nep-int New Economics Papers
on International Trade
Issue of 2005‒05‒23
twenty-one papers chosen by
Martin Berka
University of British Columbia

  1. Trade Responses to Geographic Frictions: A Decomposition Using Micro-Data By Russell Hillberry; David Hummels
  2. Vehicle currency use in international trade By Linda S. Goldberg; Cedric Tille
  3. Expansionary fiscal shocks and the trade deficit By Christopher J. Erceg; Luca Guerrieri; Christopher Gust
  4. Institutional Determinants of Foreign Direct Investment By Agnes Benassy-Quere; Maylis Coupet; Thierry Mayer
  5. South Africa’s International Competitiveness: A Product Level Analysis By Mitchell Kellman; Trevor Roxo; Yochanan Shachmurove
  7. Do free trade agreements actually increase members’ international trade? By Scott L. Baier; Jeffrey H. Bergstrand
  8. Trade liberalization and the politics of financial development By Matías Braun; Claudio Raddatz
  9. Incomplete markets and trade By Paul Willen
  10. Implications of intellectual property rights for dynamic gains from trade By Michelle P. Connolly; Diego Valderrama
  11. North-South technological diffusion and dynamic gains from trade By Michelle P. Connolly; Diego Valderrama
  12. Growth-led exports: is variety the spice of trade? By Joseph E. Gagnon
  13. Adjusting Chinese bilateral trade data: how big is China's trade surplus By John W. Schindler; Dustin H. Beckett
  14. China's export growth and U.S. trade policy By Chad Bown; Meredith Crowley
  15. Can the standard international business cycle model explain the relation between trade and comovement? By M. Ayhan Kose; Kei-Mu Yi
  16. Is China's FDI Coming at the Expense of Other Countries? By Barry Eichengreen; Hui Tong
  17. The FTAA and the political economy of protection in Brazil and the US By Marcelo de Paiva Abreu
  18. Do Regional Integration Agreements Increase Business-Cycle Convergence? Evidence From APEC and NAFTA By Viviana Fernandez; Ali M. Kutan;
  19. Learning to Love Globalization? Education and Individual Attitudes Toward International Trade By Jens Hainmueller; Michael J. Hiscox
  20. Economic evaluation of the proposed Free Trade Agreement between Australia and the United States By John Quiggin
  21. TRIPS, externalities, trade agreements, hostages By Wilfred J. Ethier

  1. By: Russell Hillberry; David Hummels
    Abstract: A large literature has shown that geographic frictions reduce trade, but has not clarified precisely why. We provide insights into why such frictions matter by examining which parts of trade these frictions reduce most. Using data that tracks manufacturers' shipments within the United States on an exceptionally fine grid, we find that the pattern of shipments is extremely localized. Shipments within 5-digit zip codes, which have a median radius of just 4 miles, are 3 times larger than shipments outside the zip code. We decompose aggregate shipments into extensive and intensive margins, and show that distance and other frictions reduce aggregate trade values primarily by reducing the number of commodities shipped and the number of establishments shipping. We consider two broad reasons for these facts and conclude that trade in intermediate goods is the most likely explanation for highly localized shipments and the dominant role of the extensive margin. In addition, we find no evidence of state-level home bias when distances are measured precisely and trade is observed over a very fine grid.
    JEL: F1 R3
    Date: 2005–05
  2. By: Linda S. Goldberg; Cedric Tille
    Abstract: Although currency invoicing in international trade transactions is central to the transmission of monetary policy, the forces motivating the choice of currency have long been debated. We introduce a model wherein agents involved in international trade can invoice in the exporter's currency, the importer's currency, or a third-country vehicle currency. The model is designed to contrast the contribution of macroeconomic variability with that of industry-specific features in the selection of an invoice currency. We show that producers in industries with high demand elasticities are more likely than producers in other industries to display herding in their choice of currency. This industry-related force is more influential than local macroeconomic performance in determining producers' choices. ; Drawing on data on invoice currency use in exports and imports for twenty-four countries, we document that the dollar is the currency of choice for most transactions involving the United States. The dollar is also extensively used as a vehicle currency in international trade flows that do not directly involve the United States. Consistent with the results of our model, this last finding is largely attributable to international trade in reference-priced goods and goods traded on organized exchanges. Although the magnitude of business cycle volatility matters for invoicing of more differentiated products, it is less central for invoicing nondifferentiated goods.
