nep-int New Economics Papers
on International Trade
Issue of 2007‒03‒10
27 papers chosen by
Martin Berka
Massey University

  1. International Trade Efficiency, the Gravity Equation, and the Stochastic Frontier By Heejoon Kang; Michele Fratianni
  2. Institutions, infrastructure, and trade By Francois, Joseph; Manchin, Miriam
  3. Size of Regional Trade Agreements and Regional Trade Bias By Michele Fratianni; Chang Hoon Oh
  4. Trade integration in East Asia : the Role of China and production networks By Haddad, Mona
  5. Market structure and market access By Francois, Joseph; Wooton, Ian
  6. China’s Trade and Growth: Impact on Selected OECD Countries By Malory Greene; Nora Dihel; Przemyslaw Kowalski; Douglas C. Lippoldt
  7. The “deeper” and the “wider” EU strategies of trade integration.An empirical evaluation of EU Common Commercial Policy effects. By Roberta De Santis; Claudio Vicarelli
  8. The impact of trade with China and India on Argentina ' s manufacturing employment By Castro, Lucio; Olarreaga, Marcelo; Saslavsky, Daniel
  9. International Terrorism, International Trade, and Borders By Michele Fratianni; Heejoon Kang
  10. Trade and Trade Policy with Differentiated Products: A Chamberlinian-Ricardian Model: A Comment By Svetlana Demidova; Kala Krishna
  12. A South American Perspective: Regional versus Global Trade Patterns By Diego Agudelo; Galia Julieta Benitez; Larry Davidson
  13. The Gravity of Globalization By Diego Agudelo; Larry Davidson
  14. The First World War and coal trade geography in Latin America and the Caribbean (1890-1930) By Anna Carreras Marin; Marc Badia Miro
  15. Examining the Trade Effect of Certain Customs and Administrative Procedures By Norbert Wilson
  16. Dynamic Gains from Trade By Hildegunn Kyvik Nordas; Sébastien Miroudot; Przemyslaw Kowalski
  17. The impact of Kazakhstan accession to the World Trade Organization : a quantitative assessment By Jensen, Jesper; Tarr, David
  18. The Welfare State and the Forces of Globalization By Hans-Werner Sinn
  19. Power and Plenty: Trade, War and the World Economy in the Second Millennium (Preface) By Ronald Findlay; Kevin H. O'Rourke
  20. Making Trade Policy in a New Democracy after a Deep Crisis: Indonesia By Kelly Bird; Sandy Cuthbertson; Hal Hill
  21. Trade in health services i n the ASEAN region By Arunanondchai, Jutamas; Fink, Carsten
  22. Technology Diffusion and Innovation - the importance of domestic and foreign sources By Lööf, Hans
  23. Does Offshoring Pay? Firm-Level Evidence from Japan By Alexander HIJZEN; INUI Tomohiko; TODO Yasuyuki
  24. A Reputation Model of Quality in North-South Trade By Eric Rasmusen
  25. Optimization in a Simulation Setting: Use of Function Approximation in Debt Strategy Analysis By David Jamieson Bolder; Tiago Rubin
  26. Information, Reputation and Ethnic Conflict By Dominic Rohner
  27. The Effects of Multinational Production on Domestic Performance: Evidence from Japanese Firms By Alexander HIJZEN; INUI Tomohiko; TODO Yasuyuki

  1. By: Heejoon Kang (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Michele Fratianni (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: In the gravity equation of international trade, bilateral trade flows are regressed on trading partners’ income and the distance that separates them along with other variables. This widely used equation is traditionally estimated by the ordinary least squares method. We employ an alternative technique of stochastic frontier estimation to assess the potential bilateral trade flows from the same gravity equation. Countries are shown to have low efficiencies in their international trade as the predicted trade from frontier estimation is generally far greater than actual trade. Trade efficiencies are computed and ranked for individual countries, ten geographical regions, and eleven regional trade agreements.
