Cross‐border Travellers and Parallel Trade: Implications for Asian Economies

• Author: Pasquale Sgro,Munirul Nabin,Xuan Nguyen,Chi‐Chur Chao
• DOI: http://doi.org/10.1111/twec.12381
• Date: 01 August 2017
• Published date: 01 August 2017

Cross-border Travellers and Parallel

Trade: Implications for Asian Economies

Xuan Nguyen, Chi-Chur Chao, Pasquale Sgro and Munirul Nabin

Deakin University, Geelong, Australia

1. INTRODUCTION

SINCE the early 2000s, parallel trade on high-quality, safe products from developed

economies to developing economies in Asia via the channel of travellers has been on

the rise. This phenomenon has recently become even more popular given the boom of the

tourism industry in Asian economies, despite the global financial crisis 2007–08.

1

This is

because Asian developing economies have not provided a strict-enough enforcement of intel-

lectual property rights for high-quality products from Asian developed economies, and the

prices of these products have been different across countries in this region.

2

In this context,

cross-border travellers can arbitrage on the price difference on certain products, in particular

high-quality, safe products, by purchasing them at lower prices in the developed countries and

selling them at higher prices in the developing countries. Such parallel trade activities by

cross-border travellers are independent of the traditional export channel whereby producing

firms from the developed economies can enter the market of the developing economies.

3

In fact, parallel trade by travellers from mainland China has recently become a hotly

debated issue in Hong Kong. Parallel trade of wine and baby milk powder purchased in Hong

Kong by travellers, who come from mainland China, are typical examples of high-qual ity,

safe products that are bought (by cross-border travellers) at lower prices in a developed

country/territory and resold in a developing country/territory at higher prices.

4

It should be

noted that since Hong Kong is close to China and many high-quality products are cheaper in

Hong Kong than those in China, the low transportation costs between these two locations also

induce travellers to undertake parallel trade activities. Parallel imports were estimated to take

up 6–10 per cent of the China’s milk formula market, with about seven billion yuan sales

annually.

5

Phenomena on parallel trade by outbound travellers are not limited to Hong Kong,

as they have also been witnessed in a number of high-income economies such as Japan,

We would like to thank Arghya Ghosh, Hodaka Morita, Yuqing Xing, Eden Yu (the editor), participants

at the Trade and Development Workshop at Deakin University, Australia, on 27 November 2014, and

the discussant, Hong Hwang, for useful comments and suggestions.

1

A record of over 54 million foreign tourists visited Hong Kong in 2013. The total spending of these

visitors exceeded HK$343 billion, 15.7 per cent higher than 2012. Source: http://www.tourism.gov.hk/

english/statistics/statistics_perform.html.

2

Chow (2011) argues that although China has made some progress on improving its IPRs enforcements,

it has not taken a clear stance on issues related to parallel imports of trademarked goods.

3

Note that in this paper, ‘parallel trade’, or similarly ‘parallel import’, is considered from the perspec-

tive of the export markets (developing countries). This is different from ‘parallel export’ from the per-

spective of the producing (developed) countries. See Maskus (2001) for formal definitions on these

terminologies.

4

See http://www.economist.com/blogs/analects/2013/08/hong-kongs-parallel-trade.

5

See http://www.scmp.com/news/hong-kong/article/1246777/can-restricting-exports-milk-formula-prove-

best-hong-kongs-babies.

©2016 John Wiley & Sons Ltd 1531

The World Economy (2017)

doi: 10.1111/twec.12381

The World Economy

Australia and New Zealand.

6

Tourists from the Asian developing economies travelling to

these locations often buy, among other things, milk powder and vitamin products to use as

gifts or sell at outrageous markups when they go back home.

7

In most cases of parallel trade on high-quality, safe products by travellers from the Asian

developing economies (or export market in what follows), distortions in the market of the

Asian developed economies (or home country in what follows) have been observed. Typically

parallel trade by outbound travellers leads to a severe shortage of supply in the home market,

triggering responses not only by the home-country authority but also by the consumers and

producers. For example, as reported by Guilliatt (2014), since May 2013, the Hong Kong gov-

ernment has started to limit the quantity of baby milk powder that outbound travellers could

take at 1.8 kg or two tins. In addition, some political groups in Hong Kong even proposed to

levy an arrival tax up to HK$100 to curb mainland visitors to Hong Kong.

8

In a similar move,

in 2013, the Australian superstore Safeway imposed a limit of four cans of milk formula per

customer (Guilliatt, 2014).

Does parallel trade by cross-border travellers from the export market always hurt the

home-country welfare? Is a ban/limit on such parallel trade always an optimal policy response

by the home country? What are the impacts of such parallel trade on the producing firm’s

profits? Given the rise of parallel trading by cross-border travellers in many developed Asian

economies, all of these interesting questions deserve some theoretical justifications.

9

As pointed out by Maskus (2001), parallel trade usually intensifies competition and has sig-

nificant welfare impacts on participating countries. He argues that, in the case of pharmaceuti-

cal products, parallel trade tends to benefit countries with similar demand structures while it

hurts countries with different demand structures (see also Malueg and Schwartz, 1994; Abbott,

1998; Scherer and Watal, 2002). However, his conclusion is based mainly on an approach that

aligns to horizontal product differentiation with homogeneous consumers’ perceptions. In

practice, there are many cases in which parallel trade occurs in vertical markets in which con-

sumers are heterogeneous and have different levels of willingness to pay for the same prod-

uct. In such cases, the conclusions of the previous analyses on parallel trade may not hold.

In this paper, we attempt to provide satisfactory answers to the aforementioned research

questions in the context of a model with heterogeneous consumers’ perceptions. To this end,

we introduce parallel trade into the popular vertical product differentiation framework pro-

posed by Mussa and Rosen (1978).

10

In our model, a producer in the home country sells a

unique product not only in its home-country market but also in the export market via a dis-

tributor, where the sizes of these markets are different. If the export market allows parallel

6

See http://www.theaustralian.com.au/news/features/chinas-demand-for-milk-powder-becomes-a-white-

gold-rush-on-aussie-dairy-farms/story-e6frg8h6-1226850390854.

7

Guilliatt (2014) points out that a typical can of baby milk costing US$20 in Australia can be sold for

US$70 in some Asian developing countries.

8

See also http://www.scmp.com/news/hong-kong/article/1425649/democratic-groups-propose-arrival-tax-

hk100-stop-mainland-visitors?page=all.

9

Parallel trade by cross-border travellers is also a popular phenomenon in African countries and it has

contributed significantly to export/import of these countries (Ackello-Ogutu and Echessah, 1997;

Peberdy, 2000; Golub, 2015).

10

The framework of vertical product differentiation has been adopted in recent analyses of price collu-

sion and quantity collusion (Andaluz, 2010), technology licensing (Nguyen et al., 2014), price discrimi-

nation (Ikeda and Toshimitsu, 2010; Nguyen, 2014), mixed oligopoly (Matsumura and Ogawa, 2012;

Lutz and Pezzino, 2014; Nguyen, 2015).

©2016 John Wiley & Sons Ltd

1532 X. NGUYEN, C.-C. CHAO, P. SGRO AND M. NABIN