nep-int New Economics Papers
on International Trade
Issue of 2007‒01‒02
twenty papers chosen by
Martin Berka
Massey University

  1. A Solution to Two Paradoxes of International Capital Flows By Ju, Jiandong; Wei, Shang-Jin
  2. Revealed comparative advantage: An analysis for India and China By Amita Batra; Zeba Khan
  3. Euro Effects on the Intensive and Extensive Margins of Trade By Harry Flam; Hakan Nordström
  4. Euros and Zeros: The Common Currency Effect on Trade in New Goods By Baldwin, Richard; Di Nino, Virginia
  5. The agreement on subsidies and countervailing measures: tying one's hand through the WTO By Meredith Crowley
  6. Prospects for IT-Enabled Services Under a Indo-US FTA By Arpita Mukherjee; Paramita Deb Gupta
  7. Would Protectionism Defuse Global Imbalances and Spur Economic Activity? A Scenario Analysis By Faruqee, Hamid; Laxton, Doug; Muir, Dirk; Pesenti, Paolo
  8. Multi-Product Firms and Trade Liberalization By Andrew B. Bernard; Stephen J. Redding; Peter K. Schott
  9. India - Pakistan Trade By Nisha Taneja
  10. Beyond Trade Costs: Firms' Endogenous Access to International Markets By Garcia Pires, Armando José
  11. Understanding the Latest Wave and Future Shape of Regional Trade and Cooperation Agreements in Asia By Biswanath Bhattacharyay
  12. Asian Economic Integration: ASEAN+3+1 or ASEAN+1s? By Amita Batra
  13. Are there Border Effects in the EU Wage Function? By Peter Huber; Michael Pfaffermayr; Yvonne Wolfmayr
  14. State-Owned Enterprise Behaviour Responses to Trade Reforms: Some Analytics and Numerical Simulation Results Using Chinese Data By John Whalley; Shunming Zhang
  15. Impact on India of Tariff & Quantitative Restrictions under WTO By Bishwanath Goldar
  16. Economic Integration and Redistributive Taxation: A Simple Model with Ambiguous Results By Andreas Haufler; Alexander Klemm; Guttorm Schjelderup
  17. Current WTO Negotiations on Domestic Subsidies in Agriculture: Implications for India By Parthapratim Pal
  18. International Taxation and the Direction and Volume of Cross-Border M&As By Huizinga, Harry; Voget, Johannes
  19. FDI in Chinese Cities: Spillovers and Impact on Growth By Nicole Madariaga; Sandra Poncet
  20. Non-Tariff barriers and India's exports: The case of Asean and Sri Lanka By Mohammed Saqib; Nisha Taneja

  1. By: Ju, Jiandong; Wei, Shang-Jin
    Abstract: International capital flows from rich to poor countries can be regarded as either too small (the Lucas paradox in a one-sector model) or too large (when compared with the logic of factor price equalization in a two-sector model). To resolve the paradoxes, we introduce a non-neo-classical model which features financial contracts and firm heterogeneity. In our model, free trade in goods does not imply equal returns to capital across countries. In addition, rich patterns of gross capital flows emerge as a function of financial and property rights institutions. A poor country with an inefficient financial system may simultaneously experience an outflow of financial capital but an inflow of FDI, resulting in a small net flow. In comparison, a country with a low capital-to-labor ratio but a high risk of expropriation may experience outflow of financial capital without compensating inflow of FDI.
    Keywords: capital bypass circulation; expropriation risk; financial development; gross capital flow; heterogeneous entrepreneurs
    JEL: F11 F21 F33
    Date: 2006–12
  2. By: Amita Batra (Indian Council for Research on International Economic Relations); Zeba Khan (Indian Council for Research on International Economic Relations)
    Date: 2005–08
  3. By: Harry Flam; Hakan Nordström
    Abstract: We estimate that the euro has increased trade within the eurozone by about 26 per cent and trade between the eurozone and outsiders by about 12 per cent on average for the years 2002-2005 compared to 1995-1998. The percentage increases were smaller for products that were exported every year during the sample period than for products that were not, indicating significant and substantial effects on the extensive margin of trade. The euro effects were concentrated to semi-finished and finished products, in particular to industries with highly processed products such as pharmaceuticals and machinery.
