nep-int New Economics Papers
on International Trade
Issue of 2007‒05‒19
twenty-one papers chosen by
Martin Berka
Massey University

  1. Specialization Patterns and the Factor Bias of Technology By Cuñat, Alejandro; Maffezzoli, Marco
  2. Firms in International Trade By Andrew Bernard; J. Bradford Jensen; Stephen Redding; Peter Schott
  3. The Ebb and Flow of Comparative Advantage: Trade and the Industrial Specialization of Canadian Manufacturing Regions, 1974 to 1999 By Brown, W. Mark
  4. Is corruption anti labor? By Roy, Suryadipta
  5. What Can Researchers Learn From the Suspension of the Doha Round Negotiations in 2006? By Simon J. Evenett
  6. An Interim Assessment of the U.S. Trade Policy of “Competitive Liberalization” By Simon J. Evenett; Michael Meier
  7. Financial Aspects of Transactions with FDI: Trade Credit Provision by SMEs in China By Ito, Seiro; Watanabe, Mariko; Yanagawa, Noriyuki
  8. Economic Partnership between the ACP countries and the EU By Karel van Hoestenberghe; Hein Roelfsema
  9. Indian manufacturing : a slow sector in a rapidly growing economy By Ural, Beyza P.; Mitra, Devashish
  10. Trade, Knowledge, and the Industrial Revolution By O'Rourke, Kevin H; Rahman, Ahmed; Taylor, Alan M
  11. Prospects for Development of the Garment Industry in Developing Countries: What Has Happened Since the MFA Phase-Out? By Yamagata, Tatsufumi
  12. Have Countries with Lax Environmental Regulations a Comparative Advantage in Polluting Industries? By Quiroga, Miguel; Sterner, Thomas; Persson, Martin
  13. The Trade Strategy of the European Union: Time for a Rethink? By Simon J. Evenett
  14. EU Commercial Policy in a Multipolar Trading System By Simon J. Evenett
  15. Decentralized trade mitigates the lemons problem By Diego Moreno; John Wooders
  16. The Trade Policy Jungle: A Survival Guide for Academic Economists By Simon J. Evenett
  17. Do sunk exporting costs differ among markets? Evidence from Spanish manufacturing firms. By José Vicente Blanes Cristóbal; Marion Dovis; Juliette Milgram Baleix; Ana I. Moro Egido
  18. Innovation and Export of Vietnam’s SME Sector By Nguyen, Ngoc Anh; Pham, Quang Ngoc; Nguyen, Dinh Chuc; Nguyen, Duc Nhat
  19. Trade Credit Defaults and Liquidity Provision by Firms By Reint Gropp; Frederic Boissay
  20. Volatility, Labour Market Flexibility, and the Pattern of Comparative Advantage By Cuñat, Alejandro; Melitz, Marc J
  21. Productivity and Taxes as Drivers of FDI By Assaf Razin; Efraim Sadka

  1. By: Cuñat, Alejandro; Maffezzoli, Marco
    Abstract: Development accounting exercises based on an aggregate production function find technology is biased in favour of a country's abundant production factors. We provide an explanation to this finding based on the Heckscher-Ohlin model. Countries trade and specialize in the industries that use intensively the production factors they are abundantly endowed with. For given endowment ratios, this implies smaller international differences in factor price ratios than under autarky. Thus, when measuring the factor bias of technology with the same aggregate production function for all countries, they appear to have an abundant-factor bias in their technologies.
