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

  1. Trade, product variety and welfare: A quantitative assessment for the transition economies in Central and Eastern Europe By Funke, Michael; Ruhwedel, Ralf
  2. Preference Erosion: The case of Bangladesh - A SUR-EC-AR Gravity Model of Trade By Erika Vianna Grossrieder
  3. Labor Market Rigidities, Trade and Unemployment By Elhanan Helpman; Oleg Itskhoki
  4. Hong Kong's Trade Patterns and Trade Elasticities By Li-gang Liu; Kelvin Fan; Jimmy Shek
  5. Innovation and the Export-productivity Link By Cassiman, Bruno; Golovko, Elena
  6. International Trade and Domestic Distortions: Modelling the Transition Process By Jean-Luc Gaffard; Francesco Saraceno
  7. Do asymmetric terms of trade shocks affect private savings in a transition economy? By Chowdhury , Abdur R.
  8. Does A Strong Dollar Increase Demand For Both Domestic And Imported Goods? By John J. Heim
  9. Sense and Nonsense on Asia's Export Dependency and The Decoupling Thesis By Dong He; Lillian Cheung; Jian Chang
  10. Structural Determinants of Hong Kong's Current Account Surplus By Frank Leung
  11. Export variety and economic growth in East European transition economies By Funke, Michael; Ruhwedel, Ralf
  12. European Community--Sugar : cross-subsidization and the World Trade Organization By Howse, Robert; Hoekman, Bernard
  13. Hierarchical Trade and Endogenous Price Distortions By Hans Gersbach; Hans Haller
  14. Landlockedness, infrastructure and trade : new estimates for central Asian countries By Grigoriou, Christopher
  15. Export Dynamics in Colombia:Firm-Level Evidence By Jonathan Eaton; Marcela Eslava; Maurice Kugler; James Tybout
  16. Canada-Wheat : discrimination, non-commercial considerations, and state trading enterprises By Trachtman, Joel; Hoekman, Bernard
  17. The Post-Crisis Sequencing of Economic Integration in Asia: Trade as a Complement to a Monetary Future By Michael G. Plummer
  18. Please Pass the Catch-up The Relative Performance of Chinese and Foreign Firms in Chinese Exports By Bruce Blonigen; Alyson Ma
  19. Congress, Treasury, and the Accountability of Exchange Rate Policy: How the 1988 Trade Act Should Be Reformed By C. Randall Henning

  1. By: Funke, Michael (BOFIT); Ruhwedel, Ralf (BOFIT)
    Abstract: We calculate welfare gains of trade liberalization in the Central and East European transition economies, following the approach of Romer (1994), who emphasized that proper modeling of the impact of trade restrictions on the number of available product varieties is crucial to quantifying the welfare impact of trade liberalization. The empirical work relies on direct measures of product variety calculated from 5-digit trade data. Although the issue is far from settled, the emerging conclusion is that freer trade has boosted welfare.
    Keywords: trade liberalization; product variety; welfare; transition economies
    JEL: D60 F14 F15
    Date: 2007–09–06
  2. By: Erika Vianna Grossrieder (IUHEI, The Graduate Institute of International Studies, Geneva)
    Abstract: This paper analyses the impact of preference erosion on Bangladesh’s clothing industry coming from both the ATC quotas phasing-out and the reduction on MFN tariffs under NAMA negotiations. First, it undertakes a numerical exercise to estimate the effects of tariffs reduction in the US and the EU on Bangladesh’s economic performance. Then it uses a SUR-EC-AR gravity model of trade to measure the effects of ATC quotas phasing out and NAMA negotiations on trade pattern. The results suggest that Bangladesh gains from importing countries’ tariffs reduction, independently of ATC implementation. Despite the fact that these results may underestimate the effects of quotas phasing out on T&C trade pattern, the model’s structure presents the advantage of eliminating the aggregation bias problem. It would be interesting to expand the econometric model to include other trade partners and new variables.
