Free trade agreements and firm-product markups in Chilean manufacturing
Chile has a network of free trade agreements (FTAs) with countries such as the United States, China, Japan, Canada, and the European Union, among others. These FTAs have led to a significant increase in Chile`s international trade and foreign direct investment. At the same time, they have brought about changes in the structure of the country`s manufacturing industry, particularly in how firms set their prices and markups.
A markup is the amount by which a firm adds to the cost of production to arrive at the final price of a product. It is usually expressed as a percentage, such as 20%, meaning that the final price is 20% higher than the cost of production. Markups are an important source of profit for firms, and they reflect the degree of market power that firms have in their respective industries.
Research has shown that FTAs have affected the markups of Chilean manufacturing firms in several ways. One effect is that firms facing increased competition from imports have reduced their markups to remain competitive. This has led to lower prices for consumers, which can be seen as a positive effect of FTAs.
However, FTAs have also led to an increase in markups for some firms, particularly those that export their products. This is because FTAs provide firms with access to new markets and customers, which can increase their market power and allow them to charge higher prices. As a result, FTAs may lead to higher profits for exporting firms, but also higher prices for consumers in foreign countries.
Another effect of FTAs on markups is the “selection effect”. This refers to the fact that FTAs encourage firms to specialize in certain industries and products that are more competitive in international markets. As a result, firms that are more efficient and have lower costs of production are more likely to survive and grow in the face of increased competition. These firms may have higher markups than less efficient firms that are pushed out of the market.
Overall, the relationship between FTAs and firm-product markups in Chilean manufacturing is complex and depends on various factors such as the degree of competition, the type of industry, and the firm`s export orientation. While FTAs can lead to lower prices for consumers by reducing markups for some firms, they can also lead to higher markups for exporting firms and increased inequality in the economy. Therefore, policymakers should carefully monitor the effects of FTAs on firm-product markups and take measures to promote competition and consumer welfare.