nep-int New Economics Papers
on International Trade
Issue of 2006‒10‒28
thirty-two papers chosen by
Martin Berka
Massey University

  1. Bigger is Better: Market Size, Demand Elasticity and Resistance to Technology Adoption By Desmet, Klaus; Parente, Stephen
  2. Human Capital and Wages in Exporting Firms By Jakob Roland Munch; Jan Rose Skaksen
  3. Stages of Diversification and Capital Accumulation in an Heckscher-Ohlin World, 1975-1995 By Batista, Catia; Potin, Jacques
  4. Legal Costs as Barriers to Trade By Turrini, Alessandro Antonio; van Ypersele, Tanguy
  5. Trade in Services, Trade Agreements and Economic Development: A Survey of the Literature By Hoekman, Bernard
  6. Can South-South Trade Liberalisation Stimulate North-South Trade? By Fugazza, Marco; Robert-Nicoud, Frédéric
  7. Multilateralising Regionalism: Spaghetti Bowls as Building Blocs on the Path to Global Free Trade By Baldwin, Richard
  8. Measuring trade diversion-the case of Russian exports in the advent of EU enlargement By A. MORDONU
  9. Democracy and Protectionism By O'Rourke, Kevin H; Taylor, Alan M
  10. Trade Integration, Firm Selection and the Costs of Non-Europe By Del Gatto, Massimo; Mion, Giordano; Ottaviano, Gianmarco I P
  11. Services Trade Liberalization at the Regional Level: Does Southern and Eastern Africa Stand to Gain from EPA Negotiations? By Jansen, Marion
  12. Openness, Inequality and Poverty: Endowments Matter By de Melo, Jaime; Gourdon, Julien; Maystre, Nicolas
  13. International Trade and Finance under the Two Hegemons: Complementarities in the United Kingdom (1870-1913) and the United States (1920-30) By Taylor, Alan M; Wilson, Janine
  14. EU accession and income growth: an empirical approach By Arjan Lejour; Vladimir Solanic; Paul Tang
  15. Gravity for Dummies and Dummies for Gravity Equations By Baldwin, Richard; Taglioni, Daria
  16. US Trade and Exchange Rate Volatility: A Real Sectoral Bilateral Analysis By Joseph P. Byrne, Julia Darby and Ronald MacDonald
  17. Agglomeration, Offshoring and Heterogenous Firms By Baldwin, Richard; Okubo, Toshihiro
  18. Financial market imperfections and the impact of exchange rate movements on exports. By Nicolas Berman; Antoine Berthou
  19. Home Market Effect, regulation costs and heterogeneous firms. By Toshihiro Okubo; Vincent Rebeyrol
  20. Genetic, Cultural and Geographical Distances By Giuliano, Paola; Spilimbergo, Antonio; Tonon, Giovanni
  21. Skill-biased Technology Adoption: Evidence for the Chilean manufacturing sector By Olga M. Fuentes; Simon Gilchrist
  22. Unravelling the World-Wide Pollution Haven Effect By de Melo, Jaime; Grether, Jean-Marie; Mathys, Nicole Andréa
  23. Rules of Origin for Preferential Trading Arrangements: Implications for AFTA of EU and US Regimes By Cadot, Olivier; de Melo, Jaime; Portugal-Pérez, Alberto
  24. Do capital market and trade liberalization trigger labor market deregulation ?. By Hervé Boulhol
  25. Productivity, External Balance and Exchange Rates: Evidence on the Transmission Mechanism among G7 Countries By Corsetti, Giancarlo; Dedola, Luca; Leduc, Sylvain
  26. Exports, Foreign Direct Investment and the Costs of Coporate Taxation By Keuschnigg, Christian
  27. Exposure to Foreign Media and Changes in Cultural Traits: Evidence from Naming Patterns in France By Disdier, Anne-Célia; Head, Charles Keith; Mayer, Thierry
  28. The Home Bias and Capital Income Flows between Countries and Regions By Artis, Michael J; Hoffmann, Mathias
  29. Openness and Industrial Response in a Wal-Mart World: A Case Study of Mexican Soaps, Detergents and Surfactant Producers By Keller, Wolfgang; Smarzynska Javorcik, Beata; Tybout, James R
  30. Export Promotion Agencies: What Works and What Doesn't By Lederman, Daniel; Olarreaga, Marcelo; Payton, Lucy
  31. Should Measures of Fiscal Stance be Adjusted for Terms of Trade Effects? By OECD
  32. Steepest Ascent Tariff Reforms By Raimondos-Møller, Pascalis; Woodland, Alan D

  1. By: Desmet, Klaus; Parente, Stephen
    Abstract: This paper's hypothesis is that larger markets facilitate the adoption of more productive technology by raising the price elasticity of demand for a firm's product. A larger market, either because of population or free trade, thus implies a larger increase in revenues following the price reduction associated with the introduction of a more productive technology. As a result, technology adoption is more profitable, and the earnings of factor suppliers are less likely to be adversely affected. Firms operating in larger markets, therefore, have a greater incentive to adopt more productive technologies, and their factor suppliers have a smaller incentive to resist these adoptions. This is the case even when there is no fixed resource cost to adoption. We demonstrate this mechanism numerically and provide empirical support for this theory.