    Keywords: International Economics, Trade, Preference Erosion, ATC, NAMA, SUR-EC-AR, Gravity Model,Quota, textiles
    JEL: F1 F5 C3
    Date: 2006–10
  3. By: Elhanan Helpman; Oleg Itskhoki
    Abstract: We study a two-country two-sector model of international trade in which one sector produces homogeneous products while the other produces differentiated products. The differentiated-product industry has firm heterogeneity, monopolistic competition, search and matching in its labor market, and wage bargaining. Some of the workers searching for jobs end up being unemployed. Countries are similar except for frictions in their labor markets. We study the interaction of labor market rigidities and trade impediments in shaping welfare, trade flows, productivity, price levels and unemployment rates. We show that both countries gain from trade but that the flexible country -- which has lower labor market frictions -- gains proportionately more. A flexible labor market confers comparative advantage; the flexible country exports differentiated products on net. A country benefits by lowering frictions in its labor market, but this harms the country's trade partner. And the simultaneous proportional lowering of labor market frictions in both countries benefits both of them. The model generates rich patterns of unemployment. Specifically, trade integration -- which benefits both countries -- may raise their rates of unemployment. Moreover, differences in rates of unemployment do not necessarily reflect differences in labor market rigidities; the rate of unemployment can be higher or lower in the flexible country. Finally, we show that the flexible country has both higher total factor productivity and a lower price level, which operates against the standard Balassa-Samuelson effect.
    JEL: F12 F16 J64
    Date: 2007–09
  4. By: Li-gang Liu (Research Department, Hong Kong Monetary Authority); Kelvin Fan (Research Department, Hong Kong Monetary Authority); Jimmy Shek (Research Department, Hong Kong Monetary Authority)
    Abstract: A salient feature of Hong Kong's external trade is its intermediation role. As the entrepot for Mainland China, Hong Kong helps channel raw materials and semi-manufacturing products from the rest of the world to the Mainland for further processing and then helps re-export the processed goods and final products to the rest of the world. Economic theory suggests that the effect of a real exchange rate depreciation on trade balance can be ambiguous. However, if the Marshall-Lerner condition is satisfied, a depreciation of the real exchange rate would lead to an improvement in the trade balance under normal circumstances. Partly because of the complicated nature of re-exports, there has not been adequate study on whether the Marshall-Lerner condition holds for an entrepot economy such as Hong Kong. This paper applies an error-correction model to examine Hong Kong's long-run price and income elasticities as well as its short-run dynamics. Our empirical estimates indicate that the sum of the absolute values of the estimated price elasticities of Hong Kong's direct imports and exports is greater than one, thus implying that the Marshall-Lerner condition holds for Hong Kong. Moreover, changes in re-exports and the re-export earnings are found to be sensitive to changes in the real effective exchange rate of the renminbi and income growth of the Mainland's trading partners. The movement in the real exchange rate between the Hong Kong dollar and the renminbi is found to have a significant influence on merchandise trade flows between Hong Kong and the Mainland, thus indicating the processing trade activities are quite sensitive to changes in the real exchange rate.
    Date: 2006–11
  5. By: Cassiman, Bruno; Golovko, Elena
    Abstract: 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 important 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 the positive association between exports and productivity for this group of firms. For small non-innovating firms with low and medium productivity levels exporting firms continue to exhibit higher productivity than non-exporting firms.
    Keywords: exports; innovation; process innovation; product innovation; productivity
    JEL: D21 O31 O32
    Date: 2007–08
  6. By: Jean-Luc Gaffard (Observatoire Français des Conjonctures Économiques; Université de Nice); Francesco Saraceno (Observatoire Français des Conjonctures Économiques)
    Abstract: According to the standard view, when full competition prevails in product, labour, and capital markets, positive or negative external trade shocks may be accommodated by the migration of jobs between sectors; the negative impact on some households' income of lower nominal wages will be more than offset by lower prices of imported final goods. Unemployment, if any, will be temporary, unless labour market rigidities prevent the necessary adjustment. We argue that trade shocks trigger a process of creative destruction that necessarily causes distortions in the structure of productive capacity and hence market disequilibria. Therefore, the structural change that follows trade shocks can no longer be analysed within an equilibrium framework. The transition following a shock may be characterized by increasing imbalances, and create scope for policy intervention. The model presented in this paper, which focuses on the time dimension of production and market imbalances, allows clarifying the debate.
    Keywords: globalization, trade, financial constraints, creative destruction, wage flexibility, time to build, Firm migration
    JEL: F11 F12 F42 F43
    Date: 2007
  7. By: Chowdhury , Abdur R. (BOFIT)
    Abstract: This paper examines whether terms of trade shocks have an asymmetric effect on private savings in transition economies. A simple three-period framework is developed to show that, in the presence of binding credit constraints in bad states of nature, savings rates can be sensitive to favorable movements in the permanent component of the terms of trade. This result contrasts with the prediction of the conventional consumption-smoothing model. Empirical analysis with a dynamic panel model further confirms that while favorable movements in the permanent component of the terms of trade have an asymmetric effect on private savings, the magnitude of the effect is relatively small. The results are robust for alternative estimators, determinants, and country groupings.
