nep-int New Economics Papers
on International Trade
Issue of 2005‒10‒04
eighteen papers chosen by
Martin Berka
Massey University

  1. Benefits and spillovers of greater competition in Europe: A macroeconomic assessment. By Tamim Bayoumi; Douglas Laxton; Paolo Pesenti
  2. Foreign trade and equilibrium indeterminacy By Luis Aguiar-Conraria; Yi Wen
  3. Trade and Business Cycle Synchronization in OECD Countries - a Re-examination By Robert Inklaar; Richard Jong-A-Pin; Jakob de Haan
  4. International risk-sharing and the transmission of productivity shocks By Giancarlo Corsetti; Luca Dedola; Sylvain Leduc
  5. World trade and global integration in production processes - a re-assessment of import demand equations By Ray Barrell; Stephane Dées
  6. Disentangling Horizontal and Vertical Intra-Industry Trade By Lionel Fontagne; Michael Freudenberg; Guillaume Gaulier
  7. The Impact of Financial Services Trade Liberalization on China By Li-Gang Liu
  8. Trade effects of the euro - evidence from sectoral data By Richard Baldwin; Frauke Skudelny; Daria Taglioni
  9. Production interdependence and welfare By Kevin X.D. Huang; Zheng Liu
  10. The Consequences of Agricultural Trade Liberalization for Developing Countries: Distinguishing Between Genuine Benefits and False Hopes By Jean-Christophe Bureau; Sébastien Jean; Alan Matthews
  11. Ramsey monetary policy and international relative prices. By Ester Faia; Tommaso Monacelli
  12. Can Deunionization Lead to International Outsourcing? By Kjell Erik Lommerud; Frode Meland; Odd Rune Straume
  13. EU Accession Countries’ Specialisation Patterns in Foreign Trade and Domestic Production - What can we infer for catch-up prospects? By Johannes Stephan
  14. China’s Integration in East Asia: Production Sharing, FDI & High-Tech Trade By Guillaume Gaulier; Francoise Lemoine; Deniz Unal-Kesenci
  15. Are International Merchants Stupid? - A Natural Experiment Refutes the Legal Origin Theory. By Stefan Voigt
  16. Ukrainian international trade: How far from the potential? By Maryanchyk Ivan
  17. Turkish Delight for Some, Cold Turkey for Others?: The Effects of the EU-Turkey Customs Union By Antonis Adam; Thomas Moutos
  18. From Bound Duties to Actual Protection: Industrial Liberalisation in the Doha Round By Hedi Bchir; Lionel Fontagne; Sebastien Jean

  1. By: Tamim Bayoumi (International Monetary Fund, NY, USA.); Douglas Laxton (International Monetary Fund, NY, USA.); Paolo Pesenti (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Using a general-equilibrium simulation model featuring nominal rigidities and monopolistic competition in product and labor markets, this paper estimates the macroeconomic benefits and international spillovers of an increase in competition. After calibrating the model to the euro area vs. the rest of the industrial world, the paper draws three conclusions. First, greater competition produces large effects on macroeconomic performance, as measured by standard indicators. In particular, we show that differences in competition can account for over half of the current gap in GDP per capita between the euro area and the US. Second, it may improve macroeconomic management by increasing the responsiveness of wages and prices to market conditions. Third, greater competition can generate positive spillovers to the rest of the world through its impact on the terms of trade.
    Keywords: Competition; Markups; Monetary Policy; Taylor Rule.
    JEL: C51 E31 E52
    Date: 2004–04
  2. By: Luis Aguiar-Conraria; Yi Wen
    Abstract: We show that dependence of production on foreign inputs (or non-producible natural resources) can significantly increase the likelihood of indeterminacy. Payment of imported foreign factors of production may act as a semi-fixed cost, amplifying production externalities and returns to scale, making self-fulfilling expectations driven busyness cycles easier to arise. This is demonstrated using a standard neoclassical growth model. Calibration exercise shows that the required increasing returns to scale can be reduced by as much as 64% based on estimated share of foreign inputs in production for OECD countries.
