nep-int New Economics Papers
on International Trade
Issue of 2007‒02‒24
24 papers chosen by
Martin Berka
Massey University

  1. Foreign direct investment and China's bilateral intra-industry trade with Japan and the US By Xing, Yuqing
  2. Estimating Trade Flows: Trading Partners and Trading Volumes By Elhanan Helpman; Marc Melitz; Yona Rubinstein
  3. Outsourcing Tariff Evasion: A New Explanation for Entrepôt Trade By Fisman, Raymond; Moustakerski, Peter; Wei, Shang-Jin
  4. Environmental Impact of Customs Union Agreement with EU on Turkey’s Trade in Manufacturing Industry By Elif Akbostanci; G. Ipek Tunc; Serap Turut-Asik
  6. The Trade Reducing Effects of Market Power in International Shipping By David Hummels; Volodymyr Lugovskyy; Alexandre Skiba
  7. Modelling Euro-Mediterranean Agricultural Trade By Garcia-Alvarez-Coque, Jose-Maria; Martinez-Gomez, Victor; Villanueva, Mique
  8. Racial Discrimination and Trade Unionism. By Orley Ashenfelter
  9. Trade in Business Services in General Equilibrium By Markusen, James R.; Strand, Bridget
  10. Inefficient policies, inefficient institutions and trade By Rubén Segura-Cayuela
  11. Assessing Euro-Med trade preferences: the case of entry price reduction By Martinez-Gomez, Victor
  12. Cost effectiveness of R&D and strategic trade policy By Praveen Kujal; Juan Ruiz
  13. Neighborhood effects in economic growth By Josep M. Vilarrubia
  14. Global Trade Models and Economic Policy Analyses: Relevance, Risks and Repercussions for Africa By Ben Hammouda, Hakim; Osakwe, Patrick N.
  15. Reform-creating regional trade agreements and foreign direct investment: applications for East Asia By Park, Innwon; Park, Soonchan
  16. Risks to Global Trade and Implications for South Africa’s Economy and Policy By Jeremy Wakeford
  17. Country Size and the Transfer Effect By Vahagn Galstyan
  18. Power and Plenty: Trade, War and the World Economy in the Second Millennium (Preface) By Ronald Findlay; Kevin H. O'Rourke
  19. Preferences for Protectionism: Do economic factors really matter? By Natalia Melgar; Juliette Milgram; Máximo Rossi
  20. Protection, Openness and Factor Adjustment: Evidence from the manufacturing sector in Uruguay By Carlos Casacuberta; Néstor Gandelman
  21. US Imbalances: The Role of Technology and Policy By Bems, Rudolfs; Dedola, Luca; Smets, Frank
  22. Emerging Issues and Concerns of African Countries in the WTO Negotiations on Agriculture and the Doha Round By Osakwe, Patrick N.
  23. Trade, Education and Skills: A Theoretical Survey By Rossana Patrón
  24. Bangladesh Apparels Export to the US Market: An Examination of Her Competitiveness vis-à-vis China By Mustafizur Rahman; Asif Anwar

  1. By: Xing, Yuqing (BOFIT)
    Abstract: This paper analyzes dynamic changes of China's intra-industry trade with its major trading partners, Japan and the US, from 1980 to 2004. It also investigates to what extent foreign direct investment promoted intra-industry trade. The empirical results show that, while shares of China's intra-industry trade with both Japan and U.S rose substantially, its intra-industry trade with Japan has reached 35 per cent of the overall trade, considerably larger than 10 per cent with the US. Sino-Japan intra-industry trade concentrated in the electrical and machinery sectors accounted for 52 per cent and 46 per cent of overall trade respectively. On the other hand, it is in the chemical and food sectors where intra-industry trade represented a relatively large proportion of Sino-US trade, 50 per cent and 30 per cent accordingly in each sector. In addition, the analysis indicates that Japanese direct investment in China performed a significant role in enhancing intra-industry trade between Japan and China. However, it found no evidence that the US direct investment in China contributed to the growth of the bilateral intra-industry trade between the two countries.
