nep-int New Economics Papers
on International Trade
Issue of 2008‒04‒29
twenty papers chosen by
Martin Berka
Massey University

  1. China's Local Comparative Advantage By James Harrigan; Haiyan Deng
  2. Pricing-to-market, trade costs, and international relative prices By Andrew Atkeson; Ariel Burstein
  3. Endogenous Variety and the Gains from Trade By Costas Arkolakis; Svetlana Demidova; Peter J. Klenow; Andrés Rodríguez-Clare
  4. Vehicle currency By Michael B. Devereux; Shouyong Shi
  5. Globalization and Inter-occupational Inequality in a Panel of Countries: 1983-2003 By Munshi, Farzana
  6. Differentiated Products and Evasion of Import Tariffs By Narciso, Gaia; Smarzynska Javorcik, Beata
  7. Market Potential and Development By Mayer, Thierry
  8. Characterizing Euro Area Multinationals By Ingo Geishecker; Holger Görg; Daria Taglioni
  9. Interregiona;Decomposition of labor productivity differences in China, 1987-1997 By Yang, Ling; Lahr, Michael/L
  10. Trade Possibilities and Non-Tariff Barriers to Indo-Pak Trade By Nisha Taneja
  11. What a Difference Trade Makes - Export Activity and the Flexibility of Collective Bargaining Agreements By Wolf Dieter Heinbach; Stefanie Schröpfer
  12. Trade Policies and Export growth - employment and poverty impact in Tanzania By Levin, Jörgen; Olin, Mikael
  13. Fast Track Authority and International Trade Negotiations By Conconi, Paola; Facchini, Giovanni; Zanardi, Maurizio
  14. Trade Adjustment and Human Capital Investments: Evidence from Indian Tariff Reform By Edmonds, Eric V; Pavcnik, Nina; Topalova, Petia
  15. OECD Agricultural Trade Reforms Impact on India's Prices and Producers Welfare By Surabhi Mittal
  16. Was Germany Ever United? Evidence from Intra- and International Trade, 1885 -1933 By Wolf, Nikolaus
  17. Using a complex weighted-network approach to assess the evolution of international economic integration: The cases of East Asia and Latin America By Javier Reyes; Giorgio Fagiolo; Stefano Schiavo
  18. Imports "R" Us: Retail Chains as Platforms for Developing-Country Imports By Emek Basker; Pham Hoang Van
  19. Technology Choice, Change of Trade Structure, and A Case of Hungarian Economy By Yoshino, Hisao
  20. Challenges for China's Agricultural Exports: Compliance with Sanitary and Phytosanitary Measures By Dong, Fengxia; Jensen, Helen H.

  1. By: James Harrigan; Haiyan Deng
    Abstract: China's trade pattern is influenced not just by its overall comparative advantage in labor intensive goods but also by geography. We use two variants of the Eaton-Kortum (2002) model to study China's local comparative advantage. The theory predicts that China's share of export markets should grow most rapidly where China's share is initially large. A corollary is that exporters that have a big market share where China's share is initially large should see the largest fall in their market shares. These market share change predictions are strongly supported in the data from 1996 to 2006. We also show theoretically that since trade costs are proportional to weight rather than value, relative distance affects local comparative advantage as well as the overall volume of trade. The model predicts that China has a comparative advantage in heavy goods in nearby markets, and lighter goods in more distant markets. This theory motivates a simple empirical prediction: within a product, China's export unit values should be increasing in distance. We find strong support for this effect in our empirical analysis on product-level Chinese exports in 2006.
    JEL: F1 F14
    Date: 2008–04
  2. By: Andrew Atkeson; Ariel Burstein
    Abstract: International relative prices across industrialized countries show large and systematic deviations from relative purchasing power parity. We embed a model of imperfect competition and variable markups in a quantitative model of international trade. We find that when our model is parameterized to match salient features of the data on international trade and market structure in the US, it can reproduce deviations from relative purchasing power parity similar to those observed in the data because firms choose to price-to-market. We then examine how pricing-to-market depends on the presence of international trade costs and various features of market structure.