    Keywords: efficiency coefficients, OLS residuals, trade gravity, trade potentials
    JEL: F10 F14 C13
    Date: 2006–03
  2. By: Francois, Joseph; Manchin, Miriam
    Abstract: The authors examine the influence of infrastructure, institutional quality, colonial and geographic context, and trade preferences on the pattern of bilateral trade. They are interested in threshold effects, and so emphasize those cases where bilateral country pairs do not actually trade. The authors depart from the institutions and infrastructure literature in this respect, using selection-based gravity modeling of trade flows. They also depart from this literature by mixing principal components (to condense the institutional and infrastructure measures) with a focus on deviations in the resulting indexes from expected values for given income cohorts to control for multicollinearity. The authors work with a panel of 284,049 bilateral trade flows from 1988 to 2002. Matching bilateral trade and tariff data and controlling for tariff preferences, level of development, and standard distance measures, they find that infrastructure and institutional quality are significant determinants not only of export levels, but also of the likelihood exports will take place at all. Their results support the notion that export performance, and the propensity to take part in the trading system at all, depends on institutional quality and access to well-developed transport and communications infrastructure. Indeed, this dependence is far more important, empirically, than variations in tariffs in explaining sample variations in North-South trade.
    Keywords: Transport Economics Policy & Planning,Free Trade,Economic Theory & Research,Trade Law,Trade Policy
    Date: 2007–03–01
  3. By: Michele Fratianni (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Chang Hoon Oh (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: We test the relationship between size of regional trade agreement (RTA) and regional trade bias using a gravity equation on a large sample of 143 countries for the period 1980-2003. We find that regional trade bias declines with the size of the club and that three of the four expanding RTAs have already surpassed their ‘optimal’ sizes. There is no evidence that RTAs have set protection levels against outsiders noncooperatively.
    Keywords: RTA, regional trade bias, trade flows
    JEL: F13
    Date: 2007–01
  4. By: Haddad, Mona
    Abstract: Production networks have been at the heart of the recent growth in trade among East Asian countries. Fragmen tation trade, reflected mainly in the trade in parts and components, is expanding more rapidly than the conventional trade in final goods. This is mainly due to the relatively more favorable policy setting for international production, agglomeration benefits arising from the early entry into this new form of specialization, considerable intercountry wage differentials in the region, lower trade and transport costs, and specialization in products exhibiting increasing returns to scale. The economic integration of China has deepened production fragmentation in East Asia, countering fears of crowding out other countries for international specialization. International production fragmentation in East Asia has intensified intraregional trade but has depended heavily on extraregional trade in final goods. While production networks centered on China have contributed significantly to growth in East Asia, they also breed vulnerabilities. They have not automatically led to technology spillovers and have led to an extreme interdependence across East Asian countries.
    Keywords: Economic Theory & Research,Free Trade,Trade Policy,Trade Law,Technology Industry
    Date: 2007–03–01
  5. By: Francois, Joseph; Wooton, Ian
    Abstract: The authors examine an issue at the nexus of domestic competition policy and international trade, the inte raction between goods trade and market power in domestic trade and distribution sectors. Theory suggests a set of linkages between service-sector competition and goods trade supported by econometrics involving imports of 22 OECD countries compared with 69 exporters. Competition in services affects the volume of goods trade. Additionally, because of interaction between tariffs and competition, the market structure of the domestic service sector becomes increasingly important as tariffs are reduced. Empirically service competition apparently matters most for exporters in smaller, poorer countries. The results also suggest that while negotiated agreements leading to cross-border services liberalization may boost goods trade as well, they may also lead to a fall in goods trade when such liberalization involves foreign direct investment leading to increased service sector concentration.
    Keywords: Markets and Market Access,Economic Theory & Research,Free Trade,Access to Markets,Trade Policy
    Date: 2007–03–01
  6. By: Malory Greene; Nora Dihel; Przemyslaw Kowalski; Douglas C. Lippoldt
    Abstract: This paper examines China's emergence as a global player in international markets over the last few decades. It provides an overview of China's trade policy environment following the country's process of market opening and joining the WTO. The report analyses China’s role in international processing activities and moving up the global value chain. It also examines China’s impact on world prices and the deterioration of its own terms of trade. The paper looks at China's two-pronged export...
