nep-int New Economics Papers
on International Trade
Issue of 2007‒06‒11
23 papers chosen by
Martin Berka
Massey University

  1. Corruption and trade protection: evidence from panel data By Subhayu Bandyopadhyay; Suryadipta Roy
  2. Globe: Asian Growth and Trade Poles: India, China, and East and Southeast Asia By Karen Thierfelder; Scott McDonald; Sherman Robinson
  3. Competing in Organizations: Firm Heterogeneity and International Trade By Marin, Dalia; Verdier, Thierry
  4. Impact of Export Subsidies on Pakistan’s Exports By Nadeem Ul Haque; M. Ali Kemal
  5. High-tech exports from developing countries: A symptom of technology spurts or statistical illusion? By Martin Srholec
  6. Fighting the Forces of Gravity - Seapower and Maritime Trade between the 18th and 20th Centuries By Ahmed S. Rahman
  7. Impacts of Japanese FTAs/EPAs: Post Evaluation from the Initial Data By ANDO Mitsuyo
  8. Wal-Mart as Catalyst to U.S.-China Trade By Emek Basker; Pham Hoang Van
  9. Trade and migration: a U-shaped transition in Eastern Europe By Cristobal, Adolfo
  10. Nash equilibrium tariffs and illegal immigration: an analysis of preferential trade liberalization By Subhayu Bandyopadhyay; Ryo Takashima
  11. Existence of equilibrium in models of international trade with perfect or imperfect competition By Arnold, Lutz G.
  12. Product Differentiation, Multi-product Firms and Estimating the Impact of Trade Liberalization on Productivity By Jan De Loecker
  13. Good Jobs, Bad Jobs, and Trade Liberalization By Donald R. Davis; James Harrigan
  14. Innovation and the export-productivity link By Cassiman, Bruno; Golovko, Elena
  15. Globalization, aggregate productivity, and inflation By W. Michael Cox
  16. Oil Price Movements and the Global Economy: A Model-Based Assessment By Selim Elekdag; René Lalonde; Douglas Laxton; Dirk Muir; Paolo Pesenti
  17. The Effect of Globalization on Union Bargaining and Price-Cost Margins of Firms By Filip Abraham; Jozef Konings; Stijn Vanormelingen
  18. Foreign aid and export performance: a panel data analysis of developing countries By Jonathan Munemo; Subhayu Bandyopadhyay; Arabinda Basistha
  19. Fiscal Shocks, the Trade Balance, and the Exchange Rate By Faik Koray; W. Douglas McMillin
  20. Openness and inflation By Mark A. Wynne; Erasmus K. Kersting
  21. Outsourcing and Volatility By Paul R. Bergin; Robert C. Feenstra; Gordon H. Hanson
  22. Demand Shocks and Trade Balance Dynamics By José García-Solanes; Jesús Rodríguez López; José Luis Torres Chacón
  23. State export data: origin of movement vs. origin of production By Cassey, Andrew

  1. By: Subhayu Bandyopadhyay; Suryadipta Roy
    Abstract: This paper provides new estimates of the effects of corruption and poor institutions on trade protection. It exploits data on several measures of trade protection including import duty, international trade taxes, and the trade-GDP ratio. The paper complements the literature on the relationship between corruption and trade reform. It deviates from the previous literature in several ways. First, unobserved heterogeneity among countries have been controlled with properly specified fixed effects exploiting the time dimension present in the dataset. Secondly, instead of using tariff and non-tariff barriers, more general measures of trade protection have been used. The issue of endogeneity of corruption with respect to trade policy has been addressed using proper instruments for corruption used in previous studies. Moreover, two separate institutional measures have been used in the same regression to estimate their comparative impacts on trade policy. In general, we find that corruption and lack of contract enforcement have strong impacts to increase trade protection and negative effects on trade openness.