    Date: 2008
  3. By: Costas Arkolakis; Svetlana Demidova; Peter J. Klenow; Andrés Rodríguez-Clare
    Abstract: We explore the implications of models with increasing returns, endogenous variety and firm-level heterogeneity for the quantification of the gains from trade. We first focus on the impact of trade liberalization on imported variety by analyzing the experience of Costa Rica from 1986 to 1992. We find that although liberalization triggered a sizable increase in variety, the resulting welfare gains were small because of strong heterogeneity across imported goods. Upon trade liberalization, the new varieties are imported in small quantities, and hence contribute little to welfare. We then present a model with firm-level increasing returns, differentiated goods, monopolistic competition, endogenous variety and free entry to show that total variety (domestic plus imported) can either increase, decrease or remain constant with trade liberalization. More importantly, the gains from trade do not depend on what happens to total variety. In fact, we find that, conditional on the estimated elasticities of trade with respect to trade costs, models with increasing returns, endogenous variety, free or restricted entry, and firm-level heterogeneity have exactly the same implications for welfare gains from trade liberalization as traditional models.
    JEL: F10 F12
    Date: 2008–04
  4. By: Michael B. Devereux; Shouyong Shi
    Abstract: While in principle, international payments could be carried out using any currency or set of currencies, in practice, the US dollar is predominant in international trade and financial flows. The dollar acts as a "vehicle currency" in the sense that agents in nondollar economies will generally engage in currency trade indirectly using the US dollar rather than using direct bilateral trade among their own currencies. Indirect trade is desirable when there are transactions costs of exchange. This paper constructs a dynamic general equilibrium model of a vehicle currency. We explore the nature of the efficiency gains arising from a vehicle currency, and show how this depends on the total number of currencies in existence, the size of the vehicle currency economy, and the monetary policy followed by the vehicle currency's government. We find that there can be very large welfare gains to a vehicle currency in a system of many independent currencies. But these gains are asymmetry weighted towards the residentsof the vehicle currency country. The survival of a vehicle currency places natural limits on the monetary policy of the vehicle country.
    Keywords: International trade ; Dollar, American ; Equilibrium (Economics) - Mathematical models ; Monetary policy
    Date: 2008
  5. By: Munshi, Farzana (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: How does globalization affect inter-occupational wage inequality within countries? This paper empirically examines this issue by focusing on two dimensions of globalization, openness to trade and openness to capital, using a relatively new dataset on occupational wages. Estimates from dynamic models for 52 countries for the 1983-2002 period suggest that openness to trade contributes to an increase in occupational wage inequality within developed countries, but that the effect diminishes with an increased level of development. In the context of developing countries, the results suggest that the effect of openness to trade on wage inequality is insignificant and does not vary with the level of development. Our results also suggest that openness to capital does not affect occupational wage inequality in either developed or developing countries.<p>
    Keywords: openness to trade; openness to capital; foreign direct investment; occupational wage inequality; panel data; dynamic model
    JEL: C33 F15 F16 F23 J31
    Date: 2008–04–23
  6. By: Narciso, Gaia; Smarzynska Javorcik, Beata
    Abstract: An emerging literature has demonstrated some unique characteristics of trade in differentiated products. This paper contributes to the literature by postulating that differentiated products may be subject to greater tariff evasion due to the difficulties associated with assessing their quality and price. Using product-level data on trade between Germany and 10 Eastern European countries during 1992-2003, we find empirical support for this hypothesis. We show that the trade gap, defined as the discrepancy between the value of exports reported by Germany and the value of imports from Germany reported by the importing country, is positively related to the level of tariff in 8 out of 10 countries. Further, we show that the responsiveness of the trade gap to the tariff level is greater for differentiated products than for homogenous goods. A one-percentage-point increase in the tariff rate is associated with a 0.4% increase in the trade gap in the case of homogenous products and a 1.7% increase in the case of differentiated products. Finally, the data indicate that while underreporting of quantities takes place for all products, only differentiated products are subject to misrepresentation of the import prices. There is no evidence of tariff evasion taking place through product misclassification.
    Keywords: differentiated products; international trade; tariff evasion; transition economies
    JEL: F1 H26
    Date: 2008–04
  7. By: Mayer, Thierry
    Abstract: This paper provides evidence on the long-term impact of market potential on economic development. It derives from the New Economic Geography literature a structural estimation where the level of factors' income of a country is related to its export capacity, labelled Market Access (MA) by Redding and Venables (2004), or Real Market Potential (RMP) by Head and Mayer (2004). The empirical part evaluates this market potential for all countries in the world with available trade data over the 1960-2003 period and relates it to income per capita. Overall results show that market potential is a powerful driver of increases in income per capita.