    Keywords: transition; private savings; terms of trade
    JEL: E21 F10 P33
    Date: 2007–09–04
  8. By: John J. Heim (Department of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA)
    Abstract: Rising exchange rates strengthen the dollar and lower prices on imported consumer goods. Lower import prices have two effects. (1) A substitution effect that shifts demand from domestically produced goods to imports. (2) An income effect that increases demand for imports even further. However, it also allows some income previously spent on imports, but no longer needed due to lower import prices, to be shifted to purchases of domestic goods. This paper finds that for the U.S., 1960 - 2000, the income effect overwhelmed the substitution effect. As a result, econometric results suggest declining import prices increased both import demand and demand for domestically produced consumer goods. The estimated increase in demand for domestically produced consumer goods and services was 3.4 times as large as the increase in demand for consumer imports. Also, because of the large increase in GDP resulting from growth in domestic demand, the trade deficit grew slower than domestic output of consumer goods. This finding suggests that while the trade deficit grows as a result of a strengthening dollar, the increase, as a percent of U.S. GDP, is small, about four tenths of a percent for a ten percent strengthening of the dollar.
    JEL: E00 F40
    Date: 2007–08
  9. By: Dong He (Research Department, Hong Kong Monetary Authority); Lillian Cheung (Research Department, Hong Kong Monetary Authority); Jian Chang (Research Department, Hong Kong Monetary Authority)
    Abstract: It has often been argued that East Asia needs to switch from an export-led growth model to a domestic-demand led growth model so as to reduce its vulnerability to a sharp slowdown in the US economy. This paper argues that, indeed, in the foreseeable future, East Asia's business cycle is unlikely to decouple with that of the US, but the switch-of-growth-model argument is problematic because it mixes up the effects of external trade on an economy's cyclical developments and its long-term growth potential. The paper argues that the desirable way to reduce external vulnerabilities is to diversify export markets and to further strengthen domestic institutions and policies in order to reduce the impact of temporary shocks, not by reducing the degree of openness or the share of exports in GDP. The paper further argues that the rising size of domestic demand in Mainland China will overtime help the rest of the region to diversify its export markets away from the major industrialized countries.
    Keywords: Export-led growth, domestic demand-led growth, decoupling
    JEL: F13 F43 O24 O11
    Date: 2007–04
  10. By: Frank Leung (Research Department, Hong Kong Monetary Authority)
    Abstract: Hong Kong as a city-state economy often records current account surplus. Empirical results show that the surplus is positively related to trade openness, terms of trade, volatility of output gap, the M2-to-GDP ratio and the non-service-sector-to-GDP ratio, and is negatively associated with the old-age dependency ratio. Among the explanatory variables, terms of trade and volatility of output gap play a predominate role in explaining movements in the current account balance. From a saving-investment point of view, the joint statistical significance of trade openness, terms of trade and volatility of output gap supports interpretation of Hong Kong's current account balance from the perspective of accumulation of net foreign assets. As a small and highly open economy, Hong Kong is specialised and subject to high income volatility in the face of terms of trade shocks and business cycle fluctuations, with relatively concentrated domestic investment opportunities. As a result, for income smoothing and risk diversification purposes, Hong Kong residents have accumulated substantial net foreign assets by running current account surpluses. From a trade-flow perspective, the shift in economic structure from manufacturing to service (as proxied by the decrease in the non-service-sector-to-GDP ratio) has deprived Hong Kong of a manufacturing base for exports, reducing the merchandise trade balance. Fortunately, this has been more than offset by the expansion of Hong Kong's role as a service centre for trade intermediation (as proxied by the increase in the trade openness ratio, which indicates increasing volume of trade flows being processed by Hong Kong) so that the overall current account has remained largely in surplus. Hong Kong's equilibrium current account surplus is estimated to be about 8.7% of GDP at present. Hong Kong's current account surplus is projected to average 4.4% of GDP over the next decade, smaller than the historical average surplus of 5.8% of GDP. This mainly reflects (1) more intense competition for intermediation of China trade from other Mainland cities (which reduces the pace of generation of external income through service exports), (2) an aging population (which reduces savings and hence the current account balance) and (3) a deterioration of terms of trade as a result of expected renminbi appreciation.