    Keywords: Development Accounting; Heckscher-Ohlin; International Trade; Simulation
    JEL: F1 F4 O4
    Date: 2007–05
  2. By: Andrew Bernard; J. Bradford Jensen; Stephen Redding; Peter Schott
    Abstract: Standard models of international trade devote little attention to firms. Yet of the 5.5 million firms operating in the United States in 2000, just 4 percent engaged in exporting, and the top 10 percent of these exporting firms accounted for 96 percent of U.S. exports. Since the mid 1990s, a large number of empirical studies have provided a wealth of information about the important role that firms play in mediating countries’ imports and exports. This research, based on micro datasets that track countries’ production and trade at the firm level, demonstrates that trading firms differ substantially from firms that solely serve the domestic market. Across a wide range of countries and industries, exporters have been shown to be larger, more productive, more skill- and capital-intensive, and to pay higher wages than non-trading firms.2 Furthermore, these differences exist even before exporting begins. The ex ante “superiority” of exporters suggests self-selection: exporters are more productive, not as a result of exporting, but because only the most productive firms are able to overcome the costs of entering export markets. It is precisely this sort of microeconomic heterogeneity that grants firms the ability to influence macroeconomic outcomes. When trade policy barriers fall or transportation costs decline, high-productivity exporting firms survive and grow while lower-productivity non-exporting firms are more likely to fail. This reallocation of economic activity across firms raises aggregate productivity and provides a new source of welfare gains from trade. Confronting the challenges posed by the analysis of micro data has shifted the focus of the international trade field from countries and industries towards firms and products. We highlight these challenges with a detailed analysis of how trading firms differ from non-trading firms in the United States. We show how these differences serve as the foundation of a series of recent heterogeneous-firm models that offer new insights into the causes and consequences of international trade. We then introduce a new set of stylized facts that emerge from analysis of recently available U.S. customs data. These transaction-level trade data track all of the products imported and exported by the U.S. firms to all of its trading partners from 1992 to 2000. They show that the extensive margins of trade – that is, the number of products firms trade as well as the number of countries they trade with – are central to understanding the well-known role of distance in dampening aggregate trade flows. We conclude with suggestions for further theoretical and empirical research.
    Date: 2007–04
  3. By: Brown, W. Mark
    Abstract: Utilizing a longitudinal micro data file of manufacturing plants (1974 to 1999), this study tests the effect of higher levels of trade on the level of industrial specialization experienced by regional manufacturing economies. Consistent with trade driven by comparative advantage, the analysis demonstrates that higher levels of export intensity (exports as a share of output) across regions are associated with greater industrial specialization. However, the analysis also shows that changes in export intensity are only weakly associated with changes in specialization. This occurs because comparative advantage tends to shift away from industries that account for a large share of regional manufacturing employment and towards industries that initially have lower shares. This ebb and flow of comparative advantage helps to explain why Canadian manufacturing regions have not become more specialized in an environment of increasing integration into the world market.
    Keywords: International trade, Manufacturing, Business performance and ownership, Business adaptation and adjustment, Regional and urban profiles
    Date: 2007–05–14
  4. By: Roy, Suryadipta
    Abstract: This paper investigates the effect of corruption on trade openness in low-income and high-income countries. The results suggest corruption is anti-labor, since it reduces trade in low-income countries and increases trade in high-income countries.
    Keywords: Openness; corruption; Stolper-Samuelson effects.
    JEL: F1 O17 D73
    Date: 2007–05–07
  5. By: Simon J. Evenett
    Abstract: The Doha Round of multilateral trade negotiations was suspended for almost six months in 2006. The purpose of this paper is to ask what scholars can learn about the political economy of reciprocal trade liberalisation from this suspension. Specifically, four potential explanations for this suspension are examined and, in turn, these suggest a number of questions that researchers and interested analysts may wish to pursue in the future.
    Keywords: Trade policy, WTO, Doha Round, multilateral trade reform, reciprocal trade reform
    JEL: F13
    Date: 2007–04
  6. By: Simon J. Evenett; Michael Meier
    Abstract: Since taking office the Administration of George W. Bush has pursued a trade policy known as Competitive Liberalization. This policy envisages a series of mutually-reinforcing steps to open markets abroad to U.S. companies, to strengthen market-oriented laws and regulations overseas, and to place the U.S. at the centre of the world trading system. Foreign and security policy considerations have influenced U.S. trade policymaking, perhaps more so than in the 1990s. To date the principal outcome of this policy has been the negotiation by the U.S. of numerous free trade agreements, mainly with developing countries individually or in subregional groupings. In addition to characterising this policy in detail, the principal purpose of this paper is to assess the logic underlying this approach to trade policymaking and whether Competitive Liberalization has begun to fulfil the promise spelt out for it at the beginning of this decade.