    Keywords: imperfect competition; Lancaster preferences; market size; technology adoption
    JEL: F12 O13
    Date: 2006–09
  2. By: Jakob Roland Munch (Department of Economics, University of Copenhagen); Jan Rose Skaksen (Copenhagen Business School)
    Abstract: This paper studies the link between a firms education level, export performance and wages of its workers. We argue that firms may escape intense competition in international markets by using high skilled workers to differentiate their products. This story is consistent with our empirical results. Using a very rich matched worker-firm longitudinal dataset we find that firms with high export intensities pay higher wages. However, an interaction term between export intensity and skill intensity has a positive impact on wages and it absorbs the direct effect of the export intensity. That is, we find an export wage premium, but it accrues to workers in firms with high skill intensities.
    Keywords: exports; wages; human capital; rent sharing; matched worker- firm data
    JEL: J30 F10 I20
    Date: 2006–10
  3. By: Batista, Catia (University of Oxford's Economics Department); Potin, Jacques (ESSEC Business School)
    Abstract: Why do we observe a U-shaped industrial concentration curve over an economy's development path? We show that at least one third of this phenomenon is explained by the effect of capital accumulation on industrial specialization.
    Keywords: Heckscher-Ohlin; International Trade
    JEL: F11 O40
    Date: 2006–09
  4. By: Turrini, Alessandro Antonio; van Ypersele, Tanguy
    Abstract: Recent evidence shows that the 'home bias puzzle' in international trade may be associated with the mere presence of national borders (McCallum (1995)). In this paper we provide a theoretical framework to explain why borders may matter so much for trade. Our argument is that even between perfectly integrated and similar countries the legal system differs, so that legal costs are higher when business is done abroad. Using a matching model of trade, we show that legal costs asymmetry produce home bias in an essentially different way than traditional trade costs. To estimate the relevance of legal costs in displacing trade we estimate gravity equations augmented with variables capturing the extent of legal asymmetries. Evidence from inter-national trade across OECD countries and intra-national trade across French support the view that legal asymmetries act as relevant obstacles to trade.
    Keywords: cross-border trade; legal costs; matching
    JEL: F12
    Date: 2006–07
  5. By: Hoekman, Bernard
    Abstract: Since the mid 1980s a substantial amount of research has been undertaken on trade in services. Much of this is inspired by the WTO or regional trade agreements, especially the EU, but an increasing number of papers focus on the impacts of services sector liberalization. This paper surveys the literature, focusing on contributions that investigate the determinants of international trade and investment in services, the potential gains from greater trade (and liberalization) and efforts to cooperate to achieve such liberalization through trade agreements. There is increasing evidence that services liberalization is an important source of potential welfare gains, but relatively little research has been done that can inform the design of international cooperation - both trade agreements and development assistance - so as to more effectively promote development objectives.
    Keywords: economic development; GATS; trade agreements; trade in services; WTO
    JEL: F1 F2 F5 L80
    Date: 2006–07
  6. By: Fugazza, Marco; Robert-Nicoud, Frédéric
    Abstract: This paper uses a combination of Ethier (1982) and Melitz's (2003) models to show that liberalizing trade among developing countries, so-called South-South trade, could contribute to improve the access to international markets of developing countries' would-be exporters. Lower trade barriers among developing countries has the effect of lowering the price of intermediate inputs and eventually allows exporters in those countries to serve international markets. We also compare unilateral and multilateral South-South trade liberalization and find that the latter unambiguously reduces the price of intermediates in all participating countries, whereas the former has ambiguous effects.