    Keywords: Tariff ; International trade
    Date: 2007
  2. By: Karen Thierfelder (United States Naval Academy); Scott McDonald (The University of Sheffield); Sherman Robinson (University of Sussex)
    Abstract: Using a global general equilibrium trade model, this study analyzes the impact on developing countries, of (1) the dramatic expansion of trade by India, China, and an integrated East and Southeast (E&SE) Asia trade bloc and (2) productivity growth in the region. China is an integral member of the E&SE Asia bloc, with strong links through value chains and trade in intermediate inputs, while India is not part of any trade bloc. The analyses consider the importance of their different degrees of integration into regional and global economies, focusing on potential complementarities and competition with other developing countries.
    Date: 2007–06
  3. By: Marin, Dalia; Verdier, Thierry
    Abstract: This paper develops a theory which investigates how firms’ choice of corporate organization is affecting firm performance and the nature of competition in international markets. We develop a model in which firms’ organisational choices determine heterogeneity across firms in size and productivity in the same industry. We then incorporate these organisational choices in a Krugman cum Melitz and Ottaviano model of international trade. We show that the toughness of competition in a market depends on who - headquarters or middle managers - have power in firms. Furthermore, we propose two new margins of trade adjustments: the monitoring margin and the organizational margin. International trade may or may not lead to an increase in aggregate productivity of an industry depending on which of these margins dominate. Trade may trigger firms to opt for organizations which encourage the creation of new ideas and which are less well adapt to price and cost competition.
    Keywords: international trade with endogenous firm organizations and endogenous toughness of competition; firm heterogeneity; power struggle in the firm
    JEL: F12 F14 L22 D23
    Date: 2007–05
  4. By: Nadeem Ul Haque (Pakistan Institute of Development Economics, Islamabad.); M. Ali Kemal (Pakistan Institute of Development Economics, Islamabad.)
    Abstract: Throughout Pakistan’s history, policy has sought to promote exports through government support and incentives. The government machinery is geared to export promotion especially through direct and indirect subsidies. Surprisingly, these policies have been continued without serious examination. This paper makes a first attempt to evaluate these policies by estimating the impact of two such schemes—export financing and rebate/refund schemes—on export performance. Our analysis shows that, over the long run, the export financing scheme had a negative effect on exports while the rebate/refund scheme affected exports insignificantly. Subsidy schemes clearly do not seem to work, yet they have been retained for many years.
    Keywords: Rebate, Duty Drawback, Export Financing, Exports, Trade, Exchange Rate, Co-integration, Vector Error Correction, Pakistan
    JEL: C32 F13 F14 F31
    Date: 2007
  5. By: Martin Srholec (Centre for Technology, Innovation and Culture, University of Oslo)
    Abstract: Specialization in high-tech products is frequently used to capture technology intensity of exports. The literature suggests that developing countries are increasingly becoming exporters of high-tech products, and some may even be among the most deeply specialized countries in the field of high-tech exports. The paper scrutinizes the relevance of the taxonomies that classify exports by technological intensity in this context. It is shown that specialization in high-tech exports typically does not appear in tandem with indigenous technological capabilities in developing countries. The analysis of intra-product imports suggests that the bulk of high-tech exports can actually be attributed to the effect of increasingly international fragmentation of production systems in electronics on trade statistics. It is confirmed in an econometric framework that while domestic technological capabilities have some influence on export performance in electronics, it is the propensity to import electronics components that accounts for by far the largest proportion of cross-country differences in specialization in electronics exports. The paper concludes with some implications for policy and future research.
    JEL: F10 O10 O30
    Date: 2005–12
  6. By: Ahmed S. Rahman (United States Naval Academy)
    Abstract: Do conflicts among naval powers hurt international trade? In theory the commercially relevant aspects of aggressive naval power can either thwart trade (through blockades, embargoes, commerce raiding, and guerre de course strategies) or facilitate trade (through control of trade routes and protection of shipping). Thus the question must be empirically addressed. Using a panel gravity model, we investigate the interactions of war, naval power and merchant trade from the 18th to mid-20th centuries . Whether looking at English trade during the 18th century, or at a wide range of trading partners during the 19th and 20th centuries, wars involving naval powers considerably limit inter-state commerce. Further, we split this effect on trade between an extensive effect (the effect on a country’s trade when fighting a naval power) and an intensive effect (the effect of that power gaining more naval strength). We conclude that the intensive effect is a powerful one - that is, naval strength has historically been a destroyer of trade when mobilized to combat.