    Keywords: telecommunications, investment, trade and growth, trade policy, insurance, banking, intellectual property rights, computable general equilibrium, value chain, China, services trade, trade restrictiveness index
    Date: 2006–11–28
  7. By: Roberta De Santis (ISAE - Institute for Studies and Economic Analyses); Claudio Vicarelli (ISAE - Institute for Studies and Economic Analyses)
    Abstract: Since the post war period, the EU Common Commercial Policy (CCP) has moved in two directions mainly through of Preferential Trade agreements (PTAs): a “deeper” (internal) trade integration process intended to reinforce trade relations among European countries (i.e. Custom Union, Single Market, European Monetary Union, Enlargement Process), and a “wider” (external) integration process intended to reinforce trade relations with third countries.Surprisingly, there are very few empirical studies in the literature which specifically quantify the effects of “all” EU PTAs on the European countries’ trade flows. This paper seeks to fill this gap by conducting an empirical investigation on whether and how the CCP has had a significant impact on European countries’ imports. It adopts an extended version of the gravity model. In line with recent studies, it also controls for heterogeneity and bilateral trends, and includes a set of variables to proxy for the “multilateral resistance index”. According to our results, the EU “free trade area” has been a successful experiment in trade liberalisation. However, the positive and significant coefficient of PTAs signed by EU with third countries may somehow have limited the occurrence of trade diversion effects. Indeed the coefficient of trade diversion dummy is small and significant.
    Keywords: trade flows, regional integration, gravity model, panel data
    JEL: F13 F15 C13 C23
    Date: 2007–03
  8. By: Castro, Lucio; Olarreaga, Marcelo; Saslavsky, Daniel
    Abstract: For many in Latin America, the increasing participation of China and India in international markets is seen as a looming shadow of two " mighty giants " on the region ' s manufacturing sector. Are they really mighty giants when it comes to their impact on manufacturing employment? The authors attempt to answer this question by estimating the effects of trade with China and India on Argentina ' s industrial employment. They use a dynamic econometric model and industry level data to estimate the effects of trade with China and India on the level of employment in Argentina ' s manufacturing sector. Results suggest that trade with China and India only had a small negative effect on industrial employment, even during the swift trade liberalization of the 1990s.
    Keywords: Labor Markets,Free Trade,Economic Theory & Research,Water and Industry,Trade Policy
    Date: 2007–03–01
  9. By: Michele Fratianni (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Heejoon Kang (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: This paper shows that terrorism reduces bilateral trade flows, in real terms, by raising trading costs and hardening borders. Countries sharing a common land border and suffering from terrorism trade much less than neighboring or distant countries that are free of terrorism. The impact of terrorism on bilateral trade declines as distance between trading partners increases. This result suggests that terrorism redirects some trade from close to more distant countries. Our findings are robust in the presence of a variety of other calamities such as natural disasters or financial crises.
    Keywords: financial crisis, natural disaster, trade gravity model, transaction cost
    JEL: F13 F02 C33
    Date: 2006
  10. By: Svetlana Demidova; Kala Krishna
    Abstract: This paper shows that the results of Venables (1987) depend critically on the assumption that there are no fixed costs of trade. The introduction of fixed costs of exporting, while making the model more consistent with the empirical evidence, leads to the opposite conclusion that technological progress in one country cannot harm the welfare of its trading partner. However, the results can be obtained in a richer setting with heterogeneous firms.
    JEL: F1
    Date: 2007–03
  11. By: Christian Jaramillo; Jorge Tovar
    Abstract: The objective of this paper is to measure the impact of trade on the sectoral labor markets. Using the Colombian National Household Survey and comparable trade-related data, we study how changes in trade policy affect the sectoral demands for labor, as measured by the change in wages and employment. We develop a structural model and estimate its reduced form specification to determine an elasticity between measures of sectoral tariffs and labor demand, correcting for tariff endogeneity. The data used covers the period of 1984 through 1999. This allows us to take advantage of the natural experiment represented by the Colombian trade liberalization process of the early nineties. The results suggest that sector tariff levels over the period are positively correlated with their employment levels, but only for tradable sectors. In the case of wages, there is no evidence that they were affected by the trade reform.
