Cost Pass–through and International Linkages

Commodity markets are linked through international trade but separated by heterogeneous regulations and input markets. We investigate theoretically and empirically how regional, as opposed to global, cost shocks are passed through into global prices and how they a ect production relocation decisions. Regional cost shocks are mitigated by capacity constraints in the short run. Once constraints bind, passthrough of a cost increase is enhanced while for cost decreases it drops to zero. We study the market for ammonia, a commodity largely produced from natural gas, to highlight the nonlinearity of cost pass-through and its implications for unilateral climate policies.