    Keywords: input-output linkages; market access; South-South trade; value chain
    JEL: F12 F13 F15
    Date: 2006–06
  7. By: Baldwin, Richard
    Abstract: This paper addresses the final steps to global free trade – what they might look like, what sort of political economy forces might drive them, and what the WTO might do to guide them. Two facts form the point of departure: 1) Regionalism is here to stay; world trade is regulated by a motley assortment of unilateral, bilateral and multilateral trade agreements; 2) this motley assortment is not the best way to organise world trade. Moving to global duty-free trade will require a multilateralisation of regionalism. The paper presents the political economy logic of trade liberalisation and uses it to structure a narrative of world trade liberalisation since 1947. The logic is then used to project the world tariff map in 2010, arguing that the pattern will be marked by fractals – fuzzy, leaky trade blocs made up of fuzzy, leaky sub-blocs (fuzzy since the proliferation of FTAs makes it impossible to draw sharp lines around the big-3 trade blocs, and leaky since some FTAs create free trade ’canals’ linking the big-3 blocs). The paper then presents a novel political economy mechanism – spaghetti bowls as building blocs – whereby offshoring creates a force that encourages the multilateralisation of regionalism. Finally, the paper suggests three things the WTO could do to help.
    Keywords: domino effect; juggernaut effect; multilateralism; regionalism; RTB unilateralism; trade
    JEL: F10 F13 F15 F2
    Date: 2006–08
  8. By: A. MORDONU
    Abstract: This paper is an attempt to assess the possible trade diversion from the Russian Federation caused by the 2004 EU enlargement to 10 Central and Eastern European Countries (CEECs). Left out of the club, Russia has been confronted with potential losses of CEECs and EU15 markets. The effect of the factual enlargement is approximated by the transformations introduced by earlier regional integration in the region. The Europe Agreements (EA) and other Preferential Trade Agreements (PTA) among the CEECs anticipated most of the transformations related to the EU enlargement, at least as far as trade is concerned. The method rests on the gravity model enriched with the Michaely indices of potential trade diversion, potential trade creation and export compatibility, as a new measure for trade diversion and trade creation. The use of the indices in this context provides several advantages over the use of PTA dummies. They constitute a more accurate measure of trade diversion, they can be correctly estimated since they are not incorporated in the bilateral importer-exporter effects and they do not suffer from endogeneity. In our exercise, the dynamic panel setting reveals to be the correct specification, from a theoretical and empirical point of view. The results of the estimations do not confirm the trade diversion hypothesis for the aggregated data. Although intra-EU25 trade increased tremendously, this was not at the expense of Russian exports. The low level of Russian exports to the EU and the CEECs could thus be caused by other factors than the EU enlargement.
    Date: 2006–06
  9. By: O'Rourke, Kevin H; Taylor, Alan M
    Abstract: Does democracy encourage free trade? It depends. Broadening the franchise involves transferring power from non-elected elites to the wider population, most of whom will be workers. The Hecksher-Ohlin-Stolper-Samuelson logic says that democratization should lead to more liberal trade policies in countries where workers stand to gain from free trade; and to more protectionist policies in countries where workers will benefit from the imposition of tariffs and quotas. We test and confirm these political economy implications of trade theory hypothesis using data on democracy, factor endowments, and protection in the late nineteenth century.
    Keywords: factor endowments; Heckscher-Ohlin trade theory; Stolper-Samuelson theorem; tariffs
    JEL: F11 F13 N70
    Date: 2006–05
  10. By: Del Gatto, Massimo; Mion, Giordano; Ottaviano, Gianmarco I P
    Abstract: In models with heterogeneous firms trade integration has a positive impact on aggregate productivity through the selection of the best firms as import competition drives the least productive ones out of the market. To quantify the impact of firm selection on productivity, we calibrate and simulate a multi-country multi-sector model with monopolistic competition and variable markups using firm-level data and aggregate trade figures on a panel of 11 EU countries. We find that EU trade has a sizeable impact on aggregate productivity. In 2000 the introduction of prohibitive trade barriers would have caused an average productivity loss of roughly 13 per cent, whereas a reduction of intra-EU trade costs by 5 per cent would have generated a productivity gain of roughly 2 per cent. Productivity losses and gains, however, vary a lot across countries and sectors depending on market accessibility and trade costs. We provide evidence that our results are robust to alternative distance and productivity measures.
    Keywords: European integration; firm selection; firm-level data; gains from trade; total factor productivity
    JEL: F12 R13
    Date: 2006–06
  11. By: Jansen, Marion
    Abstract: Given the sluggish progress in multilateral trade negotiations Southern and Eastern African negotiators are likely to focus their attention on the negotiations of Economic Partnership Agreements with the European Union. This paper analyses possible advantages and disadvantages for ACP countries of including the services sector in these regional agreements. It describes the latest developments in a number of services sectors, including financial services, tourism and business services. Particular attention is paid to the possible role of mode 4 flows. For each individual sector the role of regulation, the importance of first mover advantages and the possible role of foreign technical assistance are discussed. The paper attempts to identify possible export opportunities for ACP countries and analyses the risks and benefits for these countries of giving preferential access to EU suppliers in those services sectors where African countries are likely to import.