    Keywords: United States, trade policy, commercial policy, Competitive Liberalization, WTO, regional trade agreements
    JEL: F13 F15
    Date: 2007–02
  7. By: Ito, Seiro; Watanabe, Mariko; Yanagawa, Noriyuki
    Keywords: Incomplete contract, Trade credit, Spillover of technology, FDI, Government-owned firms, China, Foreign investments, Credit, Small and medium-scale enterprises
    JEL: G2 K0 O5 P31
    Date: 2007–04
  8. By: Karel van Hoestenberghe; Hein Roelfsema
    Abstract: In this paper we explore the nature and effects of the Economic Partnership Agreements (EPAs) between the EU and groups of African, Caribbean and Pacific (ACP) countries. We argue that the direct economic effects from reciprocal trade liberalization - both positive and negative - may be rather limited. EPAs will only marginally increase access of ACP countries to the EU market and empirical studies on the static effects of preferential trade liberalization show a small negative effect on welfare for ACP countries. After that, we investigate ways in which the EPAs can be deepened so as to contribute to development: by increasing external financing options of firms in ACP countries; by expanding the role of the private sector and MNEs in economic development; and by supporting regional organizations.
    Keywords: ACP Countries, Economics Partnership Agreements
    JEL: F15 F13 F54 O19
    Date: 2006–07
  9. By: Ural, Beyza P.; Mitra, Devashish
    Abstract: This paper investigates the determinants of productivity in Indian manufacturing industries during the period 1988-2000. Using two-digit industry level data for the Indian states, we find evidence of imperfect interindustry and interstate labor mobility as well as misallocation of resources across industries and states. Trade liberalization increases productivity in all industries across all states, and productivity is higher in the less protected industries. These effects of protection and trade liberalizat ion are more pronounced in states that have relatively more flexible labor markets. Similar effects are also found in the case of employment, capital stock and investment. Furthermore, labor market flexibility, independent of other policies, has a positive effect on productivity. Importantly, per capita state development expenditure seems to be the strongest and the most robust predictor of productivity, employment, capital stock and investment. Industrial delicensing increases both labor productivity and employment but only in the states with flexible labor market institutions. Even after controlling for delicensing, the analysis shows that trade liberalization has a productivity-enhancing effect. Finally, trade liberalization benefits most the export-oriented industries located in states with flexible labor-market institutions.
    Keywords: Economic Theory & Research,Labor Markets,Markets and Market Access,Free Trade,Economic Growth
    Date: 2007–05–01
  10. By: O'Rourke, Kevin H; Rahman, Ahmed; Taylor, Alan M
    Abstract: Technological change was unskilled-labour-biased during the early Industrial Revolution of the late eighteenth and early nineteenth centuries, but is skill-biased today. This fact is not embedded in extant unified growth models. We develop a model of the transition to sustained economic growth which can endogenously account for both these facts, by allowing the factor bias of technological innovations to reflect the profit-maximising decisions of innovators. Endowments dictated that the initial stages of the Industrial Revolution be unskilled-labour biased. The transition to skill-biased technological change was due to a growth in ``Baconian knowledge'' and international trade. Simulations show that the model does a good job of tracking reality, at least until the mass education reforms of the late nineteenth century.
    Keywords: demography; endogenous growth; trade
    JEL: F15 J13 J24 N10 O31 O33
    Date: 2007–05
  11. By: Yamagata, Tatsufumi
    Abstract: On January 1, 2005, the controlled trade regime on textiles and clothing which was based on the Multi-Fiber Arrangement (MFA) made in 1974 was abolished. This institutional change wrought great impacts on the world market for textiles and clothing.This paper reviews the impacts of the changes on the main markets and examines the prospects for the markets and the source countries. The main conclusions are as follows: (1) after the renewal of quantitative restrictions on Chinese garment exports were agreed with the US and the EU, the post-MFA surge in Chinese garment exports was significantly attenuated; (2) instead, the growth in garment exports from other Asian low-income countries to the two markets was revived in 2006; (3) the Japanese market has been kept almost intact from the impact of the regime shift; (4) some developing countries, such as Bangladesh and Cambodia, not only survived the liberalization but also have steadily expanded their garment exports throughout the transition; and (5) an indicative fact is that the profitability of the garment industry in Bangladesh and Cambodia was high on average according to surveys conducted in 2003, which might have bolstered the steady growth of garment exports in the past, and possibly future growth, too.
    Keywords: Garment, MFA phase-out, China, Bangladesh, Cambodia, Developing countries, Apparel industry, Exports, International agreements
    JEL: L67 O53
    Date: 2007–04
  12. By: Quiroga, Miguel; Sterner, Thomas; Persson, Martin
    Abstract: We aim to study whether lax environmental regulations induce comparative advantages, causing the least-regulated countries to specialize in polluting industries. The study is based on Trefler and Zhu’s (2005) definition of the factor content of trade. For the econometrical analysis, we use a cross-section of 71 countries in 2000 to examine the net exports in the most polluting industries. We try to overcome three weaknesses in the empirical literature: the measurement of environmental endowments or environmental stringency, the possible endogeneity of the explanatory variables, and the influence of the industrial level of aggregation. As a result, we do find some evidence in favor of the pollution-haven effect. The exogeneity of the environmental endowments was rejected in several industries, and we also find that industrial aggregation matters.
