nep-int New Economics Papers
on International Trade
Issue of 2005‒11‒05
twenty-one papers chosen by
Martin Berka
Massey University

  1. Trade invoicing in the accession countries: are they suited to the Euro? By Linda S. Goldberg
  2. Tradability, productivity, and understanding international economic integration By Paul R. Bergin; Reuven Glick
  3. A Re-Examination of the Border Effect By Yuriy Gorodnichenko; Linda Tesar
  4. Exchange rate pass-through to import prices in the Euro area By Jose Manuel Campa; Linda S. Goldberg; Jose M. Gonzalez-Minguez
  5. Trade, gravity, and sudden stops: on how commercial trade can increase the stability of capital flows By Eduardo A. Cavallo
  6. Supply Capacity, Vertical Specialization and Tariff Rates: The Implications for Aggregate U.S. Trade Flow Equations By Menzie D. Chinn
  7. International Price Dispersion in State-Dependent Pricing Models By Virgiliu Midrigan
  8. A New International Division of Labor in Europe: Offshoring and Outsourcing to Eastern Europe By Marin, Dalia
  9. Predicting Trade Expansion under FTAs and Multilateral Agreements By Dean A. DeRosa; John P. Gilbert
  10. Trade Liberalization and Employment Effects in Ukraine By Atanas Christev; Olga Kupets; Hartmut Lehmann
  11. Local Learning, Trade Policy and Industrial Structure Dynamics By Facundo Albornoz and Paolo Vanin
  12. A Political-Economy Theory of Trade Agreements By Giovanni Maggi; Andres Rodriguez-Clare
  13. The Economic Impact of Trade Facilitation By Michael Engman
  14. Politico-Economic Determinants of American Trade Policy Attitudes By Michael E. S. Hoffman
  15. Vertical specialization and the border effect puzzle By Kei-Mu Yi
  16. Limited Enforceable International Loans, International Risk Sharing and Trade By Almuth Scholl
  17. Monetary and Exchange Rate Policy Coordination in ASEAN 1 By William H. Branson; Conor N. Healy
  18. Estimating Models of Complex FDI: Are There Third-Country Effects? By Badi H. Baltagi; Peter Egger; Michael Pfaffermayr
  19. The New England-China relationship in 2005 By Lynn E. Browne
  20. Relative Prices and the Fallacy of Composition in Manufacturing-Based, Export-Led Growth: An Empirical Investigation By Arslan Razmi; Robert Blecker
  21. Are US Wages Really Determined by European Labor-Market Institutions? By Jürgen Meckl

  1. By: Linda S. Goldberg
    Abstract: Countries aspiring to join the euro area-the so-called accession countries-are increasingly binding their economic activity, external and internal, to the euro-area countries. This phenomenon is observed in the currency invoicing of international trade transactions, where accession countries have reduced their use of the U.S. dollar in invoicing such transactions. According to theory, the optimal invoicing choice for an accession country depends on its composition of exports and imports and on the macroeconomic fluctuations faced by its trade partners, with both factors bearing out the role of herding and hedging considerations within exporter profitability. These considerations yield country-specific estimates of the optimal degree of euro-denominated invoicing of exports. I find that the exporters in some accession countries might be pricing too much of their trade in euros rather than in U.S. dollars, even in their trade transactions with the euro-area and other European Union countries, and thus may be taking on excessive risk in international markets.
    Keywords: Euro ; European Union countries ; Exports ; International trade
    Date: 2005
  2. By: Paul R. Bergin; Reuven Glick
    Abstract: This paper develops a two-country macro model with endogenous tradability to study features of international economic integration. Recent episodes of integration in Europe and North America suggest some surprising observations: while quantities of trade have increased significantly, especially along the extensive margin of goods previously not traded, price dispersion has not decreased and may even have increased. These observations challenge the usual understanding of integration in the literature. We propose a way of reconciling these price and quantity observations in a macroeconomic model where the decision of heterogeneous firms to trade internationally is endogenous. Trade is shaped both by the nature of heterogeneity -- trade costs versus productivity -- and by the nature of trade policies -- cuts in fixed costs versus cuts in per unit costs like tariffs. For example, in contrast to tariff cuts, trade policies that work mainly by lowering various fixed costs of trade may have large effects on entry decisions at the extensive margin without having direct effects on price-setting decisions. Whether this entry raises or lowers price dispersion depends on the type of heterogeneity that distinguishes the new entrants from incumbent traders.