    Keywords: Africa; European Union; GATS; regional trade agreements; trade in services
    JEL: F13 F15 O19
    Date: 2006–08
  12. By: de Melo, Jaime; Gourdon, Julien; Maystre, Nicolas
    Abstract: Using tariffs as a measure of openness, this paper finds consistent evidence that the conditional effects of trade liberalization on inequality are correlated with relative factor endowments. Trade liberalization is associated with increases in inequality in countries well-endowed in highly skilled workers and capital or with workers that have very low education levels, and in countries relatively well-endowed in mining and fuels while it is associated with decreases in inequality in countries that are wellendowed with primary-educated labor. Similar results are also apparent when decile data are used instead of the usual Gini coefficient. The results are strongly supportive of the factor-proportions theory of trade and suggest that trade liberalization in poor countries where the share of the labor force with little education is high raises inequality, although in our sample relative endowments in capital turn out to be the overriding determinant so that trade liberalization is accompanied by reduced income inequality in low-income countries. Simulation results also suggest that relatively small changes in inequality as measured by aggregate measures of inequality like the Gini coefficient are magnified when estimates are carried out using decile data.
    Keywords: income distribution; international trade; poverty
    JEL: D3 F11 F16
    Date: 2006–07
  13. By: Taylor, Alan M; Wilson, Janine
    Abstract: Do international trade and finance flow together? In theory, trade and finance can be substitutes or complements, so the matter must be resolved empirically. We study trade and financial flows from the United Kingdom from 1870 to 1913 and the United States in the interwar years. Trade and finance are robustly correlated, even after allowing for simultaneity. Evidence from the British Empire casts doubt on the idea that trade is a punishment device in the event of default.
    Keywords: complementarities; international investment; international trade
    JEL: F10 F30 F40 N10 N20 N70
    Date: 2006–09
  14. By: Arjan Lejour; Vladimir Solanic; Paul Tang
    Abstract: The dynamic effects from EU membership are crucial for the new member states to catch up with the average income level in the old member states. To gauge the dynamic effects, we follow a two-step procedure in which a gravity equation for bilateral trade shows the trade effect of EU membership and a growth regression yields the income effect of trade. Shared EU membership is found to increase trade between two of its member states with about 34%. EU membership may contribute to trade by inducing countries to improve the quality of their institutions. Trade increases by another 22% if institutions improve, yielding a total trade increase of 56%. Improved openness increases income by 37.5% according to our estimates. Adding a small direct effect of improved institutions on income, the total income effect of EU membership is 39% for the ten new members. This implies that EU membership, or its effect on trade and institutions, could lead to large economic gains for the new member states, but does not bring them economically on par with the old member states.
    Keywords: income and openness; EU accession; gravity equation
    JEL: F15 F43
    Date: 2006–10
  15. By: Baldwin, Richard; Taglioni, Daria
    Abstract: This paper provides a minimalist derivation of the gravity equation and uses it to identify three common errors in the literature, what we call the gold, silver and bronze medal errors. The paper provides estimates of the size of the biases taking the currency union trade effect as an example. We generalize Anderson-Van Wincoop’s multilateral trade resistance factor (which only works with cross section data) to allow for panel data and then show that it can be dealt with using time-varying country dummies with omitted determinants of bilateral trade being dealt with by time-invariant pair dummies.
    Keywords: country dummies; gravity equation; pair dummies
    JEL: F10 F33 F4
    Date: 2006–09
  16. By: Joseph P. Byrne, Julia Darby and Ronald MacDonald
    Abstract: In this paper we consider the impact of exchange rate volatility on the volume of bilateral US trade (both exports and imports) using sectoral data. Amongst the novelties in our approach are the use of sectoral industrial price indices, rather than an aggregate price index, and the construction of the sectoral groupings, which is based on economic and econometric criteria. We find that separating trade into differentiated goods and homogeneous goods results in the most appropriate sectoral division, and we also report evidence to suggest that exchange rate volatility has a robust and significantly negative effect across sectors, although it is strongest for exports of differentiated goods.
    JEL: F3
  17. By: Baldwin, Richard; Okubo, Toshihiro
    Abstract: Recent trade models determine the equilibrium distribution of firm-level efficiency endogenously and show that freer trade shifts the distribution towards higher average productivity due to entry and exit of firms. These models ignore the possibility that freer trade also alters the firm-size distribution via international firm migration (offshoring); firms must, by assumption, produce in their 'birth nation.' We show that when firms are allowed to switch locations, new productivity effects arise. Freer trade induces the most efficient small-nation firms to move to the large nation. The big country gets an 'extra helping' of the most efficient firms while the small nation's firm-size distribution is truncated on both ends. This reinforces the big-nation productivity gain while reducing or even reversing the small-nation productivity gain. The small nation is nevertheless better off allowing firm migration.