    JEL: F10
    Date: 2006
  4. By: Baldwin, Richard; Di Nino, Virginia
    Abstract: This paper tests whether trade in new goods is partially responsible for the pro-trade effects of the euro and provides a measure of the size of the effect. It works with a very large data set (about 16 million observations) covering twenty countries at the most disaggregated level of trade data that is publicly available. Using predictions from a heterogeneous-firms trade model in a multi-country environment to structure our empirical model, we find that the euro had a positive impact on trade overall. Our findings provide supportive but not conclusive evidence for the new-goods hypothesis. We also determined the pro-trade effect of euro-usage on non-Euroland nations trading with euro-users. We confirmed the absence of trade diversion for non-Eurozone EU members with sizeable overall increase comparable to that of members.
    Keywords: Eurozone trade effects; extensive margin; heterogenous firms; Melitz model
    JEL: F12 F21 F33 F4
    Date: 2006–12
  5. By: Meredith Crowley
    Abstract: Why would governments agree to restrict their own discretion in setting domestic policies as part of a trade agreement? This paper examines the welfare consequences of the GATT's Agreement on Subsidies and Countervailing Measures (SCM). If countries which join a trade agreement are given free reign over the use of domestic production subsidies, then after negotiating tariff reductions, governments could undermine the agreement by introducing production subsidies to import-competing producers that effectively act as trade barriers. The SCM restricts the use of domestic subsidies by countries which have joined the WTO. Specifically, governments may not use sector-specific subsidies (agriculture is an exception) but they may subsidize their producers if they offer the same subsidy to all producers in their economies. I show that through an agreement like the SCM, governments can better achieve their goals of maximizing domestic welfare. This occurs because terms-of-trade concerns lead to subsidies in import- competing sectors that are higher than globally optimal and in export sectors that are lower than globally optimal. Therefore, a rule to require that subsidies be the same in all sectors forces a country to partially internalize these terms of trade externalities (by reducing subsidies to import-competing sectors and increasing subsidies to export sectors).
    Date: 2006
  6. By: Arpita Mukherjee (Indian Council for Research on International Economic Relations); Paramita Deb Gupta (Indian Council for Research on International Economic Relations)
    Abstract: ITES/BPO services is an important and growing component of India's trade in services with the US. While the Indian government has implemented several measures to support the growth of this sector, Indian companies face various barriers in the US market such as anti-outsourcing regulations, restrictive visa/work permit regime and concerns relating to protection of sensitive data. Multilateral negotiations would have been the best route to address many of these barriers, but with the recent suspension of the Doha Round of talks, it has become important for countries to evaluate alternative routes such as bilateral Free Trade Agreements. In fact, after the suspension of the multilateral negotiations, both India and the US have refocused on bilateral agreements. In this context, this study discusses the current and potential trade between India and the US in ITES/BPO services, identifies barriers to trade and explores how an FTA can enhance bilateral trade in this sector. The study shows that the US-FTAs have achieved a higher level of liberalization than in the WTO. It suggests various negotiating strategies for India such as a negative list approach, signing mutual recognition agreements in key professional services, asking for a H1B1 type of visa, pushing for removal of domestic regulation-related barriers, among others which would enhance market access for Indian companies in the US. It also points out that Indo-US collaborations for data protection, skill development and raising awareness of the advantages of outsourcing in the US would be mutually beneficial. The study discusses regulatory and other reforms which will improve the productivity, efficiency and global competitiveness of this sector and enable the country to gain from the FTA.
    Keywords: Indo-US FTA, GATS, Bilateral Agreements, business process outsourcing, IT-enabled services.
    JEL: F13 F14 L86
    Date: 2006–09
  7. By: Faruqee, Hamid; Laxton, Doug; Muir, Dirk; Pesenti, Paolo
    Abstract: In the evolving debate and analysis of global imbalances, a commonly overlooked issue pertains to rising protectionism. This paper attempts to fill that gap, examining the macroeconomic implications of trade policy changes through the lens of a dynamic general equilibrium model of the world economy encompassing four regional blocs. Simulation exercises are carried out to consider the imposition of uniform and discriminatory tariffs on trading partners as well as the case of tariff retaliation. We also discuss a scenario in which a ‘globalization backlash ’lowers the degree of competition in import-competing sectors, and compare the implications of higher markups in the product and labor markets.
    Keywords: current account deficit; multi-country DGE models; net asset positions; trade policy
    JEL: E66 F32 F47
    Date: 2006–12
  8. By: Andrew B. Bernard; Stephen J. Redding; Peter K. Schott
    Abstract: This paper develops a general equilibrium model of multi-product firms and analyzes their behavior during trade liberalization. Firm productivity in a given product is modeled as a combination of firm-level "ability" and firm-product-level "expertise", both of which are stochastic and unknown prior to the firm's payment of a sunk cost of entry. Higher firm-level ability raises a firm's productivity across all products, which induces a positive correlation between a firm's intensive (output per product) and extensive (number of products) margins. Trade liberalization fosters productivity growth within and across firms and in aggregate by inducing firms to shed marginally productive products and forcing the lowest-productivity firms to exit. Though exporters produce a smaller range of products after liberalization, they increase the share of products sold abroad as well as exports per product. All of these adjustments are shown to be relatively more pronounced in countries' comparative advantage industries.