    Keywords: intra-industry trade; FDI; China
    JEL: F14 F23
    Date: 2007–01–16
  2. By: Elhanan Helpman; Marc Melitz; Yona Rubinstein
    Abstract: We develop a simple model of international trade with heterogeneous firms that is consistent with a number of stylized features of the data. In particular, the model predicts positive as well as zero trade flows across pairs of countries, and it allows the number of exporting firms to vary across destination countries. As a result, the impact of trade frictions on trade flows can be decomposed into the intensive and extensive margins, where the former refers to the trade volume per exporter and the latter refers to the number of exporters. This model yields a generalized gravity equation that accounts for the self-selection of firms into export markets and their impact on trade volumes. We then develop a two-stage estimation procedure that uses a selection equation into trade partners in the first stage and a trade flow equation in the second. We implement this procedure parametrically, semi-parametrically, and non-parametrically, showing that in all three cases the estimated effects of trade frictions are similar. Importantly, our method provides estimates of the intensive and extensive margins of trade. We show that traditional estimates are biased, and that most of the bias is not due to selection but rather due to the omission of the extensive margin. Moreover, the effect of the number of exporting firms varies across country pairs according to their characteristics. This variation is large, and particularly so for trade between developed and less developed countries and between pairs of less developed countries.
    JEL: F10 F12 F14
    Date: 2007–02
  3. By: Fisman, Raymond; Moustakerski, Peter; Wei, Shang-Jin
    Abstract: Traditional explanations for indirect trade through an entrepôt have focused on savings in transport costs and on the role of specialized agents in processing and distribution. We provide an alternative perspective based on the possibility that entrepôts may facilitate tariff evasion. Using data on direct exports to mainland China and indirect exports via Hong Kong SAR, we find that the indirect export rate rises with the Chinese tariff rate, even though there is no legal tax advantage to sending goods via Hong Kong SAR. We undertake a number of extensions to rule out plausible alternative hypotheses based on existing explanations for entrepôt trade.
    Keywords: corruption; middleman; tax evasion
    JEL: F1 H2
    Date: 2007–02
  4. By: Elif Akbostanci (Department of Economics, METU); G. Ipek Tunc (Department of Economics, METU); Serap Turut-Asik (Department of Economics, METU)
    Abstract: In this study, we analyze Turkey’s manufacturing industry trade by estimating sectoral import and export demand equations for 1980-2000. The study aims to understand whether the trade in the manufacturing industry complies with pollution haven hypothesis, and whether the free trade environment provided by the customs union (CU) agreement altered the trade pattern of the clean and dirty industries. Results of our econometric models have shown that while CU positively affects the import demand, it does not have any significant impact on the export demand of Turkish manufacturing industry. In terms of the environmental impact, distinction between clean and dirty industries turns out to be significant for both import and export demand. In general, our findings suggest that both clean and dirty industries’ import demand increase during the study period. In terms of export demand, clean industries’ export demand declines whereas dirty industries’ export demand increases compared to the total demand.
    Keywords: Environmental impact analysis, EU, Turkey, manufacturing industry
    Date: 2006–03
  5. By: Valeria Costantini
    Abstract: The aim of this paper is to give a broad overview of the main issues faced by developing countries in a context of trade liberalization as part of the multilateral agricultural trade negotiations in the WTO Doha Round. The bargaining positions of developing countries in the Doha Round are described. A comparison of empirical results on possible outcomes of a Doha Round agreement follows with a focus on impacts in terms of poverty reduction. Results are then analyzed using the main theoretical findings on trade-poverty links and the specific role of preference erosion in order to shed some light on potential failures of a trade reform in the absence of complementary policy actions.
