nep-int New Economics Papers
on International Trade
Issue of 2007‒09‒02
twenty papers chosen by
Martin Berka
Massey University

  1. The Role of Multinational Firms in International Trade: The Case of Japan By Kozo Kiyota; Shujiro Urata
  2. Patterns and Determinants of International Trade Costs in the Food Industry By Alessandro Olper; Valentina Raimondi
  3. Globalization and Income Inequality By Elena Meschi; Marco Vivarelli
  4. China's WTO Entry: Antidumping, Safeguards, and Dispute Settlement By Chad P. Bown
  5. Integration and Growth in East Asia By Sanghoon Ahn; nd Jong-Wha Lee
  6. Oil Shocks and External Balances By Lutz Kilian; Alessandro Rebucci; Nikola Spatafora
  7. The Ricardian Model By Alan V. Deardorff
  8. The endogenous formation of sustanaible trade agreements By NIELSEN, Mette
  9. National Champion versus Foreign Takeover By Jens Suedekum
  10. Innovation, Firm Dynamics, and International Trade By Andrew Atkeson; Ariel Burstein
  11. Overlapping Free Trade Agreements of Singapore-USA-Japan: A Computational Analysis By Chong Soo Yuen; Jung Hur
  12. Political Stasis or Protectionist Rut? Policy Mechanisms for Trade Reform in a Democracy By Blanchard, Emily; Willmann, Gerald
  13. Global Knowledge and Local Inequality - Industry Level Evidence By Ahmed S. Rahman
  14. Currency Invoicing in International Trade: A Panel Data Approach By Ligthart, J.E.; Da Silva, J.
  15. China's Experience Under the Multifiber Arrangement (MFA) and the Agreement on Textiles and Clothing (ATC) By Irene Brambilla; Amit Khandelwal; Peter Schott
  16. Trade in Health Services - An Analytical Framework Valuation Effects and Interest Rate Changes By Patricia Waeger
  17. Detecting Illegal Arms Trade By Stefano DellaVigna; Eliana La Ferrara
  18. The Determinants of Rising Informality in Brazil: Evidence from Gross Worker Flows By Mariano Bosch; Edwin Goni; William Maloney
  19. Network Externalities and Comparative Advantage By Kikuchi, Toru
  20. Wage Inequality and Immigration: Western-Europe in the Sixties By N. CHUSSEAU; M. DUMONT; J. HELLIER; G. RAYP; P. WILLEMÉ

  1. By: Kozo Kiyota (Gerald R. Ford School of Public Policy, University of Michigan); Shujiro Urata (Graduate School of Asia-Pacific Studies, Waseda University)
    Abstract: This paper examines the role of multinational firms in international trade using firm-level panel data for Japanese firms between 1994 and 2000. Our results indicate that multinational firms dominate Japanese trade. In 2000, only 12.4 percent of Japanese firms were multinationals but they accounted for 93.6 and 81.2 percent of Japanese exports and imports, respectively. We found that multinational firms emerged from being exporters/importers. These results imply that firms do not make the choice of either exporting or undertaking FDI, contrary to the findings of previous studies. Rather, exporters make a decision on whether or not to undertake FDI.
    Keywords: Multinational Firms, Foreign Direct Investment, International Trade, Intra-firm Trade
    JEL: F10 F20 D21
    Date: 2007
  2. By: Alessandro Olper; Valentina Raimondi
    Abstract: This paper documents patterns in international trade costs in processed foods for a large cross-section of developing and developed countries, during the 1976-2000 period. A trade costs index is inferred from a micro-founded gravity equation that incorporates bilateral ‘iceberg’ trade costs. For 2000, the weighted average tariff equivalent of trade costs ranges from 73% for the North to 134% for the South countries. The time patterns show an average reduction of about -13% in the observed period, that rises to -26% for the Emerging countries. However, the same does not apply for South countries. On ranking the trade costs determinants we find that, on average, geographical and historical factors seem to dominate those of infrastructure and institutions. However, trade policy emerges as an important determinant of the North-Emerging trade costs. Finally we find strong evidence that demand-side considerations also matter to explain trade costs.