    Keywords: Currency substitution ; International trade ; Dollar, American
    Date: 2005
  3. By: Christopher J. Erceg; Luca Guerrieri; Christopher Gust
    Abstract: In this paper, we use an open economy DGE model (SIGMA) to assess the quantitative effects of fiscal shocks on the trade balance in the United States. We examine the effects of two alternative fiscal shocks: a rise in government consumption, and a reduction in the labor income tax rate. Our salient finding is that a fiscal deficit has a relatively small effect on the U.S. trade balance, irrespective of whether the source is a spending increase or tax cut. In our benchmark calibration, we find that a rise in the fiscal deficit of one percentage point of GDP induces the trade balance to deteriorate by less than 0.2 percentage point of GDP. Noticeably larger effects are only likely to be elicited under implausibly high values of the short-run trade price elasticity.
    Keywords: Balance of trade ; Budget deficits
    Date: 2005
  4. By: Agnes Benassy-Quere; Maylis Coupet; Thierry Mayer
    Abstract: In this paper, we contribute to the literature on the determinants of FDI in developing countries and re-evaluate the role of the quality of institutions on FDI. We use a newly available database, with unprecedented detail on institutions of a set of 52 countries, and compare the results with matched variables from more familiar datasets. The paper controls for the correlation between institutions and GDP per capita of the host country, and also accounts for potential endogeneity of institutions. Finally, we evaluate whether proximity of institutions between the host and the origin country raises bilateral FDI.
    Keywords: FDI; gravity model; institutions; developing countries; relocation
    JEL: F23 R3
    Date: 2005–04
  5. By: Mitchell Kellman (Department of Economics, The City College of City University of New York); Trevor Roxo (Department of Business Management, University of Transkei, South Africa); Yochanan Shachmurove (Department of Economics, University of Pennsylvania)
    Abstract: As South Africa emerges from its Apartheid period, the evolution of its international trade is vital to the growth of the economy. This paper evaluates South Africa’s trade performance in three essential markets, namely United States, Europe and Japan. It examines the nation’s flexibility in the face of fluctuations in relative exchange rates in its markets. Using the Constant Market Share (CMS) model of international trade and the “Rising Stars” model, the particular areas of industrial structure in which South Africa is positioned to succeed are identified on the market as well as the product levels.
    Keywords: Apartheid; South Africa; Southern African Development Community (SADC); United States, Japan, European Union; International Competitiveness; Entrepreneurship; Exchange Rate Responsiveness; Constant Market Share (CMS) model
    JEL: F1 F4
    Date: 2003–07–01
  6. By: Carlos Humberto Ortíz Quevedo
    Abstract: In his paper on the “Structure of Development”, Leontief (1963) claimed that underdeveloped countries are poorer because they are by far less economically diversified. In this paper it is shown that a model of international trade with strong international restrictions on factor mobility, a stable input-output structure, and a productivity externality due to input diversification, is consistent with Leontief´s hypothesis. The model also implies a growth-rate gap between industrialized and less industrialized economies.
    Keywords: Input-Output Structure
    JEL: F15
    Date: 2005–04–20
  7. By: Scott L. Baier; Jeffrey H. Bergstrand
    Abstract: For more than forty years, the gravity equation has been a workhorse for cross-country empirical analyses of international trade flows and, in particular, the effects of free trade agreements (FTAs) on trade flows. However, the gravity equation is subject to the same econometric critique as earlier cross-industry studies of U.S. tariff and nontariff barriers and U.S. multilateral imports: Trade policy is not an exogenous variable. The authors address econometrically the endogeneity of FTAs using instrumental-variable (IV) techniques, control-function (CF) techniques, and panel-data techniques; IV and CF approaches do not adjust for endogeneity well, but a panel-data approach does. Accounting econometrically for the FTA variable’s endogeneity yields striking empirical results: The effect of FTAs on trade flows is quintupled.