    Keywords: Agriculture, Developing Countries, Multilateral Trade Negotiations,
    JEL: F13 I32 Q17
    Date: 2007–12
  6. By: David Hummels; Volodymyr Lugovskyy; Alexandre Skiba
    Abstract: Developing countries pay substantially higher transportation costs than developed nations, which leads to less trade and perhaps lower incomes. This paper investigates price discrimination in the shipping industry and the role it plays in determining transportation costs. In the presence of market power, shipping prices depend on the demand characteristics of goods being traded. We show theoretically and estimate empirically that shipping firms charge higher prices when transporting goods with higher product prices, lower import demand elasticities, and higher tariffs, and when facing fewer competitors on a trade route. These characteristics explain more variation in shipping prices than do conventional proxies such as distance, and significantly contribute to the higher shipping prices facing the developing world. Markups increase shipping prices by at least 83 percent for the mean shipment in Latin American imports. Our findings are also important for evaluating the impact of tariff liberalization. Shipping firms decrease prices by 1-2 percent for every 1 percent reduction in tariffs.
    JEL: F15 L91 O19
    Date: 2007–02
  7. By: Garcia-Alvarez-Coque, Jose-Maria; Martinez-Gomez, Victor; Villanueva, Mique
    Abstract: This paper examines the methodological problems to define a modelling approach to assess the impact of full or limited bilateral liberalisation of agricultural trade flows in the Euro-Mediterranean region. The bilateral trade liberalisation process in the region is framed by complexity, in policy instruments and in the characteristics of the products, in particular fruits and vegetables. Advantages and disadvantages of the general equilibrium and partial equilibrium approaches to simulate trade policy impacts are assessed. Caveats of existing models are related to the representation of specific policy instruments (tariffs, entry prices and other non-tariff measures) and on the seasonal nature of horticultural trade, which is of major importance in the Euro-Mediterranean Free Trade Are. The paper provides an illustration of how an imperfect substitute product model could be helpful to describe the trade effects of bilateral price changes, for given seasons.
    JEL: Q00 F13
    Date: 2006–02–02
  8. By: Orley Ashenfelter
  9. By: Markusen, James R.; Strand, Bridget
    Abstract: Trade in business services has been attracting attention from academic researchers, policy makers, and business journalists. While there are many anecdotes, there has been little in the way of formal theory applied to this issue. In this paper, we adapt a general model of fragmentation of production activities to try to capture the specific features of business services. Following a general discussion, we calibrate a numerical general-equilibrium simulation model to a situation in which both trade and foreign investment in services are initially banned to technically infeasible. We then compute three counter-factual scenarios: one in which trade but not investment in services is feasible or allowed, one in which investment but not trade is allowed, and one in which both trade and investment in services are allowed.
    Keywords: business services; foreign investment in services; fragmentation; offshoring; outsourcing; trade in services
    JEL: F0 F23
    Date: 2007–02
  10. By: Rubén Segura-Cayuela (Banco de España)
    Abstract: Despite the general belief among economists on the growth-enhancing role of international trade and significant trade opening over the past 25 years, the growth performance of many developing economies, especially of those in Latin America and Africa, has been disappointing. While this poor growth performance has many potential causes, in this paper I argue that part of the reason may be related to the interaction between weak institutions and trade. In particular, I construct a model in which trade opening in societies with weak institutions (in particular autocratic and elite-controlled political systems) may lead to worse economic policies. The reason is that general equilibrium price effects of taxation and expropriation in closed economies also hurt the elites, and this puts a natural barrier against inefficient policies. Trade openness removes this barrier and enables groups with political power to exercise this power in more inefficient ways.
    Keywords: institutions, political economy, expropriation, property rights, international trade
    JEL: O10 P16 F10
    Date: 2006–12
  11. By: Martinez-Gomez, Victor
    Abstract: The EU protects some of its fruits and vegetables through the entry price system. This system consists on a two-tiered tariff, with high-priced exports paying an ad valorem tariff, whereas low-priced exports pay also a supplementary specific tariff. The breaking point between high and low export prices is the entry price level decided by the EU, generally the same level for all third countries. In a few cases, some Southern Mediterranean partners of the EU have agreed a reduced entry price for their exports, together with the more common ad valorem tariff reduction. Among the indicators used for gauge the value of preferences, there is no one devoted to this case of reduced entry price, hence we develop a new indicator that allows to split which part of the preferential gains corresponds to the entry price reduction and which part corresponds to the “usual” ad valorem tariff reduction. We apply this methodology to Moroccan clementines trade flows, with two main findings: 1) The entry price reduction ranges up to 39% of the economic value of preferences in some months; 2) Morocco is not maximizing the gains due to this reduction, and could take some trade and policy lessons, mainly trying to better fit to the concession or, if impossible, use it as negotiating capital in future reviews of the agreement.