    JEL: F12 F13 L1
    Date: 2006–12
  9. By: Nisha Taneja (Indian Council for Research on International Economic Relations)
    Abstract: Quantitative studies estimate that potential two way trade between India and Pakistan can be about 10 times than its rather unsatisfactory current level of $ 613 million. Moving towards realizing this trade potential is clearly in the interest of both countries and the region. In this context this study identifies areas of trade and investment co-operation between the two countries. On the basis of a survey conducted in three cities viz., Delhi, Mumbai and Amritsar the paper examines the characteristics of firms engaged in Indo-Pakistan trade. It also estimates existing transport arrangement between the two countries and the impact of all extant non-tariff barriers. The study suggests that the most important step towards enhancing trade would be to adopt the MFN principle as the current policy inhibits trade, lacks transparency and leads to high transaction costs. The study finds that transportation links between the two countries are inadequate and suggests that new rail and road links should be opened. Transaction costs of trading between India and Pakistan are high and can be lowered by implementing some rather simple policy measures that are spelled out in the paper. The study also examines recent developments in BIMSTEC, ASEAN and in Indo-Sri Lanka and Indo-Nepal trade agreements, and draws lessons to enhance Indo-Pakistan trade.
    Keywords: South Asia, India-Pakistan trade, commercial policy, MFN
    JEL: L6 L8 F13
    Date: 2006–06
  10. By: Garcia Pires, Armando José
    Abstract: Contrary to what has been standard in the international trade literature, we argue that firms' access to international markets should not be just reduced to exogenous factors such as trade costs. Instead, we defend that market access can also be endogenous, since firms can affect international trade patterns by acting strategically against rivals. In particular, we endogenize firms' competitiveness through commitment power advantages of R&D. In this setting we show that: (1) higher efficiency of R&D (like low trade costs) makes trade more easy (given that R&D increases the profitability of exports); (2) firms with higher commitment power in R&D are more competitive (since they have larger incentives to innovate) and as a result these firms also have better access to export markets.
    Keywords: commitment power; endogenous asymmetric firms; market access; R&D investment
    JEL: F12 L13 L25 O31
    Date: 2006–12
  11. By: Biswanath Bhattacharyay
    Abstract: Asia accounts for more than 30% of world GDP and contributes half of the global growth in recent years. Despite high growth rates, Asia is still facing considerable socio-economic challenges. If Asia is to reemerge as a major power in the global economy and in order for the region to successfully address its own challenges and issues there is a need to make the region’s economies more integrated regionally and internationally. Following the recent global trend, Asia witnessed a wave of subregional and bilateral trade agreements. This paper analyzes the recent trends and patterns and nature of regional trade and cooperation agreements (RTCAs) in Asia and associated problems and prospects. It also attempts to understand the latest wave and the future shape of RTCAs and examines if these RTCAs provide the basis for a new Asia-wide cooperation or for the emergence of new regional trade in blocs of several subregional groupings.
    Keywords: Asia, regional economic cooperation and integration, trade, bilateral and regional trade and cooperation agreements, ASEAN
    JEL: F10 F20 Q10 Q40 R40
    Date: 2006
  12. By: Amita Batra (Indian Council for Research on International Economic Relations)
    Abstract: In this paper an attempt is made to evaluate the most efficient approach to regional economic integration in Asia. For the purpose, Asia is defined as inclusive of ASEAN, the plus three economies of China, Japan, Korea and India that is the ASEAN plus four. Given that ASEAN is an existing regional bloc in Asia, alternative approaches to the alignment of the plus four economies with ASEAN for the formation of the ASEAN+4 trade bloc have been evaluated to determine if there are efficiency costs by way of distortion in the patterns of trade away from those expected on the basis of comparative advantage. The findings of our analysis underscore the efficiency of a prior alignment with ASEAN for all the plus four economies.
    Keywords: regional economic integration, Asia, efficiency cost, comparative advantage, first mover advantage, trade diversion.