    Date: 2005
  8. By: Matías Braun; Claudio Raddatz
    Abstract: A well-developed financial system enhances competition in the industrial sector by allowing easier entry. The impact varies across industries, however. For some, small changes in financial development quickly induce entry and dissipate incumbents’ rents, generating strong incentives to oppose improvement of the financial system. In other sectors incumbents may even benefit from increased availability of external funds. The relative strength of promoters and opponents determines the equilibrium level of financial system. This may be perturbed by the effect of trade liberalization on the strength of each group. Using a sample of 41 trade liberalizers, we conduct an event study and show that the change in the strength of promoters vis-à-vis opponents is a very good predictor of subsequent financial development. The result is not driven by changes in demand for external funds or by the success of the trade policy. The relationship is mediated by policy reforms, the kind that induce competition in the financial sector, in particular. Real effects follow not so much from capital deepening but mainly through improved allocation. The effect is stronger in countries with high levels of governance, suggesting that incumbents resort to this costly but more subtle way of restricting entry where it is difficult to obtain more blatant forms of anti-competitive measures from politicians.
    Keywords: International trade ; Financial modernization
    Date: 2004
  9. By: Paul Willen
    Abstract: In this paper, we show that incomplete markets lead to trade imbalances. We use a two-period general equilibrium model with countries composed of heterogeneous households. We look at a world where, when markets are complete, countries engage in balanced trade and we show that when some of those markets are absent, trade imbalances emerge. Market incompleteness across countries causes trade imbalances because national income in some countries is more sensitive to risky asset payoffs than in others. Market incompleteness within countries causes trade imbalances because superior risk-sharing in one country leads to a lower precautionary demand for saving.
    Keywords: International trade
    Date: 2004
  10. By: Michelle P. Connolly; Diego Valderrama
    Abstract: A simple intellectual property rights (IPRs) framework is introduced into a dynamic quality ladder model of technological diffusion between innovating firms in one country and imitating firms in another country. The presence of technological spillovers and feedback effects between firms in the two countries demonstrates that preferred IPR regimes are ones that positively affect world growth and hence welfare in both countries. Most existing models of international IPRs, however, generally find that high intellectual property enforcement in the imitating country leads to welfare gains in the innovating country at the expense of the imitating country. An well-designed IPR regime imposed at the time of trade liberalization will be welfare enhancing for both regions relative to trade liberalization without IPR enforcement. Moreover, the preferred IPR regime will be one that maintains competition from imitative activity but enforces some remuneration to innovators for the spillovers they generate.
    Keywords: Intellectual property ; Research and development ; Trade
    Date: 2004
  11. By: Michelle P. Connolly; Diego Valderrama
    Abstract: This paper revisits the question of gains from trade in a dynamic setting from the perspective of an R&D based growth model of technological diffusion. The transition paths, as well as steady-state growth paths, are analyzed for a developed and a developing nation trading in intermediate and final goods. Static computable general equilibrium (CGE) models have yielded only small welfare gain estimates (.5-1%) for trade liberalization. Dynamic models have increased these estimates (up to 10%), but often ignore feedback effects caused by technological diffusion and generally consider only steady-state welfare effects. These feedback effects are especially important due to the long transition paths they induce for both countries. ; This paper studies the transitional dynamics in a quality ladder model of endogenous growth in which North-South trade leads to technological diffusion through reverse engineering of intermediate goods. The concept of learning-to-learn is incorporated into both imitative and innovative processes, which in turn drive domestic technological progress. International trade with imitation leads to feedback effects between Southern imitators and Northern innovators who compete for the world market. Consequently, both regions face transition paths dependent on their relative technologies. When the South liberalizes its trade, world growth increases, leading to welfare gains of 5% for the South. While the North also experiences steady-state welfare gains, the transition costs borne by the North during the long transition lead to an overall loss in Northern welfare. Still, this loss is attributable to the lack of intellectual property rights (IPRs) rather than trade per se. Interestingly, imposition of IPRs not only leads to an overall welfare gain for the North, but also further boosts Southern welfare gains up to 16%, again because of the feedback effects in technology.