    Keywords: International economic integration ; International finance ; Econometric models
    Date: 2005
  3. By: Yuriy Gorodnichenko; Linda Tesar
    Abstract: This paper reexamines the evidence on the border effect, the finding that the border drives a wedge between domestic and foreign prices. We argue that the border effect can be inflated by the volatility and persistence of the nominal exchange rate and by the cross-country heterogeneity in the distribution of within-country price differentials. We develop a simple framework to separate the border effect from these confounding factors. Using price data from Engel and Rogers (1996) and Parsley and Wei (2001), we show that after controlling for the confounding factors the border effect between the U.S. and Canada and the U.S. and Japan is negligible.
    JEL: F3 F40 F41
    Date: 2005–10
  4. By: Jose Manuel Campa; Linda S. Goldberg; Jose M. Gonzalez-Minguez
    Abstract: This paper presents an empirical analysis of transmission rates from exchange rate movements to import prices, across countries and product categories, in the euro area over the last fifteen years. Our results show that the transmission of exchange rate changes to import prices in the short run is high, although incomplete, and that it differs across industries and countries; in the long run, exchange rate pass-through is higher and close to 1. We do not find compelling evidence that the introduction of the euro caused a structural change in exchange rate pass-through. Although some estimated point elasticities have declined, structural breaks in exchange rate pass-through into import prices are evident only in a limited sample of manufacturing industries. And since the euro was introduced, industries producing differentiated goods have been more likely to experience reduced rates of exchange rate pass-through to import prices. Exchange rate changes continue to lead to large changes in import prices across euro-area countries.
    Keywords: Imports - Prices ; Foreign exchange rates ; Euro ; Industries
    Date: 2005
  5. By: Eduardo A. Cavallo
    Abstract: The author uses gravity estimates as instrumental variables for trade to test the proposition that countries that trade less with the rest of the world are more vulnerable to sudden stops in capital flows. The author finds that, all else equal, a 10 percentage point increase in the trade-to-gross domestic product (GDP) ratio reduces the probability of a sudden stop by approximately 32 percent. ; The estimation is motivated by a model that introduces balance sheet effects to a standard small open economy. In the model, the probability of sudden stops is directly related to the temptation of the borrowers to default in the aftermath of real depreciations. Countries that trade less with the rest of the world are more vulnerable to large real depreciations and, consequently, are always more tempted to default and are more prone to sudden stops ; The policy implications of the results presented here are unambiguous: Trade protectionism does not shield countries from external shocks to their capital accounts. On the contrary, anything that increases the tradable component of a country’s GDP will, ceteris paribus, reduce the vulnerability of that country to sudden stops in capital flows. Without large quantities of trade, capital account openness that leads to indebtedness in foreign currencies is risky and should probably be avoided.
    Date: 2005
  6. By: Menzie D. Chinn
    Abstract: This paper re-examines aggregate and disaggregate import and export demand functions for the United States. This re-examination is warranted because (1) income elasticities are too high to be warranted by standard theories, and (2) remain high even when it is assumed that supply factors are important. These findings suggest that the standard models omit important factors. An empirical investigation indicates that the rising importance of vertical specialization combined with decreasing tariffs rates explains some of results. Accounting for these factors yields more plausible estimates of income elasticities, as well as smaller prediction errors.
    JEL: F12 F41
    Date: 2005–10
  7. By: Virgiliu Midrigan (Ohio State University)
    Abstract: Studies of disaggregated international price data document a robust, positive relationship between nominal exchange (NER) volatility and the variability of international relative prices. This relationship is interpreted as evidence that sticky prices rather than trade frictions are the source of the large law of one price deviations across locations. This paper shows that an explicitly micro-founded, menu-cost model predicts a hump-shaped rather than a monotonic relationship between relative price and nominal exchange rate volatility. The hump occurs at higher nominal exchange rate volatilities the less tradeable the goods are. We use this implication of the model to identify the size of the physical barriers that separate nations. Ad valorem trade costs as large as 50 percent are necessary for the model to generate the type of international relative price movements observed in the data.