    JEL: F13 F14 F15
    Date: 2006–09
  13. By: Peter Huber; Michael Pfaffermayr; Yvonne Wolfmayr
    Abstract: We estimate a linear approximation of the market potential function for Europe as derived in geography and trade models. Using a spatial econometric estimation approach, border effects are identified by a differential impact of other regions purchasing power, depending on whether two regions are located within the EU15 or outside the EU15. We find that intra EU15-borders have an insignificant but external borders a significant effect on regional wage structures. We illustrate the magnitude of EU external border effects by simulating the enlargement of the EU in May 2004. Our results suggest a large impact of the border for new member states, but a relatively small one for old members.
    Keywords: market potential, border effects, spatial econometrics
    JEL: C21 F10 F12 R12
    Date: 2006
  14. By: John Whalley; Shunming Zhang
    Abstract: We note the absence of prior literature on analytical structures to be used for China and other economies with extensive SOEs when evaluating behavioural responses of SOEs to trade policy and other changes. This is despite both the large empirical literature discussing the productivity effects of Chinese SOE enterprise reform, and wider policy discussion of the potential impacts of various reform initiatives. We present two simple analytical formulations of SOE behaviour in response to trade policy change with the aim of investigating how traditional competitive models of enterprise behaviour can mislead when used in policy debate. One formulation centres on SOE managerial control. In this enterprise managers are politically appointed, expect any non performing loans to be recapitalized by state banks andhence capital is centrally allocated by credit rationing. The managers are assured to maximize the size of the enterprise rather than profits since this yields maximal networking benefits to managers. This implies labour is priced at its average rather than its marginal product, and with a competitive non-manufacturing (agricultural) industry free trade is not optimal policy. The other assumes worker control of SOEs and that workers satisfice in their supply of effort to the enterprise given both fixed wage rates and enterprise employment and otherwise shirk or pursue second jobs. In this formulation the enterprise meets their budget constraint and covers costs. With leisure in the preferences of enterprise members, their leisure consumption will be implied by the satisfying behaviour of the enterprise and will be non optimal. In both model variants, implications for trade policy are different from those of a standard competitive model, and computations using models calibrated to 2003 Chinese data suggest the differences can be large.
    JEL: F00 F13 P2
    Date: 2006–12
  15. By: Bishwanath Goldar (Indian Council for Research on International Economic Relations)
    Date: 2005–11
  16. By: Andreas Haufler; Alexander Klemm; Guttorm Schjelderup
    Abstract: The rise in foreign direct investment and the increasing activity of multinational firms expose national corporate tax bases to cross-country profit shifting, but also lead to rising profitability of the corporate sector. We incorporate these two effects of economic integration into a simple political economy model where the median voter decides on a redistributive income tax rate. In this setting economic integration may raise or lower the equilibrium tax rate, depending on whether the higher excess burden of the tax or the larger redistributive gains from the perspective of the representative worker are the dominant effect. Our simple model holds several implications for future empirical work on the relationship between globalization and the effective rate of capital taxation.
    Keywords: redistributive taxation, multinational firms, profit shifting
    JEL: F23 H20
    Date: 2006
  17. By: Parthapratim Pal (Indian Council for Research on International Economic Relations)
    Date: 2005–12
  18. By: Huizinga, Harry; Voget, Johannes
    Abstract: In an international merger or acquisition, the national residences of the acquirer and the target determine to what extent the newly created multinational firm is subject to international double taxation. This paper presents evidence that the parent-subsidiary structure of newly created multinational firms reflects the prospect of international double taxation. The number of acquiring firms at the national level similarly reflects international double taxation. The evidence suggests that tax policy in the form of lower tax rates or the elimination of residence-based worldwide taxation attracts additional parent companies of multinational firms. On the basis of our estimation, we simulate the impact of the elimination of worldwide taxation by the United States on parent firm selection.
    Keywords: international taxation; mergers and acquisitions
    JEL: F23 H25
    Date: 2006–12
  19. By: Nicole Madariaga; Sandra Poncet
    Abstract: We study the impact of FDI on growth performance. We rely on a data set of Chinese cities between 1990 and 2002 to investigate the effects of FDI in the traditional growth regression framework using the GMM estimator for dynamic panels. Our growth model incorporates an explicit consideration of spatial dependence effects in the form of spatially lagged income and FDI. Our results reveal that Chinese cities take advantage not only of FDI flows received locally but also of FDI flows received by their neighbors.
    Keywords: Growth; regional convergence; economic geography; foreign direct investment China
    JEL: E1 O1 O5 R1
    Date: 2006–12
  20. By: Mohammed Saqib (Indian Council for Research on International Economic Relations); Nisha Taneja (Indian Council for Research on International Economic Relations)
    Date: 2005–07

This nep-int issue is ©2007 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.