    Keywords: Euro-Mediterranean Trade; trade preferences; fruits and vegetables; entry price regime
    JEL: Q17 F13
    Date: 2007–02–10
  12. By: Praveen Kujal (Universidad Carlos III de Madrid); Juan Ruiz (Banco de España)
    Abstract: This paper analyzes the incentives for governments to impose export subsidies when firms invest in a cost saving technology before market competition. Governments first impose an export subsidy or a tax. After observing export policy, firms invest in cost reducing R&D and subsequently compete in the market. Governments subsidize exports under Cournot competition. Under Bertrand competition, export subsidies are positive whenever R&D is sufficiently cost-effective at reducing marginal costs, and negative otherwise. The trade policy reversal found in models without endogenous sunk costs disappears if R&D is sufficiently cost-effective. Thus, output subsidies seem more robust than implied by the recent literature.
    Keywords: product differentiation, strategic trade policy, policy reversals, r&d
    JEL: F12 F13 L13
    Date: 2007–02
  13. By: Josep M. Vilarrubia (Banco de España)
    Abstract: One of the most striking features of the world economy is that wealthy countries are clustered together. This paper theoretically and empirically explains a mechanism for this clustering by extending the Acemoglu and Ventura model so that it takes real geography into account. Countries close to fast growing economies experience faster growth in aggregate demand for their exports, stimulating faster domestic growth. As a result, a poor country that is surrounded by other poor countries finds it more difficult to grow because its terms of trade shift against it. When this model is estimated on data for 1965 to 1985, we find statistically and economically significant effects. If the typical European country were located in Africa, these terms of trade effects would have lowered its growth rate by almost 1 percentage point per year. The results strongly suggest that it is very difficult to raise income in poor countries without dealing with regional problems.
    Keywords: economic growth, economic geography, international trade, terms of trade, empirical
    JEL: F12 F15 F43 O11 O19
    Date: 2006–10
  14. By: Ben Hammouda, Hakim; Osakwe, Patrick N.
    Abstract: Computable general equilibrium (CGE) models are widely used for trade policy analyses and recommendations. Simulation results from these models have also been used as a basis for offering advice to African countries on what positions to take in multilateral trade negotiations. There is however increasing discomfort with the use of these models for policy recommendations, especially in Africa. In this paper we compare the results of several CGE studies that examined the impact of potential Doha Round reforms on Africa and demonstrate that the results differ drastically both in terms of magnitude and direction. Part of the discrepancies in results can be explained by differences in database, model structure, and choice of parameters. Others are, however, difficult to explain because several studies either do not report key assumptions made or do not provide a clear description of how their framework differs from those in the literature. We also show that the modelling approach and the database used in most CGE studies do not take account of key features of African economies that have serious implications for the impact of trade reforms on Africa. Finally, we outline potential consequences of the misuse of CGE models for policy evaluation and suggest pitfalls to avoid if CGE model results are to be taken seriously by policy makers in Africa.
