number of invaders worldwide
Roy and Olson developed the analysis in response to the growing number of biological invasions, which are raising important trade policy issues, Roy says.

Their research was funded by the U.S. Department of Agriculture through its Program of Research on the Economics of Invasive Species Management, or PREISM. Invasive species, such as pests and weeds, destroy agriculture and cost the industry hundreds of billions of dollars annually, say experts.

“In their native habitat, these species are kept in control by their competitors and predators,” Roy says. “But once they are out of their habitat, they can multiply and spread at an enormous rate — as there are fewer natural predators — and they put local native species in great difficulty and danger of survival.”

Qualitative guidance
The analysis by Roy and Olson provides qualitative guidance to policymakers for the optimal response to a particular invasion.

“We shed some light on the level of required restrictions under various scenarios that take into consideration the economic and ecological factors such as the trade benefit, cost of control and timeframe for growth of pests and disease,” Roy says. “Our paper gives economists a set of readily usable conditions under which they can determine how restrictive a country’s current trade policy should be and how it should be altered over time as the fundamental conditions — such as the size of the existing infestation in the country — change over time.”

A host of international trade agreements address the growing problem of biological invasions, including those of the World Trade Organization. The WTO, which was formed in 1995, promotes free trade among its 153 members. It acknowledges that its members may legitimately restrict trade for reasons that include protection of human, animal or plant health from pests, diseases, toxins and other contaminants.

More restrictions = higher retail prices
Trade restrictions can prevent fresh batches of invasive species from entering. They range from direct limits on the quantity of imports to regulations and standards governing how products are produced, treated and packaged in their home country.

After the fact, “control” is the “cure” for an established invasive species. Measures can include mechanical weeding, chemical spraying and trapping, depending on whether the goal is to eradicate a pest or to merely stop its spread.

“The costs for these are reflected in higher prices of imported goods paid by you and me — the consumers,” Roy says. “This is the downside of trade restrictions that has to be balanced with current and future economic and ecological damages that are prevented, as well as current and future control costs that are avoided.”

Entry of pests sometimes the best route
From their analysis, Roy and Olson concluded that there are times when the best route is to allow some entry of pests: when damages are low, the pests’ growth rate is low and the discount rate — the relative weight placed on present costs and benefits compared to those in the future — is high enough.

Also, trade policy doesn’t have to be too restrictive if the cost of controlling established pest populations is low enough. On the other hand, managing trade to prevent further entry may be warranted when the current established population of the species is below a stage where the growth rate of the invasion is likely to increase sharply. The same is likely to be true if the future cost of controlling an established invasion is likely to be high.

Sophisticated approach
“What we’re suggesting is a more sophisticated approach to learning the cost to an economy for various scenarios, such as allowing pests to come in and then controlling them over time,” Roy says. “Different strategies would have different costs. If you can establish how the damage grows and the cost of controlling it, then we can tell you the best strategy, whether it should be controlled, eradicated completely, whether there should be some trade restrictions or prohibition of trade.”

Their study also can be seen as relevant to the control and prevention of invading diseases, such as HIV and various strains of influenza, Roy says.

Roy is a professor and director of graduate studies in the Economics Department at Southern Methodist University in Dallas. Olson is professor and chair, Department of Agricultural and Resource Economics, University of Maryland.

SMU is a private university in Dallas where nearly 11,000 students benefit from the national opportunities and international reach of SMU’s seven degree-granting schools. — Margaret Allen

SMU has an uplink facility located on campus for live TV, radio, or online interviews. To speak with an SMU expert or book an SMU guest in the SMU News Broadcast Studio, call SMU News & Communications at 214-768-7650 or email

Earth & Climate Economics & Statistics Plants & Animals

Biodiversity: Some species may always be endangered

Once hunted to near-extermination, the Northern Rocky Mountain gray wolf reached an important milestone recently. With a population estimated at 1,500, the wolf re-established itself in the Yellowstone National Park area, and in March 2008 the U.S. Fish and Wildlife Service removed it from protection under the Endangered Species Act.