    Keywords: PPP, Law of One Price, menu costs, trade costs
    JEL: E30 F41
    Date: 2005–11–01
  8. By: Marin, Dalia
    Abstract: Europe is reorganizing its international value chain. I document these changes in Europe?s international organization of production with new survey data of Austrian and German firms investing in Eastern Europe. I show estimates of the share of intra-firm trade between Austria and Germany on the one hand and Eastern Europe on the other. Furthermore, I present empirical evidence of the drivers of the new division of labor in Europe. I find among other things that falling trade costs and falling corruption levels as well as improvements in the contracting environment in Eastern Europe are affecting the level of intra-firm imports from Eastern Europe. They are also favoring outsourcing over offshoring. Low organizational costs of hierarchies and large costs of hold-up (when there are no alternative investors in Old Europe or no alternative suppliers in Eastern Europe) are favoring offshoring over outsourcing. Tax holidays granted by host countries in Eastern Europe also mildly affect the organizational choice.
    JEL: O11 L14 F11 D51 D23
    Date: 2005–09
  9. By: Dean A. DeRosa (ADR International Ltd.); John P. Gilbert (Utah State University)
    Abstract: This paper examines the historical record of eight recent free trade agreements (FTAs). It also investigates the predictive power of two popular quantitative world trade models—the single-equation gravity model and the multiequation comput-able general equilibrium (CGE) model—as applied to three major trade liberalization agreements adopted during the 1990s: Mercosur, NAFTA, and the Uruguay Round Agreement, using the Rose gravity model and the GTAP general equilibrium model. Both models are found accurate in some instances, but intervening influences in the wake of trade liberalization episodes confound the challenge of drawing a strong conclusion in favor of one modeling approach over the other. Between the “naïve” gravity model and “naïve” CGE model predictions, we find that the former tends to overpredict intrabloc trade expansion (especially over horizons of five years and less) while the latter tends to underpredict. CGE models remain favored for ex post analysis of welfare impacts and the direct and indirect linkages between policy reforms and the numerous other economic variables of concern to policymakers and the public at large.
    Keywords: gravity models, CGE models, regional trading arrangements
    JEL: C68 F13 F17
    Date: 2005–10
  10. By: Atanas Christev (CERT, Heriot-Watt University and IZA Bonn); Olga Kupets (National University-Kiev Mohyla Academy and IZA Bonn); Hartmut Lehmann (University of Bologna, CERT, Heriot-Watt University, EROC, Kiev School of Economics, and IZA Bonn)
    Abstract: This paper addresses the important issue of the effects of trade liberalization on labor market job flows. It studies the case of Ukraine where we view the sudden openness of the economy to trade as a quasi-natural experiment. We use disaggregated data on manufacturing industries and customs data on trade flows taking account of shifting trade patterns after the disintegration of CMEA trade regime. We provide some first evidence that three-digit NACE sector job flows are predominantly driven by idiosyncratic factors within industries. Other things equal, there is increased labor shedding as larger non-state share in industry relates to less job creation and more job destruction. Trade openness does affect job flows in Ukrainian manufacturing disproportionately according to trade orientation. We find that while trade with CIS decreases job destruction, trade with the EU increases excess reallocation mainly through job creation.
    Keywords: job creation, job destruction, trade flows and trade liberalization, Ukraine
    JEL: E24 F14 J63 P23
    Date: 2005–10
  11. By: Facundo Albornoz and Paolo Vanin
    Abstract: In a small open economy with heterogeneous firms, in which tariffs determine the mass of active firms, free trade optimality depends positively on the level of firm heterogeneity and negatively on transportation costs. The benefits from temporary protection depend on the level of backwardness: for a given mass of backward firms, the relative gains from protection increase with their quality and decrease with the quality of advanced firms; for given production quality levels, the relative advantage of protection increases with the mass of backward firms.