    Keywords: Trade costs, Gravity, Processed Foods, Geography, Infrastructure, Trade Policy, Inequality
    JEL: F1 F13 F14
    Date: 2007
  3. By: Elena Meschi (Marche Polytechnic University, Ancona and CSGR Warwick); Marco Vivarelli (Catholic University of Milan, CSGR Warwick, IPTS (European Commission, Seville) and IZA)
    Abstract: This paper discusses the distributive consequences of trade flows in developing countries (DCs). On the theoretical side, we argue that the interplays between international openness and technology adoption may constitute an important mechanism leading to a possible increase of income differentials in the liberalizing DCs, trough skill enhancing trade. We use a dynamic specification to estimate the impact of trade on within-country income inequality in a sample of 70 DCs over the 1980-1999 period. Our results suggest that total aggregate trade flows are weakly related with income inequality. However, once we disaggregate total trade flows according to their areas of origin/destination, we find that trade with high income countries worsen income distribution in DCs, both through imports and exports. This finding provides a preliminary support to the hypothesis that technological differentials between trading partners are important in shaping the distributive effects of trade openness. Moreover, after testing for the differential impact of trade in middle income DCs vs low income ones, we observe that the previous result only holds for middle income countries (MICs). We interpret this evidence by considering the greater potential for technological upgrading in MICs both in terms of their higher "absorptive capacity" and in terms of their superior ability in serving the differentiated and high-quality markets of the developed world.
    Keywords: globalization, within-country income distribution, technology transfer, developing countries, LSDVC estimator
    JEL: F16 O15 O33
    Date: 2007–07
  4. By: Chad P. Bown
    Abstract: This chapter assesses China's integration into the global trading system by examining areas of international political-economic "friction" associated with its increased trade. We use a number of newly constructed data sets to examine tensions associated with its rapidly increasing trade and the trade policy commitments that China and its trading partners have undertaken as part of its 2001 WTO accession. With respect to China's exports, we examine data on WTO members' use of antidumping and their discriminatory treatment of Chinese firms prior to and following accession. We conclude that the application of antidumping against China has become more discriminatory since its 2001 accession. Furthermore, evidence from a regression analysis rules out the theory that pre-accession discrimination is associated with foreign targeting of high import tariff Chinese products as a WTO accession negotiation strategy. We also provide evidence that WTO members are also discriminating against China's exports by substituting use of new import-restricting "China-safeguard" policy instruments. Next, with respect to China's imports, we examine data on China's antidumping use - now the WTO's fifth most frequent user of antidumping - by targeted sectors and countries. We also provide evidence from products within China's largest sectoral user of a positive relationship between the size of the accession year tariff liberalization and the subsequent resort to antidumping protection after accession. Finally, we examine China's experience in managing frictions associated with its growing role in world trade through formal WTO dispute settlement proceedings.
    JEL: F13 F5
    Date: 2007–08
  5. By: Sanghoon Ahn (Korea Development Institute); nd Jong-Wha Lee (Corresponding author: Office of Regional Economic Integration, Asian Development Bank, 6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, Philippines. Tel.: 632-632-4900, fax: 632-636- 2183, E-mail:
    Abstract: This paper empirically analyzes the experience of East Asiafs economic growth with data both at aggregate-economy and micro-firm levels, focusing on the role of international integration through trade and direct investment. The analysis within a framework of cross-country panel regression shows that trade openness and foreign direct investment (FDI) inflows have a positive effect on gross domestic product (GDP) growth? particularly in the 1970 and 1980s?while FDI outflows appear to have a negative effect on GDP growth. Micro-level evidence based on manufacturing data in the Republic of Korea (Korea) confirms the positive effect of trade and investment integration on plant-level productivity growth. It also suggests the relationship between FDI outflows and productivity growth depends on the characteristics of a recipient economy. We find that FDI to the Peoplefs Republic of China tends to reduce productivity growth of firms in Korea while FDI to the United States or Japan works in favor of productivity growth.
