nep-int New Economics Papers
on International Trade
Issue of 2007‒01‒28
24 papers chosen by
Martin Berka
Massey University

  1. The Impact of Production Fragmentation on Industry Skill Upgrading: New Evidence from Japanese Manufacturing By Nobuaki Yamashita
  2. Exchange rate sensitivity of China’s bilateral trade flows By Wang , Jiao; Ji, Andy G.
  3. Trade Agreements as Endogenously Incomplete Contracts By Horn, Henrik; Maggi, Giovanni; Staiger, Robert
  4. Firm Heterogeneity and the Two Sources of Gains from Trade By Itai Agur
  5. Does trade openness increase firm-level volatility? By Buch, Claudia M.; Döpke, Jörg; Strotmann, Harald
  6. Productivity, external balance and exchange rates: evidence on the transmission mechanism among G7 countries By Giancarlo Corsetti; Luca Dedola; Sylvain Leduc
  7. On Globalization and the Growth of Governments By Epifani, Paolo; Gancia, Gino A.
  8. The Effect of Trade on the Demand for Skill - Evidence from the Interstate Highway System By Michaels, Guy
  9. Contractual Frictions and Global Sourcing By Antras, Pol; Helpman, Elhanan
  10. Foreign Direct Investment in Applied General Equilibrium Models By Arjan Lejour; Hugo Rojas-Romagosa
  11. S-Curve Redux: On the International Transmission of Technology Shocks. By Zeno Enders; Gernot J. Mueller
  12. Notes on Factor Price Equality and Biased Technical Change in a Two-Cone Trade Model By Daniel Becker; Erich Gundlach
  13. Can Production Subsidies Foster Export Activity? Evidence from Chinese Firm Level Data By Girma, Sourafel; Gong, Yundan; Görg, Holger; Yu, Zhihong
  14. Protection for Sale or Surge Protection? By Susumu Imai; Hajime Katayama; Kala Krishna
  15. Industry Reallocations in a Globalizing Economy By Behrens, Kristian; Mion, Giordano; Ottaviano, Gianmarco I P
  16. Trade, Envy and Growth: International Status Seeking in a Two-Country World By Simone Valente
  17. Developing Country Borrowing from a Monopolistic Lender: Strategic Interaction and Endogenous Leadership By Saqib Jafarey; Sajal Lahiri
  18. Emerging Hubs in Central-Eastern Europe, Trade Blocs and Supply Chain Restructuring By Giuseppe Tattara
  19. International remittances and the household : analysis and review of global evidence By Adams, Richard H. Jr.
  20. Exports, sunk costs and financial restrictions in Argentina during the 1990s. By Paula Espanol
  21. More Pushed than Pulled: Self-employment in rural Mexico ten years after NAFTA By Sindy A. González; Héctor J. Villarreal
  22. International Profit Shifting within European Multinationals By Huizinga, Harry; Laeven, Luc
  23. Grant Support and Exporting Activity By Görg, Holger; Henry, Michael; Strobl, Eric
  24. US imbalances: the role of technology and policy By Rudolfs Bems; Luca Dedola; Frank Smets

  1. By: Nobuaki Yamashita
    Abstract: This paper examines the hypothesis that industries engaged in international fragmentation of production experience greater skill upgrading using a panel dataset of Japanese manufacturing over the period 1980-2000. The novelty of the study comes from the use of an index newly constructed using data on trade in parts and components to measure inter-industry variations in the degree of international vertical specialization (fragmentation intensity of trade). It also employs a methodology designed to embody peculiarities of Japan's fragmentation trade pattern. While the findings of existing studies are inconclusive, we find that the expansion of fragmentation trade with developing East Asian countries has had a significant impact on the skills composition of Japanese manufacturing employment. By contrast, trade with high income countries seems to have had a skill downgrading effect.
    Keywords: International Fragmentation of Production, Skill Upgrading, Japanese Manufacturing
    JEL: F14 F16 J31
    Date: 2007–01
  2. By: Wang , Jiao (BOFIT); Ji, Andy G. (BOFIT)
    Abstract: Traditional assessments of the impact of exchange rate depreciation or appreciation on trade have involved estimating the elasticity of trade volume to relative prices. Such studies relied heavily on aggregated trade data. More recent studies employ bilateral trade data and methodologies such as ECM and gravity models. This study uses a generalized gravity model with data panel analysis in assessing the impact of currency depreciation or appreciation on bilateral trade flows between China and its top trading partners. The empirical evidence suggests exchange rates (both real and nominal) do not exert a significant influence on the overall exports from China. Thus, a devaluation or revaluation of the yuan should be expected to have only limited impact on China’s trade balance. Moreover, previous studies provide limited evidence of a negative relation between exchange rate volatility and trade flows. Given the current revaluation expectations, we find China’s anticipated shift toward a more flexible exchange rate regime fails to address China’s trade surplus issues, and thus will merely lead to a revaluation of the nominal exchange rate and increased exchange rate volatility. It appears a major overhaul of the country’s heavily subsidized export regime must first occur for the exchange rate to assume a larger role in China’s international trade.
