The Influences of Foreign Direct Investments, Intrafirm Trading, and Currency Undervaluation on U.S. Firm Trade Disputes

Abstract

We apply insights from “new, new” trade theory to explain a puzzling decline in U.S. firm antidumping (AD) filings in an era of persistent foreign currency undervaluations and increasing import competition. Firms exhibit heterogeneity both within and across industries regarding foreign direct investment. We propose that firms making vertical, or resource-seeking, investments abroad will be less likely to file AD petitions, and firms are likely to undertake vertical FDI in the context of currency undervaluation. Hence, we argue, the increasing vertical FDI of U.S. firms makes trade disputes far less likely. We use firm level data to examine the universe of U.S. manufacturing firms and find that AD filers generally conduct no intrafirm trade with filed-against countries. We also find that persistent currency undervaluation is associated over time with increased vertical FDI and intrafirm trade by U.S. MNCs in the undervaluing country. Among larger U.S. MNCs, the likelihood of an AD filing is negatively associated with increases in intrafirm trade. In the context of currency undervaluation, we confirm the existing finding that undervaluation is associated with more AD filings. We also find, however, that high levels of intrafirm imports from countries with undervalued currencies significantly decrease the likelihood of AD filings. Our study highlights the centrality of firm heterogeneity in international trade and investment in understanding political mobilization over international economic policy.