    Date: 2006–08–05
  12. By: Diego Agudelo (EAFIT University); Galia Julieta Benitez; Larry Davidson (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: This study presents evidence of the increasing regionalization of the international trade of ten South American countries from 1980 to 2001. We found that the regionalization of trade in South America is best described as an increasing trade among Spanish-speaking countries and increasing trade within the two regional agreements: Andean Community and Mercosur. We also find evidence of border erosion in the continent, especially among the Mercosur members. These results are evident in a simple statistical analysis and are also economically significant when tested in a consistent gravity equation that controls for a set of macroeconomic and geographic variables.
    Date: 2006
  13. By: Diego Agudelo (EAFIT University); Larry Davidson (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: Can changes in the trade of the world’s largest trading countries be considered more global? Or should they be labeled as more regional? We investigated these questions for the G7 countries for the time period from 1980 to 1997. We found that the usual dichotomy of global-regional is not rich enough to answer these questions because globalization can be measured in terms of both physical and cultural distance. Our new taxonomy allows for testing these separate impacts on world trade and suggests that trade changes are best described as regional, though with some qualification. With respect to physical distance, we find that trade is clearly becoming more regional. On the cultural dimension, however, we find conflicting results. These results are robust to a series of tests. We find the same pattern at industry level, except for Paper Products and Motor Vehicles. The regionalization pattern holds for both imports to and exports from the G7, but it is stronger for exports.
    Date: 2006
  14. By: Anna Carreras Marin; Marc Badia Miro (Universitat de Barcelona)
    Abstract: This paper aims to illustrate the dynamics of coal trade between Latin America and its main trade partners, i.e. the USA, Great Britain and Germany, before and after the enormous disruption caused by the First World War. The coal trade was used as an indicator of modernization for Latin American countries, given that oil was at that time of secondary importance. Energy imports have determined the possibilities of each Latin American country in its process of development. Here we address this question and place special emphasis on supply channels, concluding that the trade link with main suppliers was of key significance. Although this was very clear by the end of the period, the process had started well before the First World War, at least for the majority of LA&C countries. These points are developed through a gravity model applied to the bilateral coal trade. The importance of the market supplier share is addressed through cluster methodologies.
    Keywords: coal trade, latin american and caribbean trade, economic geography, economic trade dependency
    JEL: N76 F19 N16
    Date: 2007
  15. By: Norbert Wilson
    Abstract: Recent research at OECD provides new evidence that customs and administrative procedures have substantial effects on trade flows. Although customs and administrative procedures are necessary for the smooth application of trade and other policies, they can ?thicken? the borders between trading partners if the customs and administrative procedures are more stringent than necessary or...
    Date: 2007–01–26
  16. By: Hildegunn Kyvik Nordas; Sébastien Miroudot; Przemyslaw Kowalski
    Abstract: The post world war II era has been characterized by unprecedented growth in the world economy and progressive reduction in barriers to international trade and investment. The objective of this study is to assess to what extent the observed growth and deepening international economic integration are related. It begins by discussing the concept of dynamic gains from trade. Narrowly defined, dynamic gains are traderelated changes in the long-run rate of productivity growth. Although there is no conclusive evidence that...