    Date: 2006–10
  11. By: Funke, Michael (BOFIT); Ruhwedel, Ralf (BOFIT)
    Abstract: Utilising panel data for 14 East European transition economies, we find support for the hypothesis that a greater degree of export variety relative to the U.S. helps to explain relative per capita GDP levels. The empirical work relies upon some direct measures of product variety calculated from 5-digit OECD trade data. Although the issue is far from settled, the emerging view is that the index of relative export variety across countries correlates significantly with relative per capita income levels.
    Keywords: product variety; transition economies; Eastern Europe; economic growth; panel data
    JEL: C33 F43 O31 O33 O52
    Date: 2007–09–05
  12. By: Howse, Robert; Hoekman, Bernard
    Abstract: An important recent World Trade Organization dispute settlement case for many developing countries concerned European Union exports of sugar. Brazil, Thailand, and Australia alleged that the exports have substantially exceeded permitted levels as established by European Union commitments in the WTO. This case had major implications for both European Union sugar producers and developing countries that benefited from preferential access to the European Union market. It was also noteworthy in the use of economic arguments by the WTO dispute settlement panel, which held that the excess sugar exports were in part a reflection of illegal de facto cross-subsidization-rents from production that benefited from high support prices being used to cover losses associated with exports of sugar to the world market. Although in principle the economic arguments of the panel could apply to many other policy areas, in practice WTO provisions greatly limit the scope to bring similar arguments for trade in products that are not subject to explicit export subsidy reduction commitments of the type that were made for sugar and other agricultural commodities.
    Keywords: Economic Theory & Research,Trade Law,Tax Law,Food & Beverage Industry,Agribusiness & Markets
    Date: 2007–08–01
  13. By: Hans Gersbach (Center of Economic Research (CER-ETH) at ETH Zurich); Hans Haller (Department of Economics, Virginia Polytechnic Institute and State University, Blacksburg VA, USA)
    Abstract: We study the allocation of commodities through a two-stage hierarchy of competitive markets. Groups or countries trade at global prices while individuals within a group trade at local prices. We identify the free trade and the autarky equilibrium as polar cases. We show that no other two-stage market equilibria exist if the commodity space is two-dimensional. An example demonstrates that other, so-called intermediate equilibria exist for three-dimensional commodity spaces. The example also exhibits endogenous price distortions in third countries when some countries follow distortionary trade policies. We give two existence proofs for intermediate equilibria in higher dimensions. Each proof provides an explicit construction of special classes of intermediate equilibria.
    Date: 2007–09
  14. By: Grigoriou, Christopher
    Abstract: This paper assesses the impact of internal infrastructure and landlockedness on Central Asian trade using a panel gravity equation estimated on a large sample of countries (167 countries over 1992-2004). The panel structure of the dataset makes it possible to control for country-pair specific effects (as opposed to the usual importer and exporter effects) that would otherwise be captured by the coefficients of time-invariant variables such as distance or landlockness. Our findings highlight the need to pursue a dual policy agenda. First, transit corridors are regional public goods and should be managed as such through international cooperation. International Financial Institutions can -and do- play a key role in this regard through assistance, coordination and policy dialogue. Second, the Central Asian countries should actively seek diversification of their tran sit corridors to prevent the creation or maintenance of monopoly positions in transit and bottleneck points such as trans-shipment platforms.
    Keywords: Transport Economics Policy & Planning,Common Carriers Industry,Transport and Trade Logistics,Economic Theory & Research,Free Trade
    Date: 2007–08–01
  15. By: Jonathan Eaton; Marcela Eslava; Maurice Kugler; James Tybout
    Abstract: Research in international trade, both theoretical and quantitative, is increasingly focussed on the role of firm heterogeneity in shaping trade flows. One strand of the literature shows how firm-specific productivity shocks affect the mix of exporting firms and their foreign sales volumes (e.g., Clerides, Lach, and Tybout, 1998; Bernard and Jensen, 1999; Melitz, 2003; Bernard, Eaton, Jensen, and Kortum, 2003; Das, Roberts, and Tybout, 2007; Bernard, Jensen, Reading, and Schott, 2007). These studies provide insight into why some producers export and others do not, and the role of market entry costs in shaping export dynamics. Another strand of the literature documents and interprets the relationship between firms’ productivity levels and the collection of foreign markets that they serve (Eaton, Kortum, and Kramarz, 2004 and 2007). These papers find that most exporting firms sell to only one foreign market, with the frequency of firms’ selling to multiple markets declining with the number of destinations. At the same time, firms selling to only a small number of markets tend to sell to the most popular ones. Less popular markets are served by firms that export very widely. These patterns are consistent with the notion that firms with relatively low marginal costs can profitably exploit relatively more foreign markets.