    Keywords: Trade ; Technology ; Economic development
    Date: 2004
  12. By: Joseph E. Gagnon
    Abstract: Fast-growing countries tend to experience rapid export growth with little secular change in their terms of trade. This contradicts the standard Armington trade model, which predicts that fast-growing countries can experience rapid export growth only to the extent that they accept declining terms of trade. This paper generalizes the monopolistic competition trade model of Helpman and Krugman (1985), providing a basis for growth-led exports without declining terms of trade. The key mechanism behind this result is that fast-growing countries are able to develop new varieties of products that can be exported without pushing down the prices of existing products. There is strong support for the new model in long-run export growth of many countries in the post-war era.
    Keywords: International trade ; Product differentiation
    Date: 2004
  13. By: John W. Schindler; Dustin H. Beckett
    Abstract: Hong Kong plays a prominent role as a re-exporter of a large percentage of trade bound for or coming from China. Current reporting practices in China and its trading partners do not fully reflect this role and therefore provide a misleading picture of the origin or ultimate destination of Chinese exports and imports. We adjust bilateral trade data for both China and its trading partners to correct for this problem. We also correct for differences due to markups in Hong Kong and different standards for reporting trade (c.i.f. versus f.o.b.). For 2003, we estimate that China's overall trade surplus was between $53 billion and $126 billion, larger than that reported in official Chinese data, but smaller than that reported by China's trading partners. We also provide evidence that, in general, the actual origin of a good that is transshipped through Hong Kong is correctly reported by the importing country, but the final destination of such goods is not correctly reported by the exporting country.
    Keywords: Balance of trade - China
    Date: 2005
  14. By: Chad Bown; Meredith Crowley
    Abstract: This paper examines how US special import restrictions affect the growth of China's exports to countries other than the US. We estimate an empirical model of trade deflection and trade depression of roughly 5100 commodities exported by China to 37 countries between 1992 and 2001. Our estimation yields evidence that US trade restrictions deflect Chinese exports to third, non-US markets. Imposition of a US antidumping duty against China leads the growth rate of targeted commodities to increase approximately 25 percentage points. Our results on the deflection of Chinese exports vary across commodity, with the strongest evidence of trade deflection appearing in the steel, pharmaceuticals and manufactured goods industries.
    Keywords: Exports ; Trade
    Date: 2004
  15. By: M. Ayhan Kose; Kei-Mu Yi
    Abstract: Recent empirical research finds that pairs of countries with stronger trade linkages tend to have more highly correlated business cycles. We assess whether the standard international business cycle framework can replicate this intuitive result. We employ a three-country model with transportation costs. We simulate the effects of increased goods market integration under two asset market structures: complete markets and international financial autarky. Our main finding is that under both asset market structures the model can generate stronger correlations for pairs of countries that trade more, but the increased correlation falls far short of the empirical findings. Even when we control for the fact that most country pairs are small with respect to the rest of the world, the model continues to fall short. We also conduct additional simulations that allow for increased trade with the third country or increased TFP shock comovement to affect the country pair’s business cycle comovement. These simulations are helpful in highlighting channels that could narrow the gap between the empirical findings and the predictions of the model.
    Keywords: Business cycles ; International trade
    Date: 2005
  16. By: Barry Eichengreen; Hui Tong
    Abstract: We analyze how China's emergence as a destination for foreign direct investment is affecting the ability of other countries to attract FDI. We do so using an approach that accounts for the endogeneity of China's FDI. The impact turns out to vary by region. China's rapid growth and attractions as a destination for FDI also encourages FDI flows to other Asian countries, as if producers in these economies belong to a common supply chain. There is also evidence of FDI diversion from OECD recipients. We interpret this in terms of FDI motivated by the desire to produce close to the market where the final sale takes place. For whatever reason -- limits on their ability to raise finance for investment in multiple markets or limits on their ability to control operations in diverse locations -- firms more inclined to invest in China for this reason are corresponding less inclined to invest in the OECD. A detailed analysis of Japanese foreign direct investment outflows disaggregated by sector further supports these conclusions.