    Keywords: Trade Reforms; CGE Models; Doha Round; Africa
    JEL: F15 F13 F11
    Date: 2006–12
  15. By: Park, Innwon; Park, Soonchan
    Abstract: The spread of regional trade agreements (RTAs) is strongly motivated by the desire for more foreign direct investment (FDI) flows. The net benefits from freer capital flows are expected to trigger a domino effect of new regionalism. However, this is still an empirical question to be tested, especially for the case of East Asia. This paper quantitatively estimates the investment creation and diversion effects of RTAs by using an extended gravity equation focusing on domestic reform as a commitment device for RTA membership. As a case study, we investigate whether reform-minded less developed countries (LDCs) can trigger this domino effect by actively participating in RTAs. Moreover, in order to search for the most preferable member pair among the proposed East Asian RTAs, we estimate the likely impact of the East Asian RTAs on inward FDI stock. From our empirical analyses, we find that (i) reform-creating RTA membership, larger market size, better skilled labor, and lower trade costs all contribute positively and significantly to inward FDI stock; (ii) reformatory LDCs attract more FDI in addition to the investment creation effect of their RTA membership; and (iii) most of proposed East Asian RTAs promote intra-bloc FDI. In particular, both South-North and North-North RTA such as an ASEAN-Japan and a Japan-Korea RTA prove to be more preferable membership combinations to South-South RTAs in East Asia.
    Keywords: regional trade agreements; reform; foreign direct investment; gravity; East Asia
    JEL: F15 F21 O53
    Date: 2006–11–18
  16. By: Jeremy Wakeford (School of Economics, University of Cape Town)
    Abstract: Abstract: The past two decades have witnessed an unprecedented globalisation of trade in goods and services. This process has been driven, inter alia, by technology, ideology and the availability of relatively cheap energy. By extrapolating this trend, one may expect further integration of world markets and increasingly unhindered international trade. However, there is mounting evidence of significant risks to global trade, at least in goods and possibly in certain services as well. Three main risk areas are identified here: (1) fossil fuel depletion, in particular a possible peak in world oil production within the next five to ten years; (2) climate change, and especially its effects on agricultural production, transport and financial risk; and (3) instability in the world financial system caused primarily by the US’s unsustainable twin deficits. The paper explores some possible implications of these risks for the South African economy and its foreign trade in particular. It argues that South Africa’s trade policy should take due cognizance of these threats, and advocates adaptation and mitigation strategies designed to improve self-sufficiency and to protect the poor in sensitive areas, especially food and energy security.
    Keywords: Sector-Specific Policies and Regulations, SMEs
    JEL: A1
    Date: 2006–07
  17. By: Vahagn Galstyan
    Abstract: This paper studies how country size affects the role of the exchange rate in external adjustment. First, the impact of country size on the sensitivity of relative prices to external imbalances is explored in a standard two-country neoclassical model. Second, at the empirical level, a significant effect of external imbalances on relative prices is found. In particular, a trade surplus is associated with a deteriorating terms of trade and a declining relative price of non-traded goods, feeding into a depreciation of the real exchange rate. Estimation for G3 and non-G3 sub-samples reveals a systematic pattern in the sensitivity of relative prices to external imbalances, with the transfer effect stronger in larger countries.
    Keywords: External imbalances; Relative prices; Transfer effect; Country size
    Date: 2007–02–19
  18. By: Ronald Findlay; Kevin H. O'Rourke
    Abstract: This book provides the first systematic, integrated, analytical account of the evolution of the international economy during the last millennium. It emphasizes the two-way interaction between trade and geopolitics, and the importance of such interactions for world economic development.
    Date: 2007–02–19
  19. By: Natalia Melgar (Facultad de Ciencias Económicas, Universidad de la República); Juliette Milgram (Universidad de Granada); Máximo Rossi (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República)
    Abstract: A common scenario for international commerce is the existence of restrictions on free trade,even when the majority of economists agree on the benefits of it, whatever the country’s size or whatever the country’s economic development. In contexts where politicians offer different policy options and voters demand them based on their individual preferences, one may ask what determines individuals preferences on trade policy; which economic, cultural, social and elements shape them. Our goal in this paper is to address this issue for an heterogeneous sample of 34 countries which includes developed and developing countries and small and big ones. In this paper we use data from the 2003 International Social Survey Program (ISSP). Based on an ordered probit model, we conclude that elements such as religion, political preferences, and nationalism, as well as demographic characteristics and country performance, have a significant impact on trade policy preferences.