    Keywords: delocation; economic geography; heterogenous firms; hollowing-out; offshoring; productivity effects
    JEL: H32 P16
    Date: 2006–05
  18. By: Nicolas Berman (Panthéon-Sorbonne Economie); Antoine Berthou (Panthéon-Sorbonne Economie)
    Abstract: This paper analyses empirically the role of financial market imperfections in the way countries' exports react to a currency depreciation. Using quarterly data for 27 developed and developing countries over the period 1990-2005, we find that the impact of a depreciation on exports will be less positive - or even negative - for a country if : (i) firms borrow in foreign currency ;(ii) they are credit constrained ; (iii) they are specialized in industries that require more external capital ; (iv) the magnitude of depreciation or devaluation is large. This last result emphasizes the existence of a non-linear relationship between an exchangerate depreciation and the reaction of a country's exports when financial imperfections are observed. This offers a new explanation for the consequences of recent currency crises in middle income countries.
    Keywords: International trade, exchange rate movements, balance-sheets effects, financial market imperfections.
    JEL: F10 F32 F37
    Date: 2006–07
  19. By: Toshihiro Okubo (Graduate Institute of International Studies, Geneva (HEI)); Vincent Rebeyrol (Panthéon-Sorbonne Economie)
    Abstract: This paper studies how market-specific entry sunk costs (regulation costs) affect the Home Market Effect (HME) with firm heterogeneity in marginal costs. our model is based on the Dixit-Stiglitz monopolistic competition model with firm heterogeneity plus regulation costs difference. We find that a regulation costs gap works as dispersion force by inducing a market potential gap, which reduces the HME and could cause the reverse HME or the anti-HME. The HME first rises and then fall in terms of trade openness, whereas the HME rises in terms of regulation costs gap coordination by technical barriers to trade (TBT) agreements. Firm heterogeneity dampens the dispersion force by the regulation costs difference and thus works as an agglomeration force. Firm heterogeneity causes a perfectspatial sorting, in which a large country attracts only high productivity firms, and vice versa.
    Keywords: Home market effect, firm heterogeneity, regulation costs, technical barriers to trade.
    JEL: F12 F15 R12 R38
    Date: 2006–07
  20. By: Giuliano, Paola; Spilimbergo, Antonio; Tonon, Giovanni
    Abstract: This paper investigates how the measures of genetic distance between populations, which have been used in anthropology and historical linguistics, can be used in economics. What does the correlation between genetic distance and economic variables mean? Using the measure of genetic distance, a newly-collected database on transport costs, as well as more refined measures of geography within Europe, we show that i) geography explains both genetic distance and transportation costs between European countries, and ii) genetic distance does not explain economic outcomes once we control for geography. We conclude that genetic distance in economics capture transportation costs between countries and not cultural differences.
    Keywords: cultural economics; genetics; geography; trade; transport costs
    JEL: F10 Z10
    Date: 2006–09
  21. By: Olga M. Fuentes (Department of Economics, Boston University); Simon Gilchrist (Department of Economics, Boston University)
    Abstract: We examine the evolution of the demand for skilled workers relative to unskilled workers in the Chilean manufacturing sector following Chile’s liberalization of trade in the late 1970’s. Following such trade reforms, the standard Heckscher-Olin model predicts that a low labor-cost country like Chile should experience an increased demand for low skilled workers relative to high skilled workers. Alternatively, if trade liberalization is associated with the adoption of new technologies, and technology is skill-biased, the relative demand for skilled workers may rise. Using a newly available plant-level data set that spans the sixteen year period 1979-1995, we find that the relative demand for skilled workers rose sharply during the 1979-1986 period and then stabilized. The sharp increase in demand for skilled workers coincided with an increased propensity to adopt new technologies as measured by patent usage. Plant-level analysis of labor demand confirms a significant relationship between the relative demand for skilled workers and technology adoption as measured by patent usage and other technology indicators. Our results suggest that skill-biased technological change is a significant determinant of labor demand and wage structures in developing economies.
    Date: 2005–11
  22. By: de Melo, Jaime; Grether, Jean-Marie; Mathys, Nicole Andréa
    Abstract: This paper contributes to the debate on the existence of pollution haven effects by systematically measuring the pollution content of trade (measured by the polluction content of imports (PCI)) and decomposing it into three components: a `deep' (i.e. unrelated to the environmental debate) component and two components (factor endowments and environmental policies) that occupy centerstage in the debate on trade and the environment. The decomposition is carried out for 1986-88 for an extensive data set covering 10 pollutants, 48 countries and 79 ISIC 4-digit sectors. Illustrative decompositions presented for 3 of the 10 pollutants in the data set indicate a significant pollution haven effect and highlight the role of factor endowments in each region's PCI. However, because the bulk of trade is intra-regional with a high North-North share, these effects are small relative to the `deep' determinants of the worldwide pollution content of trade.
