US and Chinese Strategic Trade Policies and Product Differentiation in the ASEAN Apple Market

ABSTRACT

We investigate oligopolistic competition between US and Chinese apple exporters in the ASEAN market using strategic trade theory and the NEIO literature. We also analyze competition in the US and Chinese domestic markets. The US supplies higher quality apples to ASEAN than China, resulting in product differentiation. The results show that US exporters had a higher markup than Chinese exporters through the 1990s; however, as the share of Chinese apples expanded, the US markup declined and the Chinese markup increased dramatically. Competitive pricing prevails both in the US and Chinese domestic markets.

Keywords:

• strategic trade policy
• NEIO
• conjectural elasticity
• ASEAN
• apples

Notes

¹The ten ASEAN countries are Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam, which have a combined population of 591 million people and a GDP of $1.8trillion (The World Bank, 2011).

²Since apple production is zero, apple consumption is identical to imports.

³The subsidy in this model is a catch-all of the policies implemented by the US and Chinese governments because ‘significant amounts of financial support are increasingly granted by governments for ostensibly general activities which in fact directly benefit the production of certain products. These disguised subsidies can have equally severe trade-distorting effects and they are potentially much more harmful than more direct subsidies since they confer benefits in a largely non-transparent manner’ (World Trade Organization, 2002).

⁴The determinant of A is: for plausible supply and demand functions.

⁵The own output effect on marginal profits dominate the cross effects, and , implying, . The effect of iceberg costs on marginal profits is greater in the export market then in the domestic market, , which implies , and . These conditions and plausible supply and demand conditions are used in signing the comparative static results in this and the following subsections.

⁶⁶We assume the effect of subsidies on marginal profits are greater in the export market than in the domestic market, , which implies and These conditions are used in signing the comparative static results in this subsection.

⁷⁷For the purpose of clarity in deriving the conjectural elasticities, we start from a firm-level and aggregate to the industry level.

⁸⁸The ratio of the first eigenvalue to the sum of all three eigenvalues for the United States and China is 0.89 and 0.78, respectively. This indicates that 89% and 78% of the variance in the wage rate, fuel price index, and fertilizer price (wage rate and fuel price index for China) is captured in the first principal component.

⁹⁹The ratio of the first eigenvalue to the sum of all three eigenvales for the United States, China, and ASEAN is 0.92, 0.85, and 0.88, respectively. This indicates that 92%, 85%, and 88% of the variance in the GDP, population, and orange price is captured in the first principal component.

¹⁰¹⁰The system is over-identified because the excluded variables are greater than or equal the endogenous variables in each equation. The implication of over-identification is increased efficiency of the parameter estimates if the instrumental variables are relevant (that is, highly correlated with the endogenous variables). Thus, in our model, the exogenous variables help to improve the efficiency of the estimates since they are relevant to the supply and demand specification in the system.

¹¹¹¹We also tried different start and end points for the structural change period, but t₀=1996 and t_f=2004 yielded both the most significant and defensible estimates.