nep-int New Economics Papers
on International Trade
Issue of 2006‒02‒12
twelve papers chosen by
Martin Berka
Massey University

  2. In Search for Determinants of Intra-Industry Trade within an Enlarged Europe By José Manuel Martins Caetano; Aurora Galego
  3. What's So Special About China's Exports? By Rodrik, Dani
  4. Transfer Problem Dynamics: Macroeconomics of the Franco-Prussian War Indemnity By Michael B. Devereux; Gregor W. Smith
  5. Performance on Exports: Continuous Productivity Improvements or Capacity Utilization By Joze P. Damijan; Crt Kostevc
  6. Twin Deficits: Squaring Theory, Evidence and Common Sense By Giancarlo Corsetti; Gernot J. Müller
  7. Inter-modal Linkages in Services Trade By Rupa Chanda
  8. EU Integration and its Implications for Asian Economies – What we Know and What Not By Rolf J. Langhammer; Rainer Schweickert
  9. Special and Differential Treatment Under the GATS By OECD
  10. Persistent Uneven Spread of Economic Activities within Developing RIAs By Souleymane COULIBALY
  11. The Linkages Between Open Services Markets and Technology Transfer By OECD
  12. Trend in European Manufacturing Location: Country versus Region By Eleonora CUTRINI

  1. By: Hernán Vallejo G
    Abstract: This paper builds on a circular road model of the world with horizontal product differentiation and free entry and exit of firms, to derive results that can be applied in industrial organization, international trade and political economy. The model shows that freer international trade increases welfare -with ideal variety preferences through the exploitation of economies of scale and better allocative efficiency; that all participating countries gain from trade, and that smaller countries have more to win from free trade than larger countries. The model also explains that there may be adjustment costs when liberalizing trade and thus, political resistance to trade liberalization. International migration can also be analyzed with the model, showing the possibility of suboptimal migration flows and political barriers to the exit of national citizens. The model suggests that foreign direct investment will be welfare improving for the source country in the short run, and for the receiving country in the long run. Finally, the model provides a micro foundation for the use of demand curves with constant and negative slopes.
    Date: 2005–11–05
  2. By: José Manuel Martins Caetano (Department of Economics, University of Évora); Aurora Galego (Department of Economics, University of Évora)
    Abstract: Most trade between the European Union (EU) and the Central and Eastern European Countries (CEEC) is inter-industrial in nature, based on comparative advantages. However, recent studies have uncovered structural changes in the nature of trade, the most unexpected being the rapid increase in Intra-industry trade (IIT). In this paper we characterise the dynamics of the CEEC-EU trade using several methodologies that evaluate the type of trade and price-quality ranges. The analysis confirms that there was a significant decline in inter-industrial trade and an increasing specialisation in vertical IIT. Moreover, we found substantial differences in the unit values of exported and imported goods, which suggest that the increasing weight of IIT in the EU-CEEC trade does not result from the factorial contents convergence of the traded goods. Therefore, these trends indicate the emergence of a new division of labour in the enlarged EU. Using a panel data approach we also identify the determinants of vertical and horizontal IIT. The results allow us to conclude that there are some differences in the determinants of these types of trade, although both seem to have a statistically significant relationship with country’s size and Foreign Direct Investment flows.
    Keywords: Intra-industry Trade, European Union enlargement, panel data
    JEL: F14 F15
    Date: 2006
  3. By: Rodrik, Dani
    Abstract: Much more than comparative advantage and free markets have been at play in shaping China's export success. Government policies have helped nurture domestic capabilities in consumer electronics and other advanced areas that would most likely not have developed in their absence. As a result, China has ended up with an export basket that is significantly more sophisticated than what would be normally expected for a country at its income level. This has been an important determinant of China's rapid growth. What matters for China's future growth is not the volume of exports, but whether China will continue to latch on to higher-income products over time.
    Keywords: development; economic growth
    JEL: F1 O4
    Date: 2006–01
  4. By: Michael B. Devereux (University of British Columbia); Gregor W. Smith (Queen's University)
    Abstract: We study the classic transfer problem of predicting the effects of an international transfer on the terms of trade and the current account. A two-country model with debt and capital allows for realistic features of historical transfers: they follow wartime increases in government spending and are financed partly by borrowing. The model is applied to the largest historical transfer, the Franco-Prussian War indemnity of 1871-1873. In these three years, France transferred to Germany an amount equal to 22 percent of a year's GDP. When the transfer is combined with measured shocks to fiscal policy and a proxy for productivity shocks over the period, the model provides a very close fit to the historical sample paths of French GDP, terms of trade, net exports, and aggregate consumption. This makes a strong case for the dynamic general equilibrium approach to studying the transfer problem.