    Keywords: exchange rate; trade; China; competition; gravity model; panel
    JEL: C22 C22 F14 F31
    Date: 2007–01–18
  3. By: Horn, Henrik; Maggi, Giovanni; Staiger, Robert
    Abstract: We propose a model of trade agreements in which contracting is costly, and as a consequence the optimal agreement may be incomplete. In spite of its simplicity, the model yields rich predictions on the structure of the optimal trade agreement and how this depends on the fundamentals of the contracting environment. We argue that taking contracting costs explicitly into account can help explain a number of key features of real trade agreements.
    Keywords: endogenously incomplete contracts; GATT; trade agreement; WTO
    JEL: D86 F13 K33
    Date: 2007–01
  4. By: Itai Agur
    Abstract: Recent empirical work two main channels through which consumers benefit from trade. Trade liberalization lowers prices, while it raises product variety. This paper develops the first model that connects both channels and interprets their interaction. It shows that heterogeneity in firm productivity is the source behind both. Upon liberalization efficient exporters enter, pushing out the least efficient domestic firms. Two countervailing forces emerge, both stylized facts. Liberalization leaves a moreconcentrated market. But exporters o¤er more variety than the .rms that they replace. Remarkably, total variety unambiguously increases. Exploration of comparative statics leads to an intuitive explanation.
    Keywords: Trade, Firm selection, Product Variety, Heterogeneous firms
    JEL: F12 F15 L11
    Date: 2006
  5. By: Buch, Claudia M.; Döpke, Jörg; Strotmann, Harald
    Abstract: From a theoretical point of view, greater trade openness affects firm-level volatility by changing the exposure and the reaction of firms to macroeconomic shocks. The net effect is ambiguous, though. This paper provides firm-level evidence on the link between openness and volatility. Using two novel datasets on German firms, we analyze the evolution of firm-level output volatility and the link between volatility and trade openness. We find that firm-level output volatility displays patterns similar to those found in aggregated data for Germany. Also, smaller firms and firms that grow faster are more volatile. Increased trade openness tends to lower volatility.
    Keywords: firm-level volatility, trade openness
    JEL: E32 F41 G15
    Date: 2006
  6. By: Giancarlo Corsetti; Luca Dedola; Sylvain Leduc
    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 labor 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 di¤ers 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 di¤erences 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 growthin 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, net exports, terms of trade, real exchange rates, VAR, long-run restrictions, US current account
    JEL: F32 F41 F42
    Date: 2006
  7. By: Epifani, Paolo; Gancia, Gino A.
    Abstract: This paper investigates the relationship between trade openness and the size of governments, both theoretically and empirically. We argue that openness can increase the size of governments through two channels: (1) a terms of trade externality, whereby trade lowers the domestic cost of taxation, and (2) the demand for insurance, whereby trade raises risk and public transfers. We provide a unified framework for studying and testing these two mechanisms. Our main theoretical prediction is that the relative strength of the two explanations depends on a key parameter, namely, the elasticity of substitution between domestic and foreign goods. Moreover, while the first mechanism is inefficient from the standpoint of world welfare, the second is instead optimal. In the empirical part of the paper, we provide new evidence on the positive association between openness and government size and we explore its determinants. Consistently with the terms of trade externality channel, we show that the correlation is contingent on a low elasticity of substitution between domestic and foreign goods. Our findings raise warnings that globalization may have led to inefficiently large governments.