    Keywords: International trade ; Prices
    Date: 2005
  3. By: Robert Inklaar; Richard Jong-A-Pin; Jakob de Haan
    Abstract: This paper re-examines the relationship between trade intensity and business cycle synchronization for 21 OECD countries during 1970-2003. Instead of using instrumental variables, we estimate a multivariate model including variables capturing specialisation, financial integration, and similarity of economic policies. We confirm that trade intensity affects business cycle synchronization, but the effect is much smaller than previously reported. Other factors in our model have a similar impact on business cycle synchronization as trade intensity. Finally, we find that the effect of trade on business cycle synchronisation is not driven by outliers and does not suffer from parameter heterogeneity.
    Keywords: business cycles, trade, synchronization of business cycles
    JEL: E32 F42
    Date: 2005
  4. By: Giancarlo Corsetti (European University Institute, Via dei Roccettini 9, I-San Domenico di Fiesole 50016, Italy); Luca Dedola (European Central Bank, Kaiserstr. 29, D-Frankfurt am Main, Germany); Sylvain Leduc (Federal Reserve Bank of Philadelphia,Ten Independence Mall, Philadelphia, PA 19106-1574;)
    Abstract: A central puzzle in international finance is that real exchange rates are volatile and, in stark contradiction to efficient risk-sharing, negatively correlated with cross-country consumption ratios. This paper shows that incomplete asset markets and a low price elasticity of tradables can account quantitatively for these properties of real exchange rates. The low price elasticity stems from distribution services, intensive in local inputs, which drive a wedge between producer and consumer prices and lower the impact of terms-of-trade changes on optimal agents’ decisions. Two very different patterns of the international transmission of productivity improvements generate the observed degree of risk-sharing: one associated with a strengthening, the other with a deterioration of the terms of trade and real exchange rate. Evidence on the effect of technology shocks to U.S. manufacturing, identified through long-run restrictions, is found in support of the first transmission pattern, questioning the presumption that terms-of-trade movements foster international risk-pooling.
    Keywords: Incomplete asset markets; Distribution margin; Consumption-real exchange rate. F32, F33, F41
    JEL: F32 F33 F41
    Date: 2004–02
  5. By: Ray Barrell (National Institute of Economic and Social Research (NIESR), 2 Dean Trench Street, Smith Square, London SW1P 3HE, United Kingdom); Stephane Dées (Corresponding author: European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)
    Abstract: It is common to observe that demand elasticities in trade equations for imports are implausibly large, and that they differ between countries. Both of these present us with problems, as they imply trade will rise without bound as a proportion of GDP. The research reported here looks for alternative empirical evidence of possible factors driving the increase in trade as a proportion of GDP. We show that the inclusion of the ratios of outward and inward FDI to GDP as additional openness and globalisation indicators appear to remove the spurious accuracy with which we are measuring demand elasticities.
    Keywords: International trade; FDI.
    JEL: F10 F23
    Date: 2005–07
  6. By: Lionel Fontagne; Michael Freudenberg; Guillaume Gaulier
    Abstract: Intra-Industry Trade has been repeatedly attested since the 1960s and justified on the grounds of the new approaches to international trade based on imperfect competition and differentiated products. Up to now however, scholars were relying on partial assessments of this phenomenon. We provide here a systematic decomposition of world trade using harmonised bilateral flows for some 5,000 products, into three trade types: inter-industry, intra-industry in horizontally versus vertically differentiated products, over the period 1989-2002. We show that the increase in IIT at the world level is due to two-way trade of vertically differentiated products. However inter-industry trade has recently recovered, due to the increasing participation of emerging economies in world trade.
    Keywords: Intra-Industry Trade; International Trade
    JEL: F14 F15
    Date: 2005–07
  7. By: Li-Gang Liu
    Abstract: This paper shows that financial services trade liberalization in China has set impetus for accelerated domestic financial liberalization. Foreign banks, though still relatively small in size, have already exerted considerable influence on China's capital flows. Empirical findings from a gravity model analysis indicate that financial services trade liberalization under the WTO promotes bank loans to developing economies strongly though not evenly conditional on country characteristics.