    Keywords: integration, growth, trade, foreign direct investment, East Asia
    JEL: F15 F43 O47 O53
    Date: 2007–08
  6. By: Lutz Kilian (University of Michigan and CEPR); Alessandro Rebucci (International Monetary Fund); Nikola Spatafora (International Monetary Fund)
    Abstract: This paper studies the effects of demand and supply shocks in the global crude oil market on several measures of countries’ external balance, including the oil trade balance, the non-oil trade balance, the current account and changes in net foreign assets (NFA) during 1975– 2004. We explicitly take a multilateral and global perspective. In addition to the United States, the Euro area and Japan, we consider a number of regional aggregates including oil-exporting economies and middle-income oil-importing economies. Our first result is that the effect of oil shocks on the merchandise trade balance and the current account, which depending on the source of the shock can be large, depends critically on the response of the non-oil trade balance, and differs systematically between the United States and other oil importing countries. Second, using the Lane-Milesi-Ferretti NFA data set, we document the presence of large and systematic (if not always statistically significant) valuation effects in response to oil shocks, not only for the United States, but also for other oil-importing economies and for oil exporters. Our estimates suggest that increased international financial integration will tend to cushion the effect of oil shocks on NFA positions for major oil exporters and for the United States, but may amplify it for other oil importers.
    Keywords: Oil prices; External Balances; Oil demand Shocks; Oil supply Shocks; International Financial Integration.
    JEL: F32 F36 O16 O57 Q43
    Date: 2007
  7. By: Alan V. Deardorff (The University of Michigan)
    Abstract: This essay was written for the Princeton Encyclopedia of the World Economy. The Ricardian Model describes a world in which goods are competitively produced from a single factor of production, labor, using constant-returns-to-scale technologies that differ across countries and goods. With only two goods and two countries, the standard textbook model shows that countries will export the good in which they have comparative advantage. Equilibrium takes two forms, one with both countries completely specialized and gaining from trade, the other with one country producing both goods and neither gaining nor losing from trade. The model is easily extended to more than two goods or more than two countries, but not both. Important extensions have been provided by Dornbusch, Fischer, and Samuelson (1977) to a continuum of goods with two countries, and by Eaton and Kortum (2002) to a continuum of goods with many countries and random technologies.
    Keywords: Ricardian Model, Comparative Advantage
    JEL: F1
    Date: 2007
  8. By: NIELSEN, Mette
    Abstract: This paper addresses the endogenous formation of trade agreements in a three - country model of imperfect competition. While the requirement of sustainability of preferential trade areas has often been ignored in the literature, I construct a framework for predicting which trade agreements form when sustainability is explicitly included as a constraint on the formation of the cooperative agreements. It is found that the introduction of a self-enforcement requirement reduces the overall scope for a cooperative trade agreements, and that preferential trade areas can be stepping stones or stumbling blocks depending on the size of relative demand between countries.
    Date: 2006–01–01
  9. By: Jens Suedekum (University of Konstanz and IZA)
    Abstract: We analyze an oligopolistic market where a domestic and a foreign firm are engaged in a takeover battle for a domestic competitor. Any merger or acquisition (M&A) must be approved by a welfare maximizing domestic competition agency which may or may not be prone to "economic patriotism". A patriotic government does not (fully) count wealth of domestic shareholders as relevant producer surplus if this wealth has been generated by selling a domestic firm abroad. We show that globalization (decreasing transport costs) has a different impact on the equilibrium ownership structure of that industry, depending on the type of government. With an unbiased competition agency we find that the foreign takeover is more likely to occur the higher the level of trade openness is. However, when the domestic government is biased we find that globalization reinforces the case for promoting national champions. This may explain why some countries have recently spent considerable effort to deter foreign attempts to acquire domestic firms.
    Keywords: mergers, takeovers, national champions, international trade, trade integration
    JEL: F12 F23 L13 L52
    Date: 2007–07
  10. By: Andrew Atkeson; Ariel Burstein
    Date: 2007–08–24
  11. By: Chong Soo Yuen (Singapore Centre for Applied and Policy Economics, Department of Economics, National University of Singapore); Jung Hur (Department of Economics, National University of Singapore)
    Abstract: The proliferation of overlapping free trade agreements (FTA) in the recent years has led to hub-and-spokes (HAS) throughout the world. Being avid subscribers to FTAs, many countries in the Asia-Pacific region including the USA, Japan, Singapore, South Korea, Thailand and Australia have become trade hubs to their partners who are in turn relegated to spoke status. In this paper, we question whether being a hub is welfare optimal for a small and open economy like Singapore compared to membership in a single bilateral FTA or a multi- member free trade zone. Within this context, we use a computable general equilibrium model to examine the welfare implications of the triangular trade relationship of the USA, Singapore and Japan. This is facilitated by the Japan- Singapore Economic Partnership Agreement, the USA-Singapore Free Trade Agreement, and a hypothetical USA-Japan Economic Partnership Agreement. The analysis is extended to incorporate “super-hub” effects; that is, the spoke countries can be trade hubs in other HAS systems. The experiment reveals that hub status generates positive welfare gain and is the highest Singapore can get from the trade configurations considered. Meanwhile, Japan loses more than the USA when both are relegated to spoke status. These findings prove robust under different market structures and production technologies, deeper economic integration, “super-hub” effects, as well as, uncertainty in the key model parameters and the extent of trade liberalisation shocks.