    Keywords: transfer problem, current account, terms of trade
    JEL: F32 F41 N14
    Date: 2005–08
  5. By: Joze P. Damijan; Crt Kostevc
    Abstract: Following along the lines of a growing literature on the causal link between export- ing and productivity this paper analyzes the existence of flearning-by-exporting using frm-level data. The paper asks whether, in addition to better performing firms self-selecting into exports and multinational production, exporting (multina- tional production) further improves their performance compared with non-exporters. We develop and test a simple model of trade and international production with het- erogeneous frms that generates learning effects through competition in the export markets. The estimations performed on the sample of Slovenian manufacturing enter- prises between 1994 and 2002 indicate that more productive firms tend to self-select into more competitive markets, while there is no conclusive evidence of learning-by- exporting. Although new exporters experienced a surge in productivity in the initial year of exports the effect dissipates as soon as the following year. Confronting the data on factor accumulation with TFP measures indicates that the perceived learning effects may in fact only be a consequence of increased capacity utilization brought forth by the opening of an additional market.
    Keywords: Firm heterogeneity, exports, learning-by-exporting, difference-in-differences
    JEL: D24 F12 F14
    Date: 2005
  6. By: Giancarlo Corsetti; Gernot J. Müller
    Abstract: In this paper we reconsider the twin deficit hypothesis (that fiscal shocks generating budget deficits also worsen external trade) both from a theoretical point of view and by analyzing data for Australia, Canada, the UK and the US. First, we assess the joint dynamics of budget and trade deficits along the business cycle, uncovering a strikingly recurrent S-shaped relation between the two. The correlation is actually negative, suggesting twin divergence. This observation however cannot rule out the possibility that government spending expansions and/or tax cuts may cause trade deficits, as the overall correlation is likely to be dominated by cyclical factors. Second, we reconsider the transmission of government spending in a standard two-country two-good model: we find that openness and the persistence of fiscal shocks are major determinants of the magnitude (or even sign) of the response of the trade balance to fiscal shocks. For a given persistence of the fiscal shock, the closer an economy, the larger the crowding out effect on investment, the lower the deterioration of the trade balance. Third, we take this insight to the data, investigating the transmission of fiscal shocks in a VAR framework in the four countries in our sample. Our empirical findings tend to support our view. In the US and Australia, which are relatively less open than Canada and the UK, and where government spending shocks are less persistent, we find that the external impact of fiscal policy is rather limited. Instead, private investment responds substantially. The reverse is true for Canada and the UK. These findings confirm and put into perspective earlier results, whereas fiscal expansions in the US are found to have on average a negligible effect on the country's trade balance. However, we emphasize that these results are consistent with a call for a US fiscal retrenchment to address global imbalances: the impact of budget cuts on the US external trade is muted by their positive effect on domestic investment, strengthening the US ability to generate resources against future interest and debt repayment.
    Keywords: twin deficits, budget deficit, trade deficits, home-bias, openness, crowding out, international transmission of fiscal policy, current account adjustment, business cycle dynamics.
    JEL: E62 E63 F32 F42 H30
    Date: 2005
  7. By: Rupa Chanda
    Abstract: According to the GATS, services can be traded through four different modes of supply, namely, cross border supply, consumption abroad, commercial presence, and movement of natural persons, termed modes 1, 2, 3, and 4, respectively. There is much evidence to indicate interdependence across these four modes in services trade. There are essentially two types of linkages, namely, positive and negative linkages, across the various modes of supply. Positive linkages take the form of (i) complementarities across modes, where one or more mode is simultaneously used for providing the service across borders; and (ii) facilitation across modes, where trade through one mode creates conditions that are conducive for trading through other modes. Negative linkages take the form of (i) substitution across modes, where trade through one mode is substituted by another; (ii) restrictions on one mode which affect trade through other modes of supply and distort the way in which a service is trade; and (iii) restrictions which apply across multiple modes and constrain several modes simultaneously. In addition to these first order linkages, there are also extended spillover effects across the modes that arise indirectly over the medium and long run. This paper discusses the various kinds of linkages that are found in service sector trade, using evidence from companies, countries, and surveys and from a wide range of services. The objective is to provide an integrated perspective on service sector trade and related multilateral negotiations under the GATS so that countries can better leverage cross modal and cross-subsectoral trade opportunities, address constraints in a holistic manner, and maximize the overall gains from services trade.