    Keywords: comparative advantage, environmental regulation, trade, pollution haven, Porter hypothesis
    JEL: F18 Q56
    Date: 2007–04–24
  13. By: Simon J. Evenett
    Abstract: The European Union is the world's largest trader, a fact that on the face of it ought to convert into considerable clout in international commercial negotiations. Yet, since the World Trade Organization's (WTO's) creation in 1995, it is difficult to point to a string of successes for the European Commission's (EC's) often beleaguered trade negotiators. Even the enthusiasm associated with the launch of the Doha Round in 2001 has dissipated as these negotiations have repeatedly stalled, with many questioning what can feasibly be accomplished at the WTO in the near to medium term. A 2006 EC decision to abandon its moratorium on negotiating new free trade agreements seems more of a stop-gap measure to maintain some negotiating momentum than a systematic strategy to leverage European clout. Worse, it carries the risk of seriously undermining the multilateral trading system if EC negotiations with Korea tempt Japan, and in turn possibly even the United States, to eventually seek preferential access to the European Union's markets. With so little to show for the last 10 years and the future of the multilateral trading system decidedly uncertain, a fundamental rethink of the ends and means of European trade policy is in order. That rethink needs to take account of the following realities: a shift away from a bipolar towards a multi-polar WTO; recognition of the fact that the principal liberalising accomplishment to date of the multilateral trading system has been the freeing of manufactured goods trade between industrialised countries and that many other potential reforms have either stalled or proved, on implementation, to be highly controversial; substantial opposition among many prominent groups in the leading trading powers to further trade reform (even in countries experiencing fast economic growth or export growth); and a greater emphasis on signing bilateral and regional free trade agreements (whose liberalising intent and impact is often highly circumscribed). Once the superficial attractions associated with the scramble for preferential market access in Asia fade, European trade policymakers ought to confront these realities. At a minimum, the search will then be on for a modus vivendi with the new trading powers. This will require thought to be given to the likely future offensive and defensive commercial interests of all concerned, bearing in mind the differences in level of development and overseas corporate exposure and organisation. The ultimate goal should be to identify the potential basis for future multilateral trade accords. Properly conceived, future European trade strategy could contribute significantly to the renewal of one of the most successful post-war international economic institutions.
    Keywords: European Union, commercial policy, trade policy, WTO
    JEL: F13 F15
    Date: 2007–04
  14. By: Simon J. Evenett
    Abstract: In recent years the bipolar multilateral trading system of the post-war years has given way to a multipolar alternative. Although many specifics have yet to be determined, some contours of this new trade policy landscape are coming into focus and in this short essay I examine their implications for the European Union's external commercial policy. Particular attention is given to both the state of business-government relations and the propensity to liberalise under the auspices of reciprocal trade agreements by Brazil, India, and China; the potential new poles of the world trading system. I consider the likely consequences of these developments, plus factors internal to both the European Union and the United States, for the possible content of future multilateral trade initiatives.
    Keywords: WTO, European Union, regional trade agreements, BRICs
    JEL: F13 F15
    Date: 2007–04
  15. By: Diego Moreno; John Wooders
    Abstract: In markets with adverse selection, only low-quality units trade in the competitive equilibrium when the average quality of the good held by sellers is low. Under decentralized trade, however, both high and lowquality units trade, although with delay. Moreover, when frictions are small the surplus realized is greater than the (static) competitive surplus. Thus, decentralized trade mitigates the lemons problem. Remarkably, payoffs are competitive as frictions vanish, even though both high and low-quality units continue to trade and there is trade at several prices.
    Date: 2007–03
  16. By: Simon J. Evenett
    Abstract: The rules of the trade policy arena differ from those in academia. How can an economic researcher survive, let alone thrive, in what may appear to be a trade policy jungle? The purpose of this paper is not just to offer guidance in this respect but also to think through the factors that determine the supply and demand for timely, relevant policy-relevant insights into commercial policy matters. Understanding the latter provides much of the rationale for the former. Advice follows analysis, as it should do. Economic researchers have certain advantages that they can make immediate use of in the jungle and some baggage that they would do well to shed.