    Keywords: hub and spokes; overlapping agreements; free trade; preference dilution; computable general equilibrium; GTAP; systems; trade configurations
    JEL: C68 D58 F15
  12. By: Blanchard, Emily; Willmann, Gerald
    Abstract: This paper analyzes the dynamics of trade policy reform under democracy. In an overlapping generations model, heterogeneous agents may acquire skills when young, thereby determining the skill composition of their cohort. Current and anticipated trade policies influence education decisions, and thus the identity of the median voter. We show that there may exist two political steady states: one protectionist and one liberal. Transition from the former to the latter can be achieved by government announcements, temporary educational subsidies, or (exogenous) tariff liberalization by trading partners, but not, in general, by transfer payments to adversely affected workers. We find additionally that reform is politically feasible only if the proposed liberalization is sufficiently large, suggesting that radical reform may be necessary for escaping a “protectionist rut.”
    Keywords: Political Economy, Trade Policy, Skill Acquisition, Politically Stable Policy Paths, Referenda
    JEL: D72 E60 F13 F16
    Date: 2007
  13. By: Ahmed S. Rahman (United States Naval Academy)
    Abstract: This paper attempts to ascertain if skill-biased technologies developed in R&D-active countries diffuse to the rest of the world. First, using a model of international trade, I show the effects of skill-bias knowledge diffusion. The theory suggests that skill-biased technological diffusion need not increase skill premia, as sectoral biases can exert countervailing forces. Second, I test implications from the theory using United Nations industry data. Skill-biased knowledge diffusion tends to be associated with rising local skill-premia more in skill-intensive industries than unskill-intensive ones. Thus sectoral biases can help us see the extent of such technological spillovers.
    Date: 2007–07
  14. By: Ligthart, J.E.; Da Silva, J. (Tilburg University, Center for Economic Research)
    Abstract: The paper empirically investigates the determinants of currency invoicing in Dutch goods trade with OECD countries. To this end, a currency-share systems approach is employed, which is applied to quarterly panel data for 1987?1998. One of the key findings is that a country?s share of producer currency pricing falls if demand in the foreign export market falls. In addition, we find that the better developed the partner country?s banking sector and the larger its share in world trade, the lower is the share of Dutch guilder invoicing. A higher expected rate of inflation in the partner country increases Dutch guilder invoicing. The depth of the foreign exchange market of a currency, a country?s share in world trade, and a country being part of the European Union are key determinants of vehicle currency use.
    Keywords: invoicing currency;Grassman?s law;exchange rate risk;local currency pricing;producer currency pricing;vehicle currencies
    JEL: F14 F31
    Date: 2007
  15. By: Irene Brambilla; Amit Khandelwal; Peter Schott
    Abstract: This paper analyzes China's experience under U.S. apparel and textile quotas. It makes use of a unique new database that tracks U.S. trading partners' performance under the quota regimes established by the global Multifiber Arrangement (1974 to 1995) and subsequent Agreement on Textiles and Clothing (1995 to 2005). We find that China was relatively more constrained under these regimes than other countries and that, as quotas were lifted, China's exports grew disproportionately.
    JEL: F1 F13 F15
    Date: 2007–08
  16. By: Patricia Waeger
    Abstract: The present paper deals with a topic that pertains to Health Economics as well as to Trade Theory – Trade in Health Services. It is intended to deliver an analytical framework for the assessments of this new sector of international trade which takes into account both the ‘general welfare aspects’ and the effects for the achievement of general ‘health system goals’. While to former will be scrutinized by the subcategories allocation, accumulation and location effects, the latter is aligned with the OECD Health System Performance Framework which mentions three major health system goals that are ‘Health Improvement & Outcome’, ‘Responsiveness & Access’ and ‘Financial Contribution & Health Expenditures’. For this purpose trade in Health Services is split up according to the four modes of service supply introduced by the General Agreement of Trade in Services (GATS). For each mode examples are enclosed and the current level of trade is analysed. It is also examined what are the major obstacles for trade in these modes and what liberalization perspectives are given. The subsequent discussion and plausibility considerations of how each mode may contribute to improve efficiency as well as equity in national health systems is a systematic starting point for further research. It provides a first insight in how trade in Health Services could help to overcome resource constraints in national health systems as well as allude to the potential risks of which sight shouldn’t be lost.