    Keywords: international trade, productivity growth, FDI
    Date: 2006–11–24
  17. By: Jensen, Jesper; Tarr, David
    Abstract: In this paper the authors use a computable general equilibrium model of the Kazakhstan economy to assess the impact of accession to the World Trade Organization (WTO), which encompasses (1) improved market access; (2) Kazakhstan tariff reduction; (3) reduction of barriers against entry by multinational service providers; and (4) reform of local content and value-added tax policies confronting multinational firms in the oil sector. They assume that foreign direct investment in business services is necessary for multinationals to compete well with Kazakstan business services providers, but cross-border service provision is also present. The model incorporates productivity effects in both goods and services markets endogenously, through a Dixit-Stiglitz framework. The authors estimated the ad valorem equivalent of barriers to foreign direct investment based on detailed questionnaires completed by specialized research institutes in Kazakhstan. They estimate that Kazakhstan will gain about 6.7 percent of the value of Kazakhstan consumption in the medium run from WTO accession and up to 17.5 percent in the long run. They estimate that the largest gains to Kazakhstan will derive from liberalization of barriers against multinational service providers, but the other three elements of WTO accession that the authors model all contribute positively to the estimated gains. Piecemeal sensitivity analysis shows that qualitatively the results are robust, but there are four parameters in the model that significantly affect the estimated magnitude of the gains from WTO accession.
    Keywords: Economic Theory & Research,Transport Economics Policy & Planning,Free Trade,ICT Policy and Strategies,Investment and Investment Climate
    Date: 2007–03–01
  18. By: Hans-Werner Sinn
    Abstract: The emergence of the Asian tiger countries and the participation of the ex-communist countries in world trade has reduced the equilibrium price of labor in western Europe and elsewhere. However, the actual price of labor hardly reacts, because the welfare state's minimum replacement incomes are fixed. The rigidity of wages causes pathological overreactions of the European economy in terms of excessive capital exports, excessive immigration and excessive structural change towards the capital intensive export sectors. The overreactions cause unemployment, sluggish growth, a current account surplus and a high export volume, but may prevent gains from trade. Moving from a system of wage replacement incomes to one that pays wage subsidies would enable a more efficient economic reaction that would not jeopardize social goals but bring about more employment, growth and gains from trade.
    JEL: F11 F21 F22 H53 J64
    Date: 2007–03
  19. By: Ronald Findlay; Kevin H. O'Rourke (Department of Economics, Columbia University; Department of Economics, Trinity College)
    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.
    JEL: N00 N70 F10
    Date: 2007–02
  20. By: Kelly Bird; Sandy Cuthbertson; Hal Hill
    Abstract: This paper examines the recent political economy of trade policy in Indonesia against the backdrop of two key events: the deep economic crisis of 1997-98, and the transition from three decades of rapid growth under an authoritarian regime to a weaker but democratic state. We investigate both international and domestic trade policy. The international trade policy regime has remained largely open, perhaps surprisingly in view of the unpopularity of liberal economic policies in the wake of the crisis and the forces advocating more protectionist policies. However, this openness is precarious, and lacks both institutional and community opinion support. In contrast, while remaining largely open at the international border, domestic barriers to trade have increased. This conjunction of economic crisis and weak, democratic states is a common phenomenon in the developing world, and the lessons for trade policy from the Indonesian experience over this decade are therefore relevant to many other countries.
    Keywords: Trade Reform, Political Economy, Domestic Trade, Indonesia
    Date: 2007
  21. By: Arunanondchai, Jutamas; Fink, Carsten
    Abstract: Promoting quality health services to large population segments is a key ingredient to human and economic development. At its core, healthcare policymaking involves complex tradeoffs between promoting equitable and affordable access to a basic set of health services, creating incentives for efficiencies in the healthcare system, and managing constraints in government budgets. International trade in health services influences these tradeoffs. It presents opportunities for cost savings and access to better quality care, but it also raises challenges in promoting equitable and affordable access. Drawing on a research project of the ASEAN Economic Forum, this paper offers a discussion of trade policy in health services for the ASEAN region. It reviews the state of healthcare in the region, existing patterns of trade, and remaining barriers to trade. The paper also identifies policy measures that could further harness the benefits from trade in health services and address potential pitfalls that deeper integration may bring about.
    Keywords: Health Monitoring & Evaluation,Health Law,Population Policies,Health Economics & Finance,Disease Control & Prevention
    Date: 2007–03–01
  22. By: Lööf, Hans (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: This paper asks whether there is evidence of higher innovation output from firms where there is more foreign activity in terms of foreign direct investments (FDI), trade and collaboration on innovation, or if proximity between innovators is more important. With a sample of about two-thirds of Swedish firms with at least 10 employees and by accounting for selectivity and simultaneity biases, sector specific effects and firm specific effects, we find robust evidence for import spill over. There is also support for international knowledge transfer to the local firm from foreign units indicating the importance of both inward and outward FDI. We only find some weak find association between proximity to local partners and innovation. The most important aspect of the local milieu on innovation is skilled labour.