    Keywords: Production network, Learning externalities, Infant industry
    JEL: D51 D62 F12 F13
    Date: 2005–09
  12. By: Giovanni Maggi; Andres Rodriguez-Clare
    Abstract: We develop a model where trade agreements -- in addition to correcting terms-of-trade externalities -- help governments to commit vis-a-vis domestic industrial lobbies. The model allows us to explore how the characteristics of the political environment affect the structure of the trade agreement and the extent of trade liberalization. The model also highlights the role of intersectoral capital mobility in determining trade liberalization. In a dynamic extension of the model, we explore the extent to which trade liberalization occurs gradually, and how its speed depends on the fundamentals of the problem.
    JEL: D72 F13
    Date: 2005–10
  13. By: Michael Engman
    Abstract: This paper examines the economic impact of trade facilitation and in particular the link between trade facilitation and trade flows, government revenue and foreign direct investment. It is part of a series of studies that analyse various aspects of trade facilitation and the objective is to contribute to discussions in the WTO Negotiating Group on Trade Facilitation (NGTF) and elsewhere in the trade policy community. The paper finds that improved and simplified customs procedures would have a significant positive impact on trade flows. It further shows that a large number of mostly developing countries have managed to boost government revenue by implementing customs modernisation programmes that result in more efficient collection of trade taxes. In addition, the paper demonstrates that facilitated cross-border movement of goods would have a positive effect on the ability of a country to attract foreign direct investment and better integrate in international production supply chains.
    Keywords: foreign direct investment, customs, government revenue, trade facilitation, border procedures, trade flows, trade transaction costs
    Date: 2005–10–12
  14. By: Michael E. S. Hoffman (U.S. Government Accountability Office)
    Abstract: Voting behavior and constituent attitudes are central to many models of trade policy determination. Examining the demographic and economic variables that are associated with attitudes toward various trade policies can provide some insight into the public perception of globalization, and the political response to those perceptions. Using detailed response and demographic data from the Program on International Policy Attitudes survey “Americans on Globalization, Trade, and Farm Subsidies†I assess a number of potential determinants of trade policy attitudes. Educational attainment is most clearly associated with pro- trade attitudes, and party affiliation suggests a certain malleability of opinion on trade issues. In addition, there is substantial variation in the determinants of trade policy attitudes across policy variables.
    Keywords: trade policy, globalization, policy attitudes
    JEL: F1 F2
    Date: 2005–10–28
  15. By: Kei-Mu Yi
    Abstract: A large body of empirical research finds that a pair of regions within a country tends to trade 10 to 20 times as much as an otherwise identical pair of regions across countries. In the context of the standard trade models, the large “border effect” is problematic, because it is consistent only with high elasticities of substitution between goods and/or high unobserved national border barriers. The author proposes a resolution to this puzzle based on vertical specialization, which occurs when regions or countries specialize only in particular stages of a good’s production sequence. The author develops a Ricardian model of intra-national and international trade, and shows how endogenous vertical specialization magnifies the effects of border barriers such as tariffs. He calibrates the model to match relative wages, trade shares, and vertical specialization for the U.S. and Canada. The model implies a much smaller border barrier and border effect than previous estimates.
    Date: 2005
  16. By: Almuth Scholl
    Abstract: This paper analyzes the impact of limited enforceable international loans on international risk sharing and trade fluctuations in a two-country two-good endowment economy. Our specification of the punishment threat allows the exclusion from trade to last only finitely many periods and distinguishes between financial autarky and full autarky. Quantitative results show that limited enforceability substantially alters cross-country consumption correlations and the dynamics of net exports. In contrast to existing studies, risk sharing is low for large elasticities of substitution between the domestic and foreign goods. However, it remains challenging to explain the high volatility of the terms of trade empirically observed.
    JEL: E32 D52 F34 F41
    Date: 2002–06
  17. By: William H. Branson; Conor N. Healy
    Abstract: This paper develops the basis for monetary and exchange rate coordination in Asia as part of a package of monetary integration that could support growth and poverty reduction. This could be achieved directly through coordinated exchange rate stabilization, and indirectly through the implications of this for reserve pooling and investment in an Asian development fund (ADF) and through development of the Asian bond market (ABM). Macro policy coordination could be viewed as a necessary condition for further development of both reserve pooling via the Chiang Mai Initiative (CMI) and of the ABM. The paper analyzes the trade structure of ASEAN and China in terms of both geographic sources of imports and markets for exports, and of the commodity structure of trade. The similarities of the geographic and commodity trade structures across the region are consistent with adoption of a common currency basket for stabilization, and with an argument for monetary integration across the region along the lines of Mundell (1961) on optimum currency areas. The paper constructs currency baskets and real effective exchange rates (REERs) for the countries in the region. Since their trade patterns are quite similar and their policies are already implicitly coordinated, their REERs tend to move together. This means that ASEAN and China are already moving toward integration in practical effect. Explicit movement toward coordination could support surveillance and reserve-sharing under the CMI, and release reserves to be invested in an ADF.