    Keywords: pollution haven; trade and the environment
    JEL: F18
    Date: 2006–09
  23. By: Cadot, Olivier; de Melo, Jaime; Portugal-Pérez, Alberto
    Abstract: With FTAs under negotiation between Japan and AFTA members and between Korea and AFTA members, preferential market access will become more important in Asian regionalism. Protectionist pressures will likely rise with Rules of Origin (RoO), the natural outlet for these pressures. Based on the experience of the EU and US experience with RoO, this paper argues that, should these FTAs follow in the footsteps of the EU and the US and adopt similar RoO, trading partners in the region would incur unnecessary costs. Using EU trade with its GSP and ACP partners, the paper estimates how the utilization of preferences would likely change if AFTA were to veer away from its current uniform RoO requiring a 40% local content rate. Depending on the sample used, a 10 percentage point reduction in the local value content requirement is estimated to increase the utilization rate of preferences by between 2.5 and 8.2 percentage points.
    Keywords: AFTA; ASEAN; market access; NAFTA; PANEURO; preferential trade agreements; rules of origin
    JEL: F13 F15
    Date: 2006–08
  24. By: Hervé Boulhol (IXIS CIB et Panthéon-Sorbonne Economie)
    Abstract: Previous analyses showed that product market deregulation often precedes labor market (LM) reforms. This paper introduces LM imperfections within an economic geography framework, the level of optimal LM regulation being based on each country's social preferences. Due to capital mobility, opening the economy to a country with a deregulated LM puts pressure on LM institutions. As the fall in trade costs increases the intensity of the agglomeration force, LM regulation loses in efficiency. The threat of relocation drives changes in LM policy, with suggests that the effect of liberalization might be found primarily in the weakening of employment protection, resulting in minimal actual relocations.
    Keywords: Deregulation, wage bargaining, capital mobility, agglomeration, relocations.
    JEL: F12 F16 F20 J41 J42
    Date: 2006–09
  25. By: Corsetti, Giancarlo; Dedola, Luca; Leduc, Sylvain
    Abstract: This paper investigates the international transmission of productivity shocks in a sample of five G7 countries. For each country, using long-run restrictions, we identify shocks that increase permanently domestic labour productivity in manufacturing (our measure of tradables) relative to an aggregate of other industrial countries including the rest of the G7. We find that, consistent with standard theory, these shocks raise relative consumption, deteriorate net exports, and raise the relative price of nontradables -- in full accord with the Harrod-Balassa-Samuelson hypothesis. Moreover, the deterioration of the external account is fairly persistent, especially for the US. The response of the real exchange rate and (our proxy for) the terms of trade differs across countries: while both relative prices depreciate in Italy and the UK (smaller and more open economies), they appreciate in the US and Japan (the largest and least open economies in our sample); results are however inconclusive for Germany. These findings question a common view in the literature, that a country's terms of trade fall when its output grows, thus providing a mechanism to contain differences in national wealth when productivity levels do not converge. They enhance our understanding of important episodes such as the strong real appreciation of the dollar as the US productivity growth accelerated in the second half of the 1990s. They also provide an empirical contribution to the current debate on the adjustment of the US current account position. Contrary to widespread presumptions, productivity growth in the US tradable sector does not necessarily improve the US trade deficit, nor deteriorate the US terms of trade, at least in the short and medium run.
    Keywords: international transmission mechanism; long-run restrictions; net exports; real exchange rates; terms of trade; US current account; VAR
    JEL: F32 F41 F42
    Date: 2006–09
  26. By: Keuschnigg, Christian
    Abstract: Depending on the definition of the tax base, the statutory corporate tax rate implies rather different measures of effective average and marginal tax rates. This paper develops a model of a monopolistically competitive industry with extensive and intensive business investment and shows how these margins respond to changes in average and marginal corporate tax rates. Intensive investment refers to the size of a firm's capital stock. Extensive investment refers to the firm's production location and reflects the trade-off between exports and foreign direct investment as alternative modes of foreign market access. The paper derives comparative static effects of the corporate tax and shows how the cost of public funds depends on the elasticities of the extensive and intensive investment responses.