    Keywords: elasticity of substitution between imports and exports; government size; openness; terms of trade externality
    JEL: F1 H1
    Date: 2007–01
  8. By: Michaels, Guy
    Abstract: Since changes in trade openness are typically confounded with other factors, it has been difficult to identify the labour market consequences of increased international trade. The advent of the United States Interstate Highway System provides a unique policy experiment, which I use to identify the effect of reducing trade barriers on the relative demand for skilled labour. The Interstate Highway System was designed to connect major metropolitan areas, to serve national defence and to connect the United States to Canada and Mexico. As a consequence - though not an objective - many rural counties were also connected to the highway system. I find that these counties experienced an increase in trade-related activities, such as trucking and retail sales, by 7-10 percentage points per capita. Most significantly, by increasing trade the highways raised the relative demand for skilled manufacturing workers in counties with a high endowment of human capital and reduced it elsewhere, consistent with the predictions of the Heckscher-Ohlin model.
    Keywords: highways; skill premium; trade
    JEL: F16 J23 J31
    Date: 2007–01
  9. By: Antras, Pol; Helpman, Elhanan
    Abstract: We generalize the Antràs and Helpman (2004) model of the international organization of production in order to accommodate varying degrees of contractual frictions. In particular, we allow the degree of contractibility to vary across inputs and countries. A continuum of firms with heterogeneous productivities decide whether to integrate or outsource the production of intermediate inputs, and from which country to source them. Final-good producers and their suppliers make relationship-specific investments which are only partially contractible, both in an integrated firm and in an arm’s-length relationship. We describe equilibria in which firms with different productivity levels choose different ownership structures and supplier locations, and then study the effects of changes in the quality of contractual institutions on the relative prevalence of these organizational forms. Better contracting institutions in the South raise the prevalence of offshoring, but may reduce the relative prevalence of FDI or foreign outsourcing. The impact on the composition of offshoring depends on whether the institutional improvement affects disproportionately the contractibility of a particular input. A key message of the paper is that improvements in the contractibility of inputs controlled by final-good producers have different effects than improvements in the contractibility of inputs controlled by suppliers.
    Keywords: contractual frictions; FDI; sourcing; trade
    JEL: D23 F10 L23
    Date: 2007–01
  10. By: Arjan Lejour; Hugo Rojas-Romagosa
    Abstract: Global applied general equilibrium (AGE) models focus on the interactions between regional product markets. Many of these models are developed to represent trade flows and evaluate trade policies. Foreign direct investment (FDI) and foreign commercial presence are ignored in most of them, although sales by foreign affiliates sometimes exceed the value of trade flows. This paper gives an overview of the scarce literature on modelling FDI in AGE models. Modelling options, data availability and simulation results are reviewed. Some conclusions are drawn for future work.
    Keywords: CGE models; FDI; economic modelling
    JEL: C68 F23
    Date: 2006–12
  11. By: Zeno Enders; Gernot J. Mueller
    Abstract: Using vector autoregressions on U.S. time series, we find that technology shocks induce an ‘S’- shaped cross-correlation function for the trade balance and the terms of trade (S-curve). In calibrating a prototypical international business cycle model to match the S-curve under complete and incomplete financial markets, we find two distinct sets of parameter values. While both model specifications deliver the S-curve, the underlying transmission mechanism of technology shocks is fundamentally different. Most importantly, only in the incomplete markets economy the terms of trade appreciate and thus amplify the relative wealth effects of technology shocks - as suggested by time series evidence.
    Keywords: S-curve, Technology shocks, Terms of trade, Trade balance, Incomplete markets
    JEL: F41 E32 F32
    Date: 2006
  12. By: Daniel Becker (University of Rostock); Erich Gundlach (Kiel Institute for the World Economy)
    Abstract: We reconsider the effects of long-run economic growth on relative factor prices across cones of specialization. We model economic growth as exogenous technical change. Allowing for capital biased technical change with a sector bias and for endogenous commodity prices, we find that economic growth may increase or decrease factor price differences across cones. For a neutral demand side and capital biased growth in the most capital intensive sector, we find that eco-nomic growth encourages less factor price diversity across cones.
    Keywords: Factor Price Equalization, Cones of Diversification, Trade, Technical Change, Growth
    JEL: F11 O1 O40
    Date: 2006
  13. By: Girma, Sourafel; Gong, Yundan; Görg, Holger; Yu, Zhihong
    Abstract: Using a unique firm level data set from the Chinese manufacturing sector, this paper analyses the impact of production subsidies on firms’ export performance. It documents robust evidence that production subsidies stimulate export activity, although this effect is conditional on firm characteristics. In particular, the beneficial impact of subsidies is found to be more pronounced amongst profit-making firms, firms in capital intensive industries and those with previous exporting experience. Compared to firm characteristics, the extent of heterogeneity across ownership structure (SOEs, collectives and privately-owned firms) proves to be relatively less important.