Almost immediately, hunters began petitioning the state offices of Idaho, Montana and Wyoming for permits to hunt the wolves, perhaps down to as little as 20 percent of their current numbers in some areas. Such a weighty issue begs the questions: How much hunting is safe for a given species? How many gray wolves can die before the species loses its chance at recovery?

Gray Wolf. Credit: John & Karen Hollingsworth/USFWS

Understanding the market forces that drive these environmental decisions is a vital yet missing piece of public policy on natural resource management, says Santanu Roy, SMU professor of economics in Dedman College and 2007-08 SMU Ford Research Fellow.

An expert in dynamic economic models and microeconomic theory, Roy focuses on the economics of natural resources and the environment.

Central to Roy’s model for managing biological species is a concern about how population size and uncertainty affect the flow of benefits and costs from the harvesting of resources and what it means for conservation and extinction when resources are managed optimally over time.

“The traditional model of biological harvesting usually considers only the market value and benefits of using these resources,” he says. “But there is an increasing consciousness of the value of biodiversity, that a species might be very valuable someday because of the biodiversity it helps provide.”

The traditional view of natural resources in general, and of biological species in particular, is as an investment asset, as something speculators can own or privatize, liquidate or conserve, Roy adds.

“These simple comparisons have to be abandoned,” he says.

As an example, Roy focuses on the critically endangered blue whale. Suppose an individual gained the right to own the entire stock of blue whales in the oceans, he says.

“If the blue whale population were doubling every year, it would be worth conserving from an investment standpoint. But, at present, it is growing at only 2 percent to 5 percent a year,” Roy says. “If you take all the available blue whales now, sell them at market price, put the money in the bank and enjoy the interest for the rest of your’s and your children’s lives, that’s more money than you could make by cultivating whales forever.”

Gray Wolf. Credit: Tracy Brooks/Mission Wolf.

But this approach fails to consider several factors unique to species, he says.

“There are peculiar challenges that come from the biological side of the story,” Roy says. “And these challenges must become part of the equation.”

One is the possibility of what biologists call depensation, if a population becomes too small, it collapses and cannot grow anymore.

“The International Whaling Commission basically stopped all harvesting of blue whales 30 years ago,” he says, “but the population hasn’t recovered. They don’t meet each other to mate that often.”

Another factor in Roy’s model is stock dependence of cost.

“If you take $100 out of your checking account and have a party, the enjoyment you get will not depend upon how much money you have left in the bank,” he says.

Roy%201.jpg“That’s not true for biological species, which become more and more costly to harvest as their populations shrink,” Roy says. This is one reason why species like the blue whale, almost paradoxically, stop losing their numbers once they are near extinction, he adds.

“If you’ve ever gone fishing,” Roy says, “you know that it’s very difficult to fish if there are very few of them.”

Conversely, if a population is large, its harvesting cost becomes small — a condition that took a toll on the American bald eagle in the past century, Roy says. Protections for the bird allowed its population to grow rapidly. The resulting easy harvesting gave hunters an incentive to drive them nearly to extinction.

“When a population increases, at some point it sharply decreases, because it becomes very economical to harvest,” he says. “These are the critical moments at which species can become extinct.”

Roy hopes his research will help steer public policy toward more intelligent management of biological issues, especially regarding extinction, he says. The U.S. government has long held “safe standards,” meaning the point at which a population is greater than a size critical to survival, as its conservation yardstick. But Roy’s work has shown that “some species may never be safe,” he says.

“The thing most lacking in public policy right now is that it doesn’t understand individual cases,” he adds. “We need to take much more of the available scientific information into account. What’s good for one species is not good for another.”

Roy, who joined SMU in 2003, earned his Ph.D. degree from Cornell University. He has published his work in the “Journal of Economic Theory” and other publications. — Kathleen Tibbetts

Related links:
SMU: Economics of extinction
Santanu Roy
USFWS: Gray Wolf news, info and recovery status reports
USFWS Video: Gray Wolvesvideo.jpg
SMU Department of Economics
Dedman College of Humanities and Sciences