    Keywords: Trade policy, political economy
    JEL: F13
    Date: 2007–04
  17. By: José Vicente Blanes Cristóbal (Universidad Pablo Olavide Sevilla (Spain)); Marion Dovis (Centre d'Economie et de Finances Internationales (France)); Juliette Milgram Baleix (Department of Economic Theory and Economic History, University of Granada.); Ana I. Moro Egido (Department of Economic Theory and Economic History, University of Granada.)
    Abstract: In this paper, we test the hypothesis of sunk exporting costs differing among markets. We use a sample of Spanish firms from Encuesta sobre Estrategias Empresariales (ESEE) for period 1991-2002. Our results confirm the importance of those sunk costs and demonstrate that they differ depending on the market they export to. Although most of the firms exports to developed markets, the costs to enter (and "to re-enter") are greater in those markets.
    Keywords: Sunk costs, heterogeneity of firms, Regionalism.
    JEL: F12
    Date: 2007–05–09
  18. By: Nguyen, Ngoc Anh; Pham, Quang Ngoc; Nguyen, Dinh Chuc; Nguyen, Duc Nhat
    Abstract: Innovation has long been considered an important factor for creating and maintaining the competitiveness of nations and firms. The relationship between innovation and exporting has been investigated for many countries. However, there is a paucity of research in Vietnam with respect to this issue. In this paper we examine whether innovation performed by Vietnam’s small and medium enterprises (SMEs) enhances their exporting likelihood. Using the recently released Vietnam Small and Medium Enterprise Survey 2005, we find that innovation as measured directly by ‘new products’, ‘new production process’ and ‘improvement of existing products’ are important determinants of exports by Vietnamese SMEs.
    Keywords: Vietnam; Export; Innovation; Small and Medium Enterprise
    JEL: F10 O3
    Date: 2007–05
  19. By: Reint Gropp; Frederic Boissay
    Abstract: Using a unique data set on trade credit defaults among French firms, we investigate whether and how trade credit is used to relax financial constraints. We show that firms that face idiosyncratic liquidity shocks are more likely to default on trade credit, especially when the shocks are unexpected, firms have little liquidity, are likely to be credit constrained or are close to their debt capacity. We estimate that credit constrained firms pass more than one fourth of the liquidity shocks they face on to their suppliers down the trade credit chain. The evidence is consistent with the idea that firms provide liquidity insurance to each other and that this mechanism is able to alleviate the consequences of credit constraints. In addition, we show that the chain of defaults stops when it reaches firms that are large, liquid, and have access to financial markets. This suggests that liquidity is allocated from large firms with access to outside finance to small, credit constrained firms through trade credit chains.
    JEL: G30 D92 G20
    Date: 2007–05
  20. By: Cuñat, Alejandro; Melitz, Marc J
    Abstract: This paper studies the link between volatility, labour market flexibility, and international trade. International differences in labour market regulations affect how firms can adjust to idiosyncratic shocks. These institutional differences interact with sector specific differences in volatility (the variance of the firm-specific shocks in a sector) to generate a new source of comparative advantage. Other things equal, countries with more flexible labour markets specialize in sectors with higher volatility. Empirical evidence for a large sample of countries strongly supports this theory: the exports of countries with more flexible labor markets are biased towards high-volatility sectors. We show how differences in labour market institutions can be parsimoniously integrated into the workhorse model of Ricardian comparative advantage of Dornbusch, Fischer, and Samuelson (1977). We also show how our model can be extended to multiple factors of production.
    Keywords: comparative advantage; labour market flexibility
    JEL: F1
    Date: 2007–05
  21. By: Assaf Razin; Efraim Sadka
    Abstract: We develop a framework in which the host country productivity has a positive effect on the intensive margin (the size of FDI flows), but only an ambiguous effect on the extensive margin (the likelihood of FDI flows to occur). The source-country productivity has a negative effect on the extensive margin. An increase in the host-country corporate tax rate reduces the actual FDI flows the likelihood of such flows to occur. An increase in the source-country corporate tax rate reduces the likelihood of FDI flows. These predictions are confronted with Data on FDI flows, drawn from the International Direct Investment dataset (Source OECD), covering the bilateral FDI flows among 18 OECD countries over the period 1987 to 2003. We find some support for the main predictions of the model.
    JEL: F2 F21 F23 F3
    Date: 2007–05

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.