    JEL: F0
    Date: 2005–05
  17. By: Marcelo de Paiva Abreu (Department of Economics PUC-Rio)
    Abstract: This paper is divided in nine sections. A short introduction puts the subject matter in perspective in the context of the FTAA negotiations. Section 1 deals with obstacles to a successful conclusion of the FTAA both in Mercosur - especially in Brazil. The following section considers briefly how notions about reciprocity and balance of concessions have been applied in multilateral negotiations and how they may be adjusted in the case of negotiations involving free trade areas. The following two triads of sections refer to the United States (sections 3, 4 and 5) and Brazil (sections 6, 7 and 8). Sections 3 and 6 analyze in both economies how protectionist interests are distributed from the point of view of sectors affected and of their location (states and, for the United States, congressional districts). The relative importance of export interests by state is gauged in sections 4 and 7. The relative net balance of protectionist and export interests is evaluated in sections 5 and 8 under different assumptions in an effort to cope with the limitations of the measures used. Section 9 concludes.
    Date: 2005–01
  18. By: Viviana Fernandez; Ali M. Kutan;
    Abstract: Using monthly industrial sector data from January 1971 to March 2004, we test for business cycles convergence among the major APEC members: Japan, South Korea, Malaysia, Mexico, USA, and Canada. In addition, we examine the synchronization of business cycles among Australia, Japan, and South Korea, based on the quarterly data for the 1957-2003 period, as well as among the different economic sectors of the NAFTA countries from January 1970 through March 2004. We apply different techniques to identify business cycles. In particular, we propose a new trend-cycle decomposition method based on wavelet analysis. The results show that convergence of business cycles of Asia-Pacific countries is far from complete, but joining the APEC has increased the mean correlation of industrial production cycles of the member economies. On the other hand, although some economic sectors of the NAFTA countries already exhibited some degree of business cycle co-movement even during pre-NAFTA period, the volatility of pair-wise correlation of business cycles declined during NAFTA. In addition, we conclude that, in general, the transmission of business cycles is relatively slow, and, consequently, business cycles appear to be asynchronous.
    Keywords: business-cycles convergence, wavelets, APEC, NAFTA
    JEL: B41 E32
    Date: 2005–04–01
  19. By: Jens Hainmueller (Harvard University); Michael J. Hiscox (Harvard University)
    Abstract: Recent studies of public attitudes toward trade have converged upon one central finding: support for trade restrictions is highest among respondents with the lowest levels of education. This has been interpreted as strong support for the Stolper-Samuelson theorem, the classic economic treatment of the income effects of trade which predicts that trade openness benefits those owning factors of production with which their economy is relatively well endowed (those with skills in the advanced economies) while hurting others (low skilled workers). We re- examine the available survey data, showing that the impact of education on attitudes toward trade is almost identical among respondents in the active labor force and those who are not (even those who are retired). We also find that, while individuals with college-level educations are far more likely to favor trade openness than others, other types of education have no significant effects on attitudes, and some actually reduce the support for trade, even though they clearly contribute to skill acquisition. Combined, these results strongly suggest that the effects of education on individual trade preferences are not primarily a product of distributional concerns linked to job skills. We suggest that exposure to economic ideas and information among college-educated individuals plays a key role in shaping attitudes toward trade and globalization. This is not to say that distributional issues are not important in shaping attitudes toward trade – just that they are not clearly manifest in the simple, broad association between education levels and support for free trade.
    Keywords: International Trade, Trade Preferences, Stolper-Samuelson, Education Effects
    JEL: F1 F2
    Date: 2005–05–19
  20. By: John Quiggin (Department of Economics, University of Queensland)
    Abstract: This paper is a critical evaluation of the proposed Free Trade Agreement between Australia and the United States
    Keywords: FTA, PBS
    JEL: F13 H40
    Date: 2004–04
  21. By: Wilfred J. Ethier (Department of Economics, University of Pennsylvania)
    Abstract: This paper makes several basic points relating to the economics of Intellectual Property Rights, the TRIPS Agreement, and the World Trade Organization dispute settlement process.
    Keywords: TRIPS, externalities, trade agreements, hostages
    JEL: F10 F13
    Date: 2003–11–21

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