    Keywords: corporate taxation; costs of public funds; exports; foreign direct investment
    JEL: D21 F23 H25 L11 L22
    Date: 2006–08
  27. By: Disdier, Anne-Célia; Head, Charles Keith; Mayer, Thierry
    Abstract: Free trade in audio-visual services has faced opposition on the grounds that foreign media undermine domestic culture, and ultimately, global diversity. We assess the media-culture link using name frequencies as a measure of tastes. Using a 47-year panel of French birth registries, we first show that names appearing on television shows, movies, or in songs are about five times more popular than other names. Most, but not all, of this relationship arises from endogeneity: song and script writers, as well as performers and their parents, select names that would be popular anyways. Using name attributes, fixed effects, and lagged popularity as controls, our regression results suggest that media affect choices by informing parents of unfamiliar names.
    Keywords: cinema; cultural transmission; endogenous tastes; popular music; television
    JEL: D19 F15 Z10
    Date: 2006–05
  28. By: Artis, Michael J; Hoffmann, Mathias
    Abstract: This paper documents a marked increase in international consumption risk sharing throughout the recent globalization period. Unlike earlier studies that have found it difficult to document a consistent effect of financial globalization on international consumption comovements, we make use of the information implicit in the relative levels of consumption and output to measure long-run risk sharing among OECD countries and US federal states. We derive our empirical setup from a deliberately simplistic model in which countries can trade perpetual claims to each other’s output (Shiller securities). This model allows us to identify the channels through which improvements in international risk sharing have come about. The model predicts crosscountry and cross-regional income flows with considerable precision. Both international income flows as well as consumption risk sharing have increased since 1990, in line with the gradual removal of country portfolio home bias documented elsewhere. Still, the increase in international income flows falls short of explaining all of the consumption risk sharing we see in international data. We show that heterogeneity in countries’ gross foreign asset positions is important in explaining this result. While countries with less portfolio home bias enjoy better consumption risk sharing, our findings also suggest that heterogeneity in country portfolios opens a separate channel for consumption risk sharing, possibly through asymmetric valuation effects that have been emphasized in the recent literature.
    Keywords: consumption risk sharing; home bias; international and regional business cycles; non-stationary panel data
    JEL: C23 E21 F36
    Date: 2006–05
  29. By: Keller, Wolfgang; Smarzynska Javorcik, Beata; Tybout, James R
    Abstract: This paper uses a case study approach to explore the effects of NAFTA and GATT membership on innovation and trade in the Mexican soaps, detergents and surfactants (SDS) industry. Several basic findings emerge. First, the most fundamental effect of NAFTA and the GATT on the SDS industry was to help induce Wal-Mart to enter Mexico. Once there, Walmex fundamentally changed the retail sector, forcing SDS firms to cut their profit margins and/or innovate. Those unable to respond to this new environment tended to lose market share and, in some cases, disappear altogether. Second, partly in response to Walmex, many Mexican producers logged impressive efficiency gains during the previous decade. These gains came both from labour-shedding and from innovation, which in turn was fuelled by innovative input suppliers and by multinationals bringing new products and processes from their headquarters to Mexico. Finally, although Mexican detergent exports captured an increasing share of the U.S. detergent market over the past decade, Mexican sales in the U.S. were inhibited by a combination of excessive shipping delays at the border and artificially high input prices (due to Mexican protection of domestic caustic soda suppliers). They were also held back by the major re-tooling costs that Mexican producers would have had to incur in order to establish brand recognition among non-Latin consumers, and in order to comply with zero phosphate laws in many regions of the United States
    Keywords: detergent industry; FDI liberalization; GATT; multinational enterprises; NAFTA; retail sector reform; technology transfer; trade liberalization; trucking; Wal-Mart; WTO
    JEL: F1 F2 L1 L6
    Date: 2006–09
  30. By: Lederman, Daniel; Olarreaga, Marcelo; Payton, Lucy
    Abstract: The number of national export promotion agencies (EPAs) has tripled over the last two decades. While more countries made them part of their national export strategy, studies criticized their efficiency in developing countries (Hogan, Keesing and Singer, 1991). Partly in reaction to these critiques, EPAs have been retooled (see ITC, 1998 or 2000 for example). This paper studies the impact of existing EPAs and their strategies, based on a new data set covering 104 developing and developed countries. Results suggest that on average they have a strong and statistically significant impact on exports. For each $1 of export promotion, we estimate a $300 increase in exports for the median EPA. However, there is heterogeneity across regions, levels of development and types of instruments. Furthermore, there are strong diminishing returns, suggesting that as far as EPAs are concerned small is beautiful.