    Date: 2007–06
  7. By: ANDO Mitsuyo
    Abstract: This paper attempted to assess impacts of existing Japanese EPAs in their initial years and to draw policy implications for possible future FTAs/EPAs. Our gravity model estimations as well as detailed analysis on trade and actual tariff reduction by EPAs demonstrated that the Japan-Singapore EPA has almost no direct impact on trade since actual reduction of tariffs by the EPA is quite limited. On the other hand, our empirical investigation confirmed a certain degree of positive impact of the Japan-Mexico EPA on trade, particularly on the export side, and investment. Several important outcomes of the EPA beyond tariff removal are also revealed. Discussion on future designs of FTAs/EPAs includes issues on some possible abuse of phasing out tariffs, desirable structure of EPA tariffs, effective utilization of EPAs beyond trade liberalization, and the relationship with multilateral trade liberalization.
    Date: 2007–06
  8. By: Emek Basker (Department of Economics, University of Missouri-Columbia); Pham Hoang Van
    Abstract: Retail chains and the volume of imports of consumer goods from developing countries have grown sharply over the past 25 years. Wal-Marts sales, which currently account for 15% of U.S. imports of consumer goods from China, grew 90-fold over this period, while U.S. imports from China increased 30-fold. We relate these trends using a model in which scale economies in retail interact with scale economies in the import process. Combined, these scale economies amplify the effects of technological change and trade liberalization, creating a two-way relationship between the chains size and its sourcing choice. Falling trade bar- riers increase imports not only through direct reduction of input costs but also through an expanded chain and higher investment in technology. Calculations based on our model suggest that the existence of the chain more than doubles the sensitivity of imports to tariff reductions. Technological innovations account for approximately 60% of Wal-Marts growth from 19842004 and reductions in input cost, due to tariff reductions and changes in sourcing, account for 40% of this growth.
    Keywords: Wal-Mart, Trade, Economies of Scale, China, Technological Change, Retail Chain
    JEL: L11 L81 F12
    Date: 2007–05–15
  9. By: Cristobal, Adolfo
    Abstract: This paper proposes a 2-country 3-region economic geography model that can account for the most salient stylized facts experienced by Eastern European transition economies during the 1990s. In contrast to the existing literature, which has favored technological explanations, trade liberalization and factor mobility are the only driving forces. The model correctly predicts that in the first half of the decade trade liberalization led to divergence in GDP per capita, both between the West and the East and within the East. Consistent with the data, in the second half of the decade, internal labor mobility in the East reversed this process, and convergence became the dominant force. The model furthermore shows that the same U-shaped pattern applies to relative industrialization of West and East, although within the East the hinterland continued to lose industry throughout the decade.
    Keywords: Trade liberalization; migration; convergence; welfare.
    JEL: J30 F22 F12 F16
    Date: 2007–06–07
  10. By: Subhayu Bandyopadhyay; Ryo Takashima
    Abstract: We use a version of the small-union Meade model to consider the effects of interdependent import tariffs in the presence illegal immigration. First, we analyze the condition under which illegal immigration is likely to increase (or decrease) in response to reciprocal trade liberalization between the source and host nations (of illegal immigration). Next we describe the Nash equilibrium in tariffs between these nations and discus how a liberalization of tariffs starting from this Nash equilibrium is likely to affect their utility. Finally, we consider the effect of the host nation's liberalization of the import tariff (imposed on its imports from a third nation). We show that strategic considerations regarding the effect of this tariff liberalization on the Nash equilibrium tariffs can modify the traditional (trade creating/diverting) gains from such liberalization.