    Keywords: China; endogenous tobit; exporting; subsidies
    JEL: F1 O2 P3
    Date: 2007–01
  14. By: Susumu Imai (Queen's University); Hajime Katayama (University of Sydney); Kala Krishna (Pennsylvania State University and NBER)
    Abstract: This paper asks whether the results obtained from using the standard approach to testing the influential Grossman and Helpman "protection for sale (PFS)" model of political economy might arise from a simpler setting. A model of imports and quotas with protection occuring in response to import surges, but only for organized industries, is simulated and shown to provide parameter estimates consistent with the protection for sale framework. This suggests that the standard approach may be less of a test than previously thought.
    Keywords: Common agency, Political economy, Protection for sale, Quotas, Non tariff barriers
    JEL: F13 D72 F17
    Date: 2006–12
  15. By: Behrens, Kristian; Mion, Giordano; Ottaviano, Gianmarco I P
    Abstract: We distill the main insights from recent trade models on firms' responses to globalisation. Our primary aim is to assess the economic impact and the welfare implications of the resulting reallocation of resources across firms and countries. In so doing, we bring theory into life through the numerical implementation of a theoretical framework calibrated on European data, which encompasses aspects of economic geography, firm heterogeneity, and firms' organizational choices. Our final purpose is to provide a comprehensive background for empirical investigations and to stimulate further theoretical research.
    Keywords: economic geography; firm heterogeneity; international integration; multinationals; resource reallocation
    JEL: F12
    Date: 2007–01
  16. By: Simone Valente (Center of Economic Research, Swiss Federal Institute of Technology Zurich (ETH))
    Abstract: This paper analyzes international status seeking in a two-country model of endogenous growth: utility of agents in developing countries is a¤ected by con- sumption gaps with the average consumer in advanced economies. By distorting terms of trade, status seeking: (i) may compensate for structural gaps in physical productivity, inducing convergence; (ii) may revert the link between trade and growth; and (iii) induces divergence when interacting with technological catching- up. In particular, envy in conjunction with catching-up predicts switchovers of growth leadership: when the advanced economy is both status- and technology- leader in the short run, convergence in interest rates - e.g. due to R&D spillovers - implies that the initially lagging economy becomes growth-leader in the long run, due to permanent price distortions induced by envy.
    Keywords: Consumption externalities, international trade, two-country models.
    JEL: D91 E21 F11
    Date: 2006–06
  17. By: Saqib Jafarey (Department of Economics, City University, London); Sajal Lahiri (Department of Economics, Southern Illinois University)
    Abstract: We develop a two-period model with endogenous investment and credit flows. Credit is subject to quantitative restrictions. With an exogenous restriction, we analyze the welfare effects of temporary tariffs. We then consider three scenarios under which a monopoly lender optimally decides the level of credit and a borrower country chooses an import tariff: one in which the two parties act simultaneously and two scenarios where one of them has a firstmover advantage. The equilibrium under the leadership of the borrower country is Pareto superior to the Nash equilibrium but may or may not be to that under the leadership of the lender. If the sequence of moves is itself chosen strategically, leadership by the borrower emerges as the unique equilibrium.
    Keywords: Trade intervention, investment credit, credit constraints, credit control, leaderfollower
    JEL: F13 O10 O16
    Date: 2005–10–12
  18. By: Giuseppe Tattara (Department of Economics, University Of Venice Ca’ Foscari)
    Abstract: Many European countries have faced the erosion of the competitive advantage in the international market with a mixed strategy of productivity increase at home and labour cost reduction abroad, through the international fragmentation of production and subcontracting in low wage countries. Italy in particular, has delocalized segments of its industrial production in Eastern Europe. The advantage of delocalization abroad – with particular reference to East European countries – is due to the low cost of labour, depends from the capability to transmit information efficiently and the availability of a complete supply-type blueprint in the receiving country.The paper discusses the prospects open to Italia apparel firms and presents a case study dealing with the development of outsourcing by the Benetton group in the last decades.
