Many developing countries design their trade policies to discriminate against importation of second-hand goods through import bans, licensing requirements, or higher tariff rates. Discrimination against used products is even found among the ranks of the industrialized countries; witness Australia's additional $12,000 tariff on used cars.
The motivation for these policies is a combination of a desire to protect domestic industries from competition from low-priced goods, an attempt to avoid becoming a "dumping-ground" for cast-offs from high-income countries, and an attempt to push industries toward the "technological frontier" and avoid the use of "obsolete" technologies.
But trade restrictions on used capital goods appear contrary to the appropriate choice of production techniques in developing countries, where low wages and high interest rates would call for the use of labor-intensive production processes. Older equipment is likely to be more labor-intensive than new equipment because technological change tends to be labor-saving and older equipment requires greater maintenance and implies greater risk of machine down-time. Moreover, the smaller optimal scale of older machines may be more appropriate to smaller developing-country markets and older machines may be more flexible in their use and less specialized. Some or all of these considerations led a number of authors to conclude that firms in low-wage developing countries would find second-hand equipment more profitable than new machines and that developing countries would suffer a welfare loss from import restrictions on used machinery.
In this literature some models have focused on the impact of greater maintenance costs as machines age (Schwarz (1974), Thoumi (1975)), the so-called "vintage capital" literature has emphasized labor-saving technological change (Bardhan (1970), Smith (1976)), and some models have incorporated both these phenomena (Mainwaring (1986)). Recent contributions on technology transfer link the choice of technique to "skills" available to a firm or in a country. Such "skills" are human capital or other technological capabilities acquired through deliberate learning and/or learning-by-doing (Benhabib and Rustichini (1991), Chari and Hopenhayn (1991), Keller (1994), Javanovic and McDonald (1993) and Javanovic and Nyarko (1995 and 1996)). The more skills that are specific to a particular technique, the more costly it is to switch to that technique. The skill factor is likely to affect the choice between new and used machines, when new models also embody technical change.
Contents
1. Introduction
2. New versus used machines
3. Thefirm's choice of new versus used machines
4. Demandfor used equipment with heterogeneousfirms
5. The empirical analysis: determinants of trade in used equipment.
6. Conclusions
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