    Keywords: Trade ; Immigrants
    Date: 2007
  11. By: Arnold, Lutz G.
    Abstract: Dixit and Norman ("Theory of International Trade", Cambridge: Cambridge University Press, 1980) showed that, under certain conditions, the world economy replicates the equilibrium of the hypothetical integrated economy without national borders in the traditional trade model with perfect competition. Helpman and Krugman ("Market Structure and Foreign Trade. Increasing Returns, Imperfect Competition, and the International Economy", Cambridge, MA: MIT Press, 1985) extended their analysis to settings with imperfectly competitive sectors. This paper derives necessary and sufficient conditions for the existence of free trade equilibria with replication in models with perfect or imperfect competition.
    Keywords: Allgemeines Gleichgewichtsmodell; Außenhandel; Unvollständige Konkurrenz
    JEL: F12 C62
    Date: 2007–05–31
  12. By: Jan De Loecker
    Abstract: In this paper I analyze the productivity gains from trade liberalization in the Belgian textile industry. So far, empirical research has established a strong relationship between opening up to trade and productivity, relying almost entirely on deflated sales to proxy for output in the production function. The latter implies that the resulting productivity estimates still capture price and demand shocks which are most likely to be correlated with the change in the operating environment, which invalidate the evaluation of the welfare implications. In order to get at the true productivity gains I propose a simple methodology to estimate a production function controlling for unobserved prices by introducing an explicit demand system. I combine a unique data set containing matched plant-level and product-level information with detailed product-level quota protection information to recover estimates for productivity as well as parameters of the demand side (markups). I find that when correcting for unobserved prices and demand shocks, the estimated productivity gains from relaxing protection are only half (from 6 to only 3 percent) of those obtained with standard techniques.
    JEL: F13 L11
    Date: 2007–06
  13. By: Donald R. Davis; James Harrigan
    Abstract: Globalization threatens "good jobs at good wages", according to overwhelming public sentiment. Yet professional discussion often rules out such concerns a priori. We instead offer a framework to interpret and address these concerns. We develop a model in which monopolistically competitive firms pay efficiency wages, and these firms differ in both their technical capability and their monitoring ability. Heterogeneity in the ability of firms to monitor effort leads to different wages for identical workers - good jobs and bad jobs - as well as equilibrium unemployment. Wage heterogeneity combines with differences in technical capability to generate an equilibrium size distribution of firms. As in Melitz (2003), trade liberalization increases aggregate efficiency through a firm selection effect. This efficiency-enhancing selection effect, however, puts pressure on many "good jobs", in the sense that the high-wage jobs at any level of technical capability are the least likely to survive trade liberalization. In a central case, trade raises the average real wage but leads to a loss of many "good jobs" and to a steady-state increase in unemployment.
    JEL: F1 F16 J2 J31
    Date: 2007–05
  14. By: Cassiman, Bruno (IESE Business School); Golovko, Elena (IESE Business School)
    Abstract: In this paper, we explore the relationship between innovation activity, productivity, and exports, using a panel of Spanish manufacturing firms for 1990-1998. Our results -based on non-parametric tests- suggest that firm innovation status is critical in explaining the positive export-productivity association documented in prior research. For the sample of small innovating firms, we find no significant differences in productivity levels between exporters and non-exporters. Especially product innovation seems to explain this positive association between exports and productivity. For small non-innovating firms with the low and medium productivity levels, however, exporting firms continue to exhibit higher productivity than non-exporting firms.
