The Connection between Imported Inputs and Exports: The Importance of Strategic Interdependence

Ignoring strategic interactions among final goods producers, the extant theoretical literature shows that lower costs of imported inputs increase the exports of the final goods using those inputs. Hence, it does not explain the empirically relevant positive relationship between the costs of imported inputs and the export of the final goods. We use a simple Cournot duopoly (i.e., duopoly quantity competition) with homogeneous products to show that if the exporters differ in input coefficients, lower costs of imported inputs may increase or decrease the exports of the final goods. Thus, we argue that strategic interdependence among the exporters can be an important factor for the positive relationship between lower costs of imported inputs and the export of the final goods. We further show that a lower cost of imported inputs may reduce the consumer surplus, total profits of the exporters, and world welfare. We also show the implications of a Bertrand duopoly (i.e., duopoly price competition) with horizontal product differentiation for our analysis.

Automated summary

Ignoring strategic interactions among final goods producers, existing theoretical literature cannot explain the empirically relevant positive relationship between lower costs of imported inputs and the export of final goods. Using a simple Cournot duopoly model, we show that the relationship between lower costs of imported inputs and the export of final goods depends on the differences in input coefficients among exporters. We argue that strategic interdependence among exporters is an important factor for this relationship.