    Keywords: developing countries; export promotion agencies
    JEL: F13 O19
    Date: 2006–08
  31. By: OECD
    Abstract: This paper considers the case for adjusting measures of the cyclically-adjusted fiscal balance for exceptional movements in the terms of trade for those countries where production of commodities is a substantial share of output. For such countries exceptional movements in commodity prices, such as have occurred in recent years, are likely to lead to higher tax revenues, most immediately from the companies directly involved in extracting or producing the commodities, but also less directly as the consequent rise in the terms of trade increases real incomes more broadly. A simple method is proposed to allow for exceptional developments in commodity prices using an adjustment based on a concept of the real income gap rather than a real output gap. This method is subsequently applied to Australia -- one of the world?s leading producers of mined commodities -- and the results contrasted with the standard OECD method of calculating the cyclically-adjusted fiscal balance. It is shown that over much of history the two methods generate similar results, but during exceptional periods of rapid change in commodity prices the measures can be very different. The analysis highlights that a key assumption needed to adjust for commodity price developments concerns the equilibrium level of the terms of trade. While the assumption that the terms of trade returns to long-run historical trends might appear a natural benchmark, recent sustained strong growth in demand for commodities from China and other developing Asian economies raises the question as to whether this has led to a permanent increase in the terms of trade of major commodity producers like Australia and has thus permanently raised government revenues. This Working Paper relates to the 2006 OECD Economic Survey of Australia ( <P>Faut-il ajuster les indicateurs budgétaires pour tenir compte de l'incidence des termes de l'échange ? <BR>Ce document examine s'il y a lieu d'ajuster les indicateurs du solde budgétaire corrigé des fluctuations conjoncturelles afin de tenir compte de variations exceptionnelles des termes de l'échange, pour les pays où les produits de base représentent une part importante de la production. Dans ces pays, il est probable que des hausses exceptionnellement prononcées des cours des produits de base, telles que celles qui se sont produites ces dernières années, entraînent un accroissement des recettes fiscales, d'abord en provenance des entreprises qui participent directement à l'extraction ou à la production desdits produits de base puis, plus indirectement, lorsque l'amélioration des termes de l'échange induit une augmentation plus générale des revenus réels. Une méthode simple est proposée pour tenir compte des variations exceptionnelles des cours des produits de base en procédant à un ajustement fondé sur un concept d'écart de revenu réel, et non d'écart de production réelle. Cette méthode est ensuite appliquée à l'Australie -- l'un des premiers producteurs mondiaux de produits d'extraction -- et les résultats sont comparés à ceux que l'on obtient avec la méthode habituellement utilisée à l'OCDE pour calculer le solde budgétaire corrigé des fluctuations conjoncturelles. On constate que d'une manière générale, les deux méthodes aboutissent à des résultats similaires, mais que pendant les périodes exceptionnelles se caractérisant par des mouvements rapides des cours des produits de base, les indicateurs peuvent être très différents. L'analyse révèle que l'une des principales hypothèses à poser pour tenir compte de l'évolution des cours des produits de base concerne le niveau d'équilibre des termes de l'échange. Bien que l'hypothèse selon laquelle les termes de l'échange retrouvent leurs tendances historiques de long terme puisse paraître la plus valable, la croissance vigoureuse et soutenue de la demande de produits de base émanant de la Chine et d'autres économies d'Asie en développement au cours de la période récente incite à examiner si cette évolution n'a pas entraîné une augmentation permanente des termes de l'échange pour de grands producteurs de produits de base comme l'Australie. Ce document de travail se rapporte à l'Étude économique de l'Australie 2006 (
    Keywords: taxation, fiscalité, fiscal policy, public finances, politique budgétaire, finances publiques, Australia, Australie, commodity, produit de base
    JEL: E62 H30 H60
    Date: 2006–10–06
  32. By: Raimondos-Møller, Pascalis; Woodland, Alan D
    Abstract: This paper introduces the concept of a steepest ascent tariff reform for a small open economy. By construction, it is locally optimal in that it yields the highest gain in utility of any feasible tariff reform vector of the same length. Accordingly, it provides a convenient benchmark for the evaluation of the welfare effectiveness of other well known tariff reform rules, as e.g. the proportional and the concertina rules. We develop the properties of this tariff reform, characterize the sources of the potential welfare gains from tariff reform, use it to establish conditions under which some existing reforms are locally optimal, provide geometric illustrations and compare welfare effectiveness of reforms using numerical examples. Moreover, being a general concept, we apply it to the issue of market access and examine its implications. Overall, the paper’s contribution lies in presenting a theoretical concept where the focus is upon the size of welfare gains accruing from tariff reforms rather than simply with the direction of welfare effects that has been the concern of the literature.
    Keywords: market access; piecemeal tariff policy; small open economy; steepest ascent tariff reforms; welfare
    JEL: F15
    Date: 2006–08

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