    Keywords: Vertical Integration, Global Organization of Production, Macroeconomics
    JEL: F23 L16 L22 L23
    Date: 2006
  19. By: Adams, Richard H. Jr.
    Abstract: This paper examines the economic impact of international remittances on countries and households in the developing world. To analyze the country-level impact of remittances, the paper estimates an econometric model based on a new data set of 115 developing countries. Results suggest that countries located close to a major remittance-sending region (like the United States, OECD-Europe) are more likely to receive international remittances, and that while the level of poverty in a country has no statistical effect on the amount of remittances received, for those countries which are fortunate enough to receive remittances, these resource flows do tend to reduce the level and depth of poverty. At the household level, a review of findings from recent research suggest that households receiving international remittances spend less at the margin on consumption goods-like food-and more on investment goods-like education and housing. Households receiving international remittances also tend to invest more in entrepreneurial activities.
    Keywords: Population Policies,Remittances,Rural Poverty Reduction,Agriculture & Farming Systems,Inequality
    Date: 2007–02–01
  20. By: Paula Espanol
    Abstract: This paper examines firms' export decisions in Argentina during the 1990s. Using a sample of 1600 Argentine industrial firms with information for the years 1992, 1996, 1998 and 2001, we test which factors affect the probability of entering foreign markets. We focus on the role of sunk costs and the access to financial markets as key determinants of firms' export decisions. The estimation of a non-linear binary variable model using export prior experience and explicit sunk costs variables confirms self-selection hypothesis on export markets participation. Results also suggest that firm-specific characteristics are significant to explain export decisions, particularly firm's access to the financial system.
    Date: 2007
  21. By: Sindy A. González; Héctor J. Villarreal
    Abstract: Who are the self-employed in rural Mexico? This paper tries to answer that question with special emphasis on the role of human capital in self-employment decisions. The model presented suggests that the need for leisure/flexibility may have a driving effect once the household framework is considered. Imperfect markets may hinder possible gains of self-employment with particular groups being more vulnerable (e.g. women). Some estimated parameters in this study for propensities to become self-employed and returns to education vary between 1994 and 2004, the first decade of the North American Free Trade Agreement (NAFTA). Pull and push factors emerge in the decision to enter into self-employment in rural area. Being self-employed still may be the best or sole option for a considerable percentage of the population. The alter may suggest that if self-employment in the rural sector is posed as a development strategy, this should come with adequate policy supports.
    Keywords: Mexico, rural, NAFTA, self-employment, leisure, flexibility
    JEL: R10 R13 R11 R15
    Date: 2006–11
  22. By: Huizinga, Harry; Laeven, Luc
    Abstract: The conduct of business activities in two or more countries creates opportunities for international profit shifting, while international tax rate differences create incentives. Using detailed information on both multinational firm structure and the international tax system, this paper examines the extent of intra-European profit shifting by European multinationals. Firm-level estimates of profit shifting can be aggregated to arrive at macro measures of international profit shifting. On average, we find a macro semi-elasticity of reported profits with respect to the top statutory tax rate of 1.43 in Europe, while shifting costs are estimated to be 1.6 percent of the tax base. International profit shifting leads to a substantial redistribution of national corporate tax revenues. Many European nations appear to gain revenues from intra-European profit shifting by multinationals largely at the expense of Germany.
    Keywords: corporate taxation; international profit shifting
    JEL: F23 H25
    Date: 2007–01
  23. By: Görg, Holger; Henry, Michael; Strobl, Eric
    Abstract: This paper investigates whether government support can act to increase exporting activity. We use a uniquely rich data set on Irish manufacturing plants and employ an empirical strategy that combines a non-parametric matching procedure with a difference-in-differences estimator in order to deal with the potential selection problem inherent in the analysis. Our results suggest that if grants are large enough they can encourage already exporting firms to compete more effectively on the international market. However, there is little evidence that grants encourage non-exporters to start exporting.
    Keywords: difference-in-differences; exporting; propensity score matching; subsidies
    JEL: F2 H2 L2 O3
    Date: 2007–01
  24. By: Rudolfs Bems (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Luca Dedola (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Frank Smets (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper investigates the role of three likely factors in driving the steady deterioration of the US external balance: US technology developments, changes in the US government fiscal position and the Fed’s monetary policy. Estimating several Vector Autoregressions on US data over the period 1982:2 to 2005:4 we identify five structural shocks: a multi-factor productivity shock; an investment-specific technology shock; a monetary policy shock; and a fiscal revenue and spending shock. Together these shocks can account for the deterioration and subsequent reversal of the trade balance in the 1980s. Productivity improvements and fiscal and monetary policy easing also play an important role in the increase of the external deficit since 2000, but these structural shocks can not explain why the trade balance deteriorated in the second half of the 1990s. JEL Classification: F3, F4.
    Keywords: global imbalances, open economy, VARs.
    Date: 2007–01

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