    Date: 2005–09
  8. By: Richard Baldwin (University of Geneva - Graduate Institute of International Studies (HEI), CH-1202 Geneva, Switzerland.); Frauke Skudelny (Corresponding author: European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Daria Taglioni (University of Geneva - Graduate Institute of International Studies (HEI), CH-1202 Geneva, Switzerland.)
    Abstract: This paper contributes to the literature on the impact of EMU on trade, adding two new elements. First, we propose a theoretical model for explaining how the euro could have increased trade by the large amounts found in the empirical literature. Second, we propose a sectoral dataset to test the insights from the theory. Our theoretical model shows that in a monopolistic competition set-up, the effect of exchange rate uncertainty on trade has nonlinear features, suggesting that EMU and a standard measure for exchange rate uncertainty should be jointly significant. Our empirical results confirm this finding, with a trade creating effect between 108 and 140% in a pooled regression, and between 54 to 88% when sectors are estimated individually. Importantly, we find evidence for a trade creating effect also for trade with third countries.
    Keywords: Rose effect; exchange rate volatility; monetary union; sectoral trade; gravity.
    JEL: F12 C33 E0
    Date: 2005–02
  9. By: Kevin X.D. Huang (Economic Research Department, Federal Reserve Bank of Kansas City, 925 Grand Boulevard, Kansas City, MO 64198, USA;); Zheng Liu (Department of Economics, Emory University, Atlanta, GA 30322, USA;)
    Abstract: The international welfare effects of a country's monetary policy shocks have been controversial in the new open economy macro (i.e., NOEM) literature. While a unilateral monetary expansion increases the production efficiency in each country, it affects the terms of trade in favor of one country against another depending on the currencies of price setting. In this paper, we incorporate multiple stages of production and trade into a standard NEOM model to capture world production interdependence, and show that increased world production interdependence tends to magnify the efficiency-improvement effect while dampening the terms-of-trade effect. As a consequence, a unilateral monetary expansion can be mutually beneficial regardless of in which currency prices are set. In this sense, international monetary policy transmission may not be a source of potential conflict in a world with production interdependence.
    Keywords: Stages of processing; Monopolistic competition; Local currency pricing; Welfare.
    JEL: E32 F31 F41
    Date: 2004–05
  10. By: Jean-Christophe Bureau; Sébastien Jean; Alan Matthews
    Abstract: Recent analyses suggest that the impact of agricultural trade liberalization on developing countries will be very uneven. Simulations suggest that the effects of agricultural trade liberalization will be small, overall, and are likely to be negative for a significant number of developing countries. The Doha Round focuses on tariff issues, but some developing countries currently have practically duty-free access to European and North American markets under preferential regimes. Multilateral liberalization will erode the benefits of these preferences, which are presently rather well utilized in the agricultural sector. While South American and East Asian countries should benefit from an agricultural agreement, African and Caribbean countries are unlikely to do so. The main obstacles to the exports of the sub-Saharan African and Least Developed Countries appear to be in the non-tariff area (sanitary, phytosanitary standards) which increasingly originate from the private sector and are not dealt with under the Doha framework (traceability requirements, etc.). An agreement in Doha is unlikely to solve these problems and open large markets for the poorest countries. While this is not an argument to give up multilateral liberalization, a more specific and differentiated treatment should be considered in WTO rules, and corrective measures should be implemented.
    Keywords: Agricultural trade liberalization; WTO; developing countries
    JEL: F13 Q17
    Date: 2005–08
  11. By: Ester Faia (Universitat Pompeu Fabra, Ramon Trias Fargas 25, Barcelona, Spain.); Tommaso Monacelli (IGIER Universita’ Bocconi,Via Salasco 3/5, 20136 Milan, Italy.)