    JEL: F33 F41 G15
    Date: 2005–10
  18. By: Badi H. Baltagi (Center for Policy Research, Maxwell School, Syracuse University); Peter Egger (IFO Institute for Economic Research and University of Munich, Poschingerstrasse 5, D-81679 Munich, Germany); Michael Pfaffermayr (Department of Economics, University of Innsbruck, Universitaetsstrasse 15, 6020 Innsbruck, Austria; and Austrian Institute of Economic Research, P.O. Box 91, A-1103, Vienna, Austria)
    Abstract: The recent general equilibrium theory of trade and multinationals emphasizes the importance of third countries and the complex integration strtegies of multinationals. Little has been done to test this theory empirically. This paper attempts to rectify this situation by considering not only bilateral determinants, but also spatially weighted third-country determinants of foreign direct investment (FDI). Since the dependency among host markets is paticularly related to multinationals' trade between them, we use trade costs (distances) as spatial weights. Using panel data on U.S. industries and host countries observed over the 1989-1999 period, we estimate a "complex FDI" version of the knowledge-capital model of U.S. outward FDI by various recently developed spatial panel data generalized moments (GM) estimators. We find that third-country effects are significant, lending support to the existence of various modes of complex FDI.
    Keywords: multinational firms, complex FDI, panel econometrics, spatial econometrics, generalized moments (GM) estimators
    JEL: C33 F14 F15
    Date: 2005–10
  19. By: Lynn E. Browne
    Abstract: This essay provides an overview of current trade patterns between New England and China. It was prepared for a symposium sponsored by The Boston Athenaeum comparing New England’s present-day trade with China to the region’s prominence in the U.S.-China trade of the 19th century. The essay concludes that a special trade relationship between New England and China does not exist at the present time. Although New England’s exports to China are growing rapidly, they are not growing markedly faster than exports from the rest of the country, and China does not account for an unusually large fraction of New England’s exports. Moreover, there is some indication that New England has felt the brunt of competition from Chinese imports more strongly than other regions. In one arena, New England does hold a special position: New England universities are highly regarded in China, and the region’s share of Chinese students is above its population share—although in line with its share of foreign students generally.
    Keywords: International trade ; China ; New England
    Date: 2005
  20. By: Arslan Razmi (University of Massachusetts Amherst); Robert Blecker (American University)
    Abstract: This paper studies whether intra-developing country price competition has significant effects on the growth rates of developing countries that are specialized in manufactured exports. Panel regression estimates using data for 1983-2001 show that countries that export mainly low-technology manufactures face a double bind in that while they derive significant competitive gains from real depreciations relative to competing developing country exporters, they have contractionary real depreciations relative to the industrialized countries. However, countries that export mainly high-technology products do not face this dilemma. Results vary across different panels of countries and between the first and second halves of the sample period. JEL Categories: F43, O19, O14, F14
    Keywords: Export-led growth, fallacy of composition, terms of trade, manufactured exports, contractionary devaluations, competitive devaluations.
    Date: 2005–11
  21. By: Jürgen Meckl (University of Giessen and IZA Bonn)
    Abstract: This paper integrates institutionally determined wage rigidities into an otherwise standard Heckscher-Ohlin model of international trade. It accounts for differences in individual productivities and their implications for individual wage incomes and demand for education. Although preserving the factor-price-equalization property of the global equilibrium approach, the model does not support the view expressed by Davis (1998) that global equilibrium links insulate the US labor market from exogenous shocks. It provides a foundation of the derived from comparative studies that do not consistently account for the global general equilibrium links.
    Keywords: wage rigidities, international trade, education, skill-specific unemployment
    JEL: F11 J31
    Date: 2005–10

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