    Keywords: Innovation; productivity; exports; industry dynamics;
    Date: 2007–04–05
  15. By: W. Michael Cox
    Abstract: This paper investigates the effects of globalization on aggregate productivity, output growth, and inflation. I present a simple two-country, two-good, flexible exchange rate model using Fisher Ideal aggregators to examine changes in the mapping from microeconomic to macroeconomic productivity growth as nations globalize. Advances in industry-specific labor productivity are shown to have potentially a much greater passthrough to aggregate productivity, output, and prices the more open nations are to trade. Globalization raises both the level and growth rate of aggregate productivity by allowing more economywide reorganization in response to ongoing technological advances than would be optimal otherwise. ; I develop a globalized version of the quantity equation of money, where inflation in the home country depends on domestic money growth and a weighted average of home and foreign GDP growth. Relative country size, consumer preferences, production technologies, and the openness of trade are the chief determinants of these weights. Calibrating the model to match certain stylized facts about the U.S. and global economies, U.S. consumer price inflation falls from roughly 3.8 percent when economies are closed to under 2 percent in the transition period, eventually settling at around 2.3 percent in free trade. Producer and consumer prices trek a common path under autarky but diverge as the world globalizes. Both home and foreign aggregate productivity growth rates increase—by 0.4 and 0.7 percentage points, respectively. Roughly 30 percent of the output weight in the determination of home inflation shifts from the home to the foreign economy—greater than might be expected from strong home bias.
    Date: 2007
  16. By: Selim Elekdag; René Lalonde; Douglas Laxton; Dirk Muir; Paolo Pesenti
    Abstract: We develop a five-region version (Canada, an oil exporter, the United States, emerging Asia and Japan plus the euro area) of the Global Economy Model (GEM) encompassing production and trade of crude oil, and use it to study the international transmission mechanism of shocks that drive oil prices. In the presence of real adjustment costs that reduce the short- and medium-term responses of oil supply and demand, our simulations can account for large endogenous variations of oil prices with large effects on the terms of trade of oil-exporting versus oil-importing countries (in particular, emerging Asia), and result in significant wealth transfers between regions. This is especially true when we consider a sustained increase in productivity growth or a shift in production technology towards more capital- (and hence oil-) intensive goods in regions such as emerging Asia. In addition, we study the implications of higher taxes on gasoline that are used to reduce taxes on labor income, showing that such a policy could increase world productive capacity while being consistent with a reduction in oil consumption.
    Keywords: Economic models; Inflation and prices; International topics
    JEL: E66 F32 F47
    Date: 2007
  17. By: Filip Abraham; Jozef Konings; Stijn Vanormelingen
    Abstract: In recent years, Europe has witnessed an accelerated process of economic integration. Trade barriers were removed, the euro was introduced and ten new member states have joined the European Union. This paper analyzes how this process of increased economic integration has affected labor and product markets. To this end, we use a panel of Belgian manufacturing firms to estimate price-cost margins and union bargaining power and show how various measures of globalization affect them. Our findings can be summarized as follows: On average, firms set prices about 30% above marginal costs, but there is substantial variation across sectors, with the lowest mark-up around 19% and the highest around 52%. In addition, we find evidence that unions bargain over both wages and employment. We estimate an index of bargaining power, which reflects the fraction of profits that is passed on to workers into higher wages. Depending on the sector, this fraction varies between 6% and 18% and it increases with the markups of firms. Finally, we find that globalization puts pressure on both markups and union bargaining power, especially when there is increased competition from the low wage countries. This suggests that increased globalization is associated with a moderation of wage claims in unionized countries, which should be associated with positive effects on employment.
    Keywords: Mark-ups, Trade Unions, International Trade
    JEL: F16 J50 L13
    Date: 2007
  18. By: Jonathan Munemo; Subhayu Bandyopadhyay; Arabinda Basistha
    Abstract: The effect of foreign aid on economic activity of a country can be dampened due to potentially adverse effects on exports through a real exchange rate appreciation. In this study we examine the long-term relationship between export performance and foreign aid in developing countries while accounting for other factors. The estimates of direct effect of foreign aid on exports are imprecise. However, the effect of the quadratic term of foreign aid on exports is negative and precise. This implies large amount of foreign aid does adversely affect export performance. The results are robust to the use of two different export performance measures and different sub-samples.