    Keywords: Preferences, protectionism, religion, nationalism, ISSP
    JEL: D01 F13
    Date: 2006–10
  20. By: Carlos Casacuberta (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Néstor Gandelman (Universidad ORT, Uruguay)
    Abstract: Using a panel of Uruguayan manufacturing firms we analyze the adjustment process in capital, blue collar and white collar employment. Our results confirm the lumpy nature of factor adjustment, the relevance of nonlinearities and the interdependence between factor shortages. The average annual estimated output gap due to adjustment cost for1982-1995 was 2%. Trade openness affected the adjustment functions of all three factors. Highly protected sectors adjust less when creating jobs (reducing labor shortages) than sectors with low protection. This may be due to fears of policy reversal in highly protected sectors. Also, highly protected sectors adjust more easily (than low protection sectors) when destroying jobs (reducing labor surpluses), especially in the case of blue collar labor. This suggests that trade protection may in fact destroy rather than create jobs within industries, as firms in highly protected sectors are more reluctant to hire and more ready to fire than firms in sectors with low protection. The results for capital are qualitatively similar but quantitatively smaller. Overall the impact of higher international exposure is larger for blue collar workers than white collar workers.
    Keywords: Adjustment costs, Adjustment functions, Openness
    JEL: F16 E22 J23
    Date: 2006–09
  21. By: Bems, Rudolfs; Dedola, Luca; Smets, Frank
    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.
    Keywords: global imbalances; open economy; VARs
    JEL: F3 F4
    Date: 2007–02
  22. By: Osakwe, Patrick N.
    Abstract: Since the Uruguay Round, African countries have been concerned about the rules and operations of the multilateral trading system and are beginning to realize that they have to be active in the negotiation process to protect their interests. Consequently, several countries in the region have been relatively more active in the Doha Round negotiations and have formed alliances with other developing countries to increase their bargaining power. This paper provides a critical assessment of Africa’s concerns in the negotiations on agriculture and the Doha Round. It also examines the extent to which the Hong Kong Ministerial declaration meets the demands of African countries in the agriculture negotiations. Furthermore, it outlines essential elements of any new agreements on agriculture that would ensure a fair outcome for the region. Finally, the paper stresses that trade is important for development in Africa but is not the solution to the numerous economic and social problems facing the region. Consequently, African countries must adopt a strategic approach to trade which ensures that their participation in the Doha Round reforms does not jeopardize the achievement of key national development goals.
    Keywords: Doha Round; WTO Negotiations; Agriculture; Africa; Concerns
    JEL: O19 O13 F13
    Date: 2006–02
  23. By: Rossana Patrón (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República)
    Abstract: This paper reviews the literature that relates trade, education and skills formation,intending to provide a theoretical background to policy discussions in education matters. The paper is organised as follows. Section 1 summarises the literature on education and human capital in trade models. Section 2 focuses on education as an investment and the process of human capital accumulation. Section 3 deals with the returns to education. Section 4 analyses the economic literature on the education production function and on issues of effectiveness, efficiency and quality. Section 5 discusses the public provision of education. Section 6 presents some concluding remarks.
    Keywords: public education, economics of education, trade
    JEL: I21 I28 F16
    Date: 2006–10
  24. By: Mustafizur Rahman; Asif Anwar
    Abstract: The paper tries to focus whether China's ascendancy will have any tangible impact on Bangladesh's export oriented RMG sector and identifies some of the apparel categories in which both the countries have common interests in the US market by analyzing the RCA index and recent performance of both the countries in view of the recent US-China MoU. The paper tries to assess the impact of China's accession to the WTO on Bangladesh's export oriented apparels sector by undertaking an indepth examination of the relative competitiveness correlates of Bangladesh and China in the US market and study their implications for Bangladesh's apparels export to the US market. Towards this, the study investigates the export performance of Bangladesh and China in the US market and price dynamics, and identifies the sources of strengths and weaknesses of Bangladesh vis-à-vis China.
    Keywords: Apparels, Export, US market, China, Bangladesh
    Date: 2006–11

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