    Date: 2007–07
  17. By: Stefano DellaVigna; Eliana La Ferrara
    Abstract: Illegal arms are responsible for thousands of deaths in civil wars every year. Yet, their trade is very hard to detect. We propose a method to statistically detect illegal arms trade based on the investor knowledge embedded in financial markets. We focus on eight countries under UN arms embargo in the period 1990-2005, and analyze eighteen events during the embargo that suddenly increase or decrease conflict intensity. If the weapon-making companies are not trading or are trading legally, an event worsening the hostilities should not affect their stock prices or affect them adversely, since it delays the removal of the embargo. Conversely, if the companies are trading illegally, the event may increase stock prices, since it increases the demand for illegal weapons. We detect no significant effect overall. However, we find a large and significant positive reaction for companies head-quartered in countries where the legal and reputation costs of illegal trades are likely to be lower. We identify such countries using measures of corruption and transparency in arms trade. We also suggest a method to detect potential embargo violations based on stock reactions by individual companies, including chains of reactions. The presumed violations are higher for conflicts with more UN investigations and for companies with more Internet stories regarding embargo.
    JEL: G14 J00 O17
    Date: 2007–08
  18. By: Mariano Bosch (London School of Economics); Edwin Goni (World Bank); William Maloney (World Bank and IZA)
    Abstract: This paper studies gross worker flows to explain the rising informality in Brazilian metropolitan labor markets from 1983-2002. This period covers two economic cycles, several stabilization plans, a far-reaching trade liberalization, and changes in labor legislation through the Constitutional reform of 1988. Focusing first on cyclical patterns, we confirm Bosch and Maloney’s (2006) findings for Mexico that the patterns of worker transitions between formality and informality correspond primarily to the job-to-job dynamics observed in the US and not to the traditional idea of informality constituting the inferior sector of a segmented market. However, we also confirm distinct cyclical patterns of job finding and separation rates that lead to the informal sector absorbing more labor during downturns. Second, focusing on secular movements in gross flows and the volatility of flows, we find the rise in informality to be driven primarily by a reduction in job finding rates in the formal sector. A small fraction of this is driven by trade liberalization, and the remainder seems driven by the rising labor costs and reduced flexibility arising from Constitutional reform.
    Keywords: gross worker flows, labor market dynamics, informality, labor costs, trade liberalization
    JEL: J23 J38 J63 J65 O17 F16
    Date: 2007–08
  19. By: Kikuchi, Toru
    Abstract: In this article I examine how the network externalities of communications activities and trading opportunities interact to determine the structure of comparative advantage. These interactions are examined by constructing a two-country, three-sector model of trade involving a country-specific communications network sector. The role of the connectivity of network providers, which allows users of a network to communicate with users of another network, is also explored.
    Keywords: Network Externalities; Comparative Advantage
    JEL: F12
    Date: 2007
    Abstract: We analyse the immigration flows to Western Europe in the sixties. We develop a theoretical model tailored to account for some of the key features of this period, i.e., trade in manufacturing that essentially involved advanced countries, the growing administration of labour markets in Western Europe and the huge inflow of low skilled immigrants from the South (less advanced countries) into Western Europe. Two propositions are subsequently derived from this model. First, the immigration flow increases with the skill premium in the country of destination. Second, for a given skill premium, immigration is an increasing function of both the host country’s working population and its relative endowment in skilled labour. The first proposition reflects a demand side effect that diverges from the result of the traditional self-selecting approach to migration, i.e., that a higher skill premium in the country of destination tends to discourage potential low-skilled migrants. Estimations implemented for a panel of four European countries (Belgium, France, Sweden and West Germany) over the period 1960-1975 corroborate to a large extent our propositions. We also find that none of the supply determinants are individually significant at equilibrium. These results confirm the hypothesis that immigration to Western Europe in the sixties was primarily demand driven.
    Keywords: Immigration, International Division of Labour, Wage Inequality
    JEL: F22 J31
    Date: 2007–06

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