    Keywords: Developing countries - Economic conditions ; Exports
    Date: 2007
  19. By: Faik Koray; W. Douglas McMillin
    Abstract: This paper investigates empirically, using a VAR model, the response of the exchange rate and the trade balance to fiscal policy shocks for the U.S. economy during the period 1981:3-2006:3. The results indicate that positive shocks to real government purchases generate a persistent increase in the budget deficit, a transitory expansionary effect on output, and a long-lived positive effect on the price level, but reduce the real interest rate. Simultaneously, and consistent with interest parity, the real exchange rate depreciates, and the trade balance improves. Negative shocks to net taxes also generate a persistent increase in the budget deficit, and the effects on the model variables are generally in the same direction, but are almost never significant. Our results indicate it is inappropriate to attribute rising trade balance deficits to expansionary fiscal policy shocks, even though these shocks generate long-lived increases in the budget deficit.
  20. By: Mark A. Wynne; Erasmus K. Kersting
    Abstract: This paper reviews the evidence on the relationship between openness and inflation. There is a robust negative relationship across countries, first documented by Romer (1993), between a country's openness to trade and its long-run inflation rate. However, a key part of the standard explanation for this relationship—that central banks have a smaller incentive to engineer surprise inflations in more-open economies because the Phillips curve is steeper—seems at odds with the facts. While the United States is still not a very open economy by conventional measures, there are channels through which global developments may influence the nation's inflation. We document evidence that global resource utilization may play a role in U.S. inflation and suggest avenues for future research.
    Keywords: Inflation (Finance) ; Trade ; Phillips curve
    Date: 2007
  21. By: Paul R. Bergin; Robert C. Feenstra; Gordon H. Hanson
    Abstract: While outsourcing of production from the U.S. to Mexico has been hailed in Mexico as a valuable engine of growth, recently there have been misgivings regarding its fickleness and volatility. This paper is among the first in the trade literature to study the second moment properties of outsourcing. We begin by documenting a new stylized fact: the maquiladora outsourcing industries in Mexico experience fluctuations in value added that are roughly twice as volatile as the corresponding industries in the U.S. A difference-in-difference method is extended to second moments to verify the statistical significance of this finding. We then develop a stochastic model of outsourcing with heterogeneous firms that can explain this volatility. The model employs two novel mechanisms: an extensive margin in outsourcing which responds endogenously to transmit shocks internationally, and translog preferences which modulate firm entry.
    JEL: F1 F4
    Date: 2007–06
  22. By: José García-Solanes (Departamento de Fundamentos del Análisis Económico, Universidad de Murcia); Jesús Rodríguez López (Department of Economics, Universidad Pablo de Olavide); José Luis Torres Chacón (Departamento de Teoría e Historia Económica, Universidad de Málaga)
    Abstract: This paper studies the current account dynamics in the G-7 countries plus Spain. We estimate a SVAR model which allows us to identify three different shocks: supply shocks, real demand shocks and nominal shocks. We use a different identification procedure from previous work based on a microfounded stochastic open-economy model in which the real exchange rate is a determinant of the Phillips curve. Estimates from a structural VAR show that real demand shocks explain most of the variability of current account imbalances, whereas, contrary to previous findings, nominal shocks play no role. The results we obtain are consistent with the predictions of a widely set of open-economy models and illustrate that demand policies are the main responsible of trade imbalances.
    Keywords: Current account, SVAR.
    JEL: F3
    Date: 2007–05
  23. By: Cassey, Andrew
    Abstract: The Origin of Movement (OM) series is unique data documenting the destination of state ex- ports. This data indicates the state an export begins its journey, not the production location (OP). Recent OM data has not been examined to determine if it represents OP. Here the collection, dissemination, and limitations of the OM data are described. Diagnostic tests asses how eectively the OM data represents OP. Results indicate the OM data are usable for OP, though there are idiosyncratic subsectors and states, and systematic dierences distinguishing the OM from OP.
    Keywords: international trade; exports; states; origin of movement; origin of production
    JEL: R14 F14 R12
    Date: 2006–10–15

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.