    Keywords: Innovation; knowledge spillovers; proximity; trade; FDI
    JEL: D21 F23 O23
    Date: 2007–02–28
  23. By: Alexander HIJZEN; INUI Tomohiko; TODO Yasuyuki
    Abstract: This paper explores the impact of offshoring, or contracting out of business activities to foreign providers, on firm productivity, using Japanese firm-level data for the period 1994-2000. We find that offshoring has generally a positive effect on productivity growth. This effect is robust to controlling for the possible endogeneity of offshoring with respect to unobserved productivity shocks. Our preferred specification suggests that a one percent increase in offshoring intensity raises productivity growth by 0.17 percent. For the average offshoring firm this implies a 1.8 percent increase in annual productivity growth. These results do not appear to depend much on either the level of technological sophistication of a firms' industry or a firms' international orientation. However, we find that the scope for productivity improvements from offshoring depends negatively on the initial level of productivity of the firm.
    Date: 2007–03
  24. By: Eric Rasmusen (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: Countries have different comparative advantages in quality. These might be due to technological differences, or to reputation differences of the sort described in Klein & Leffler (1981). Reputation differences are particularly interesting, since good reputations are a form of “social capital” that is amenable to modelling. They can explain why firms in these industries like to export even if the foreign price is no higher than the domestic one, and why governments would like to have large “high- value” sectors.
    Date: 2007
  25. By: David Jamieson Bolder; Tiago Rubin
    Abstract: This paper provides an analysis of how a firm’s decision to serve a foreign market by exporting or by engaging in foreign direct investment (FDI) affects firm productivity, when productivity is endogeneous as a function of training. The main result of our paper is that, with endogeneous productivity, exporting results in lower productivity than does FDI, but exporting may result in higher or lower employment and output than does FDI. We also show that FDI has lower employment, higher training, higher wages and higher productivity than does production for the home market. A further interesting and unexpected result of our model is that exporting results in the same level of training and productivity as does production for the home market. However, under the same demand conditions, the exporting firm employs less labour for foreign production than for home production and, consequently, output for the foreign market is lower than output for the home market. In addition, we investigate the firm's decision to serve the foreign market by exporting or by engaging in FDI and determine parameter values for which either regime is chosen.
    Keywords: International topics; Labour markets; Productivity
    JEL: F22 F23
    Date: 2007
  26. By: Dominic Rohner
    Abstract: Empirical studies have found ethnic cleavages to play an important role in the occurrence of civil conflict. Surprisingly, theoretical research on ethnic con.ict has been very scarce. In the present contribution a theoretical model of reputation and ethnic conflict is built. Depending on the information structure and the reputation cost of defecting, economic interaction can either result in (peaceful) trade or in appropriative conflict. Ethnic divisions affect the reputation cost of defection and therefore influence the conflict risk. It is shown what respective effects ethnic fractionalisation, polarisation and segregation have on the risk of conflict.
    Keywords: Conflict, Ethnicity, Reputation, Information, Trade
    JEL: C73 D74 F10 L14 Z13
    Date: 2006–11
  27. By: Alexander HIJZEN; INUI Tomohiko; TODO Yasuyuki
    Abstract: In the present paper we investigate the causal effect of becoming a multinational on home performance for a large panel of Japanese firms for the period 1995-2002. We adopt matching techniques in combination with a difference-in-difference estimator to evaluate the causal effect of establishing a foreign affiliate on productivity, output and employment. We find that Japanese outward FDI tends to strengthen the economic activities of Japanese firms in Japan in terms of both output and employment. This finding is in line with the stylized fact in the literature that FDI and exports are complements. However, we do not find a significant positive effect on productivity.
    Date: 2007–03

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