    Date: 2007–07–24
  16. By: Trachtman, Joel; Hoekman, Bernard
    Abstract: Statutory marketing boards that have exclusive authority to purchase domestic production, sell for export, and set purchase and sales prices of commodities are a type of state trading enterprise that is subject to World Trade Organization disciplines. This paper assesses a recent dispute brought by the United States against Canada, alleging that WTO rules require state trading enterprises to operate solely in accordance with commercial considerations and t hat the Canadian government did not require the Canadian Wheat Board to do so. The panel and Appellate Body found that the primary discipline of the WTO regarding state trading enterprises was nondiscrimination, and that operating on the basis of " commercial considerations " was not an independent obligation. Instead, WTO disciplines regarding the pricing behavior of state trading enterprises use a " commercial considerations " test as a possible indicator of discrimination. Although a significant degree of price discrimination is observed in the case of Canadian wheat exports, there are economic arguments why this might also be pursued by a private, profit maximizing firm.
    Keywords: Trade Law,Markets and Market Access,Economic Theory & Research,Access to Markets,Access to Finance
    Date: 2007–08–01
  17. By: Michael G. Plummer (Johns Hopkins University SAIS-Bologna, Italy and Ganeshan Wignaraja, Asian Development Bank)
    Abstract: Bilateral and regional cooperation initiatives in Asia have been growing in importance over the last five years. These accords span the real and financial sectors; rather than following the more typical pattern of Òtrade first, money laterÓ, recent policy initiatives involve the simultaneous implementation of trade and monetary/financial accords. Given this sequence, is there a case for monetary union in East Asia? Is there a case for expanded free-trade areas (FTAs) in the region? This paper attempts to answer these questions using a variety of empirical techniques, including a Computational General Equilibrium (CGE) model, to evaluate the economics of monetary/financial integration and various configurations of FTAs in Asia. We conclude that, at present, the post-sequencing of economic integration in Asia is developing such that trade agreements will ultimately complement the movement toward financial and monetary integration. While the political constraint on monetary union is real, it is argued that FTAs should help relax this constraint, adding a political complement to the trade complement.
    Date: 2007–07
  18. By: Bruce Blonigen; Alyson Ma
    Abstract: Foreign-invested enterprises (FIEs) account for well over half of all Chinese exports and this share continues to grow. While the substantial presence of FIEs has contributed greatly to the recent export-led growth of China, an important objective of the Chinese government is to ultimately obtain foreign technologies and develop their own technological capabilities domestically. This paper uses detailed data on Chinese exports by sector and type of enterprise to examine the extent to which domestic enterprises are "keeping up" or even "catching up" to FIEs in the volume, composition and quality of their exports. We also use a newly-created dataset on Chinese policies encouraging or restricting FIEs across sectors to examine the extent to which such policies can affect the evolving composition of Chinese exports.
    JEL: F14 L11 L15
    Date: 2007–09
  19. By: C. Randall Henning (Peterson Institute for International Economics)
    Abstract: The controversy within the United States over Chinese exchange rate policy has generated a series of legislative proposals to restrict the discretion of the Treasury Department in determining currency manipulation and to reform the department’s accountability to Congress. This paper reviews Treasury’s reports to Congress on exchange rate policy—introduced by the 1988 Trade Act—and Congress’s treatment of them. It finds that the accountability process has often not worked well in practice: The reports provide only a partial basis for effective congressional oversight. For its part, Congress held hearings on less than half of the reports and overlooked some important substantive issues. Several recommendations can improve guidance to the Treasury, standards for assessment, and congressional oversight. These include (1) refining the criteria used to determine currency manipulation and writing them into law, (2) explicitly harnessing US decisions on manipulation to the International Monetary Fund’s rules on exchange rates, (3) clarifying the general objectives of US exchange rate policy, (4) reaffirming the mandate to seek international macroeconomic and currency cooperation, (5) requiring Treasury to lead an executivewide policy review, and (6) institutionalizing multicommittee oversight of exchange rate policy by Congress. Legislators should strengthen reporting and oversight of broader exchange rate policy in addition to strengthening the provisions targeting manipulation.
    Keywords: Exchange rate policy, currency manipulation, accountability, congressional oversight, China,Treasury, International Monetary Fund
    JEL: F31 F33 F42 F51 F53
    Date: 2007–09

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