    Date: 2006–01–27
  8. By: Rolf J. Langhammer; Rainer Schweickert
    Abstract: In this paper, we analyse effects of EU integration on Asian countries. Since the early 1990s, it is especially the trade creation effect of monetary integration (so-called Rose effect) which is heavily debated in the literature. Recent papers seem to indicate that the Rose effect seems to be significant especially for countries like the old EU members which are already highly integrated in terms of trade and factor mobility. The potential discrimination effect against trade with third countries tends to increase with new member states entering EMU and could also affect Asian economies’ exports to Europe. At the same time, so-called overlap or similarity indices for trade patterns show an increasing similarity between EU, US, and Japanese exports to Asia on the one hand and Asian and European exports to industrialized countries on the other hand. These observations are consistent with recent policy responses, i.e., the focus of European contingent protection on Asian competitors, the desire of Asian countries to negotiate free trade agreements (FTA) with the US and Japan, and the EU’s response by probably entering into FTA negotiations with Asian countries, including ASEAN.
    Keywords: Trade, Monetary Integration, Protection, FTA, Overlap Index, Europe, Asia
    JEL: F13 F15 F31 O52 O53
    Date: 2006–01
  9. By: OECD
    Abstract: This report sets out the particular approach to special and differential treatment (SDT) in the General Agreement on Trade in Services (GATS). In particular, the report explores how the degree of flexibility afforded to all Members under the GATS shapes its approach to SDT. Further, the report analyses the current proposals for improving SDT provisions in the context of the GATS. Finally, some initial empirical evidence on the use and effectiveness of SDT provisions in the GATS is presented, both in terms of market access in sectors of export interest to developing countries and services-related technical assistance.
    Keywords: trade policy, services, developing countries, WTO
    Date: 2006–01–26
  10. By: Souleymane COULIBALY
    Abstract: One of the striking features of many developing Regional Integration Areas (RIAs) is the strong asymmetry between countries. In this paper, we consider a three-country two-sector model in a footloose capital framework. Two of these countries are involved in a regional integration process while the third is left out of the union. They are "port-like" economies where only one region is endowed with international infrastructures, so that imports and exports between trading partners necessarily pass through this transit region. The comparative statics of our model show that better domestic transport infrastructure helps to attract a higher share of footloose activity when trade costs within the RIA are lowered, inducing a persistent uneven spread of the mobile sector between the member countries. If the domestic infrastructure levels of these countries are both raised towards a high-quality level, a convergence process is triggered to the disadvantage of the country left outside the RIA.
    Keywords: uneven development; regional integration area; convergence
    JEL: F12 F15 R12
    Date: 2006–01
  11. By: OECD
    Abstract: Services are the main drivers of economic growth in OECD countries and they are becoming increasingly innovative. This study analyses the role of open services markets in the transfer and diffusion of technology from developed countries to developing countries. It first explores how trade in services increases exposure to foreign technologies. The four modes of supply of services, as defined in the General Agreement on Trade in Services (GATS), are closely interlinked with the main channel of technology diffusion identified in the economic literature. The report then investigates how open services markets can reduce the cost of technology transfer and help to build better absorptive capacities in five sectors (business services, telecommunications, financial services, higher education and training, and logistics services). The last part of the study highlights the productivity gains from services trade liberalisation and the technological spillovers inside the receiving economy. The report shows that emphasis should be placed on services in the debate on trade and growth and that services liberalisation in key sectors, which facilitate the exchange of knowledge between foreign and domestic companies, can have a significant impact on technology diffusion.
    Keywords: growth, productivity, services, linkages, trade liberalisation, technology transfer
    Date: 2006–01–27
  12. By: Eleonora CUTRINI (Universita' Politecnica delle Marche, Dipartimento di Economia)
    Abstract: The purpose of this paper is to investigate whether and to what extent European manufacturing location has been driven by regional localisation or national comparative advantages during the period 1985-2001. To this end, the relative concentration pattern of each industry is disentangled into within and between country components. The original methodology adopted is based on the use of the Theil dissimilarity entropy index allowing to handle two geographical levels of analysis. The evidence suggests that the agglomeration of manufacturing industries is more likely to find expression between the internal regions of each country rather than across countries. Counterintuitively, after the completion of the Single European Market the relevance of national border remains stable or even increase in the localisation of the majority of the sectors considered.
    Keywords: Theil dissimilarity entropy index, comparative advantages, european economic integration, european internal geography, relative concentration
    JEL: L16 L60 O18 O52 R12
    Date: 2005–12

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