    Abstract: We analyze welfare maximizing monetary policy in a dynamic two-country model with price stickiness and imperfect competition. In this context, a typical terms of trade externality affects policy interaction between independent monetary authorities. Unlike the existing literature, we remain consistent to a public finance approach by an explicit consideration of all the distortions that are relevant to the Ramsey planner. This strategy entails two main advantages. First, it allows an accurate characterization of optimal policy in an economy that evolves around a steady-state which is not necessarily efficient. Second, it allows to describe a full range of alternative dynamic equilibria when price setters in both countries are completely forwardlooking and households’ preferences are not restricted. In this context, we study optimal policy both in the long-run and along a dynamic path, and we compare optimal commitment policy under Nash competition and under cooperation. By deriving a second order accurate solution to the policy functions, we also characterize the welfare gains from international policy cooperation.
    Keywords: Optimal Monetary Policy; Ramsey planner; Nash equilibrium; Cooperation; sticky prices; imperfect competition.
    JEL: E52 F41
    Date: 2004–04
  12. By: Kjell Erik Lommerud; Frode Meland; Odd Rune Straume
    Abstract: We analyze unionized firms’ incentives to outsource intermediate goods production to foreign (low-cost) subcontractors. Such outsourcing leads to increased wages for the remaining in-house production. We find that stronger unions, which imply higher domestic wages, reduce incentives for international outsourcing. Though somewhat surprising, this result provides a theoretical reconciliation of the empirically observed trends of deunionization and increased international outsourcing in many countries. We further show that globalization - interpreted as either market integration or increased product market competition - will increase incentives for international outsourcing.
    Keywords: international outsourcing, deunionization, globalization
    JEL: F16 J51 L24
    Date: 2005
  13. By: Johannes Stephan
    Abstract: Diese Arbeit ergänzt die frühere Analyse der Spezialisierungsmuster und den sich daraus ergebenden Zukunftsaussichten (patterns and prospects: Stephan, 2003). Deren Ziel war es, das künftig zu erwartende Wachstumstempo der Produktivität an den Spezialisierungsmustern im verarbeitenden Gewerbe abzulesen. In der vorliegenden Arbeit wird nun zusätzlich der Außenhandel in die Abschätzung der Aussichten einbezogen. Die sich hier ergebenden Ergebnisse stimmen im Allgemeinen mit den Resultaten der früheren Untersuchung überein. Das wichtigste Ergebnis betrifft Slowenien und die Slowakische Republik: In beiden Ländern deuten die jeweiligen Spezialisierungsmuster sowohl im Außenhandel als auch in der Binnenwirtschaft auf ein hohes Potenzial für rasches Produktivitätswachstum. Polen und Estland zeigen dagegen deutlich weniger Potenzial, nur für Poland werden die düsteren Aussichten aus der ursprünglichen Analyse bestätigt.
    Date: 2003–11
  14. By: Guillaume Gaulier; Francoise Lemoine; Deniz Unal-Kesenci
    Abstract: China has taken advantage of the globalisation process and has become a assembly country for firms in Asia which have extended to China their production and trade networks. China’s position in the segmentation of the production processes has fostered its trade in high-technology products. However the rapid technological upgrading of China’s trade is associated with an increasing dependence on foreign capital and technology. The emergence of China has led to the reorganisation of production in Asia and to a triangular trade pattern: firms in advanced Asian economies use China as an export base and instead of exporting finished goods to the US and Europe, now export intermediate goods to their affiliates in China.
    Keywords: technology transfers; international trade; specialization; FDI; globalization; IDPP; specialization; China; east Asia; international production sharing
    JEL: F13 F14 F15 O53
    Date: 2005–06
  15. By: Stefan Voigt
    Abstract: In economics, there is currently an important discussion on the role of "legal origins" or "legal families". Some economists claim that legal origins play a crucial role until today. Usually, they distinguish between Common Law, French, Scandinavian and German legal origin. When these legal origins are compared, countries belonging to the Common Law tradition regularly come out best (with regard to many different dimensions) and countries belonging to the French legal origin worst. International arbitration provides an ideal "natural experiment" to test this view empirically: in international trade, the contracting parties are free to choose the substantive law that suits their interests best. If the literature just cited was correct, we would expect that rational traders would structure their interactions according to some substantive law based on the Common Law tradition such as British or US American law. Although exact statistics are not readily available, the evidence from cases that end up with international arbitration courts (such as the International Court of Arbitration run by the International Chamber of Commerce in Paris) clearly demonstrates that this is not the case.
    Keywords: Legal Origins, International Arbitration, Choice of Substantive Law
    JEL: F23 K12
    Date: 2005–09
  16. By: Maryanchyk Ivan
    Abstract: This paper applies gravity theory to model Ukrainian trade patterns. I estimate two specifications — Global and Ukrainian. The former is used to forecast optimal trade volumes and compare with actual. The latter helps analyzing factors affecting Ukrainian trade. According to the results, Ukraine explored its trade potential with the EU. On the other hand, having, according to the model, low potential in 1995 the country achieved even better results in this direction in 2002. On the contrary, trade with CIS states deteriorated despite vast possibilities predicted by the model. Another unexplored opportunity is large economies of G7, trade partners in Asia and Americas. To reach its potential, Ukraine should liberalize trade relations with Russia (to gain in trade and reach the potential) and with EU (to safeguard achieved results). Accession to the WTO would help to explore potential with G7 and other big economies.
    JEL: F12 F13 F14
    Date: 2005–09–13
  17. By: Antonis Adam; Thomas Moutos
    Abstract: Following Turkey’s application for EU membership in 1987, a Customs Union (CU) between Turkey and the EU, mainly covering trade in manufacturing goods and processed agricultural products, came into effect in 1995. In addition to a large agricultural sector, Turkey also specializes in the production and exportation of relatively low-price, low-quality varieties of manufactured products. We use a theoretical framework in order to demonstrate that these features of the Turkish economy imply asymmetric changes in the trade volumes of the incumbent countries of the EU as a result of the EU-Turkey CU. By examining disaggregated trade data we find that the technologically sophisticated EU countries (e.g., mainly the Northern European countries) are also least similar to Turkey in terms of their export structure, whereas the degree of export similarity between the less technologically sophisticated EU members and Turkey is high. Our econometric results indicate that, in contrast to the “Northern” group’s exports to other EU15 countries (which have remained intact), the Southern countries’s exports to the other EU15 countries have declined as a result of the EU-Turkey CU. Moreover, the extra penetration of the Turkish market by EU countries has not been more favourable to the Southern group. These findings also imply that technologically sophisticated countries may see no significant further benefits from Turkey’s full accession to the EU (whereas the migration and political influence related costs for these countries may be large).
    Keywords: European Union, Turkey, customs union, exports, gravity, differentiated products
    JEL: F13 F15
    Date: 2005
  18. By: Hedi Bchir; Lionel Fontagne; Sebastien Jean
    Abstract: This study proposes a CGE assessment of multilateral liberalisation of non-agricultural market access. Scenarios considered include the so-called Girard proposal (with alternative choices for the involved coefficient), the removal of tariff peaks and complete liberalisation. This study is the first one to take duly into account the difference between bound and applied tariffs, while accounting for all enforced preferential trade arrangements and computing tariff cuts at the detailed product level (HS-6 classification). While non-agricultural market access liberalisation is found to be welfare-enhancing at the world level, cross-country distributive impacts prove significant. A soft liberalisation would not lower significantly applied duties in developing countries, due to their significant binding overhang. In contrast, a deep liberalisation would entail fierce price-competition between developing countries, largely specialised on similar sectors and on the same quality range.
    Keywords: Doha development agenda; applied tariffs; preferential trade agreements; binding overhang; computable general equilibrium model
    JEL: D58 F12 F13
    Date: 2005–07

This nep-int issue is ©2005 by Martin Berka. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.