    Keywords: Development; Gravity; International Trade; Market Potential
    JEL: F15 O11
    Date: 2008–04
  8. By: Ingo Geishecker; Holger Görg; Daria Taglioni
    Abstract: This study uses firm-level data on a large sample of European manufacturing firms to investigate the links between opening up foreign affiliates and firms' productivity. The analysis is guided by recent theoretical models of international trade with firm heterogeneity. The paper finds that while only a small share of euro area firms locate affiliates abroad, these firms account for over-proportionally large shares of output, employment and profits in their home countries. They have higher survival rates and their productivity growth is also higher. The strongest contribution is by productivity growth of existing firms with a multinational status rather than entry into the multinational status. Finally, there are performance premia for multinationals with a large number of affiliates abroad relative to those with a small number
    Keywords: multinational enterprises, productivity growth, productivity decomposition, survival
    JEL: F23 F43 L25
    Date: 2008–04
  9. By: Yang, Ling; Lahr, Michael/L
    Abstract: The literature on regional disparities in China is both broad and deep. Nonetheless much of its focus has been on the effects of trade liberalization and national policies toward investment in interior provinces. Few pieces have examined whether the disparities might simply be due to differences in industry mix, final demand, or even interregional trade. Using multiregional input-output tables and disaggregated employment data, we decompose change in labor productivity growth for seven regions of China between 1987 and 1997 into five partial effects—changes in value added coefficients, direct labor requirements, aggregate production mix, interregional trade, and final demand. Subsequently we summarize the contributions to labor productivity of the different factors at the regional level. In this way, we present a new perspective for recent causes of China’s interregional disparity in GDP per worker.
    Keywords: Decomposition; input-output analysis; productivity; regional disparity; China
    JEL: O1 C6 R11 O4
    Date: 2008–04–04
  10. By: Nisha Taneja (Indian Council for Research on International Economic Relations)
    Abstract: This paper aims to identify the bilateral trade possibilities and non-tariff barriers between India and Pakistan. The study shows that there is a large untapped trade potential between the two countries. Using the potential trade approach, the study finds that the export potential from India to Pakistan is to the tune of US$ 9.5 billion while that from Pakistan to India is US$ 2.2 billion. Items having export potential from Pakistan are largely in the textile sector while items having export potential from India are predominantly in non-textile sectors. Very few items having export potential from India are on the positive list adopted by Pakistan. At the same time there are several items that India is importing from other countries but not from Pakistan. This indicates that there is a huge information gap on both sides on items that can be imported by India from Pakistan. A working definition of non-tariff barriers adopted in the study included six major categories, namely, quantitative restrictions, trade facilitation and customs procedures, technical barriers to trade and sanitary and phytosanitary measures, financial measures, para-tariff measures and visas. The study was based on an extensive survey conducted in several cities in India and Pakistan. Further, despite the two countries having liberalized their import regimes, Pakistan continues to follow a positive list approach towards Indian imports. The study identifies the ways in which this policy impedes India's exports and recommends the dismantling of the positive list. It also identifies problems related to transportation, custom procedures, rules of origin certification and valuation and suggests measures to address them. The imposition and application of standards in India was perceived as a major non-tariff barrier by Pakistani exporters. The study found that even though the TBT and SPS measures are not discriminatory across trading partners, Pakistani exports to India are surely affected by these. Pakistan has an export interest in textiles and agricultural products which also happen to be sectors where import restrictions/standards are most rigorously applied by India. It also found that due to a restrictive visa regime only selected traders have access to trade-related information. Thus lack of transparency, market imperfections and information asymmetries on both sides raise transaction costs and restrict market access for several other aspiring traders.
    Keywords: Trade, Trade policy, non-tariff barriers, South Asia, India Pakistan and International Relations
    JEL: F1 F13 F5
    Date: 2007–10
  11. By: Wolf Dieter Heinbach; Stefanie Schröpfer
    Abstract: The prevalence of opening clauses in collective bargaining agreements may indicate a tendency to a higher decentralised wage settlement. Increasing competition on international product markets is assumed to be one reason for wage-setting decentralisation, whereas theoretical explanations focus currently on the change of production structure and the impact of exogenous shocks. Incorporating stylised facts about exporting firms, new trade models suggest a different way of adjustment to increasing competition depending on a firm's nature. While the most productive exporters expand into new markets, small, less productive non-exporters are threatened by import competition. Based on the model from Bernard et al. (2003), we apply the theoretical implications to explain why decentralisation in bargaining may arise. We examine in a second step whether small, less productive, non-exporting firms paying low average wages, possess a higher propensity to use opening clauses than more productive, large exporters with a high wage level. Based on IAB Establishment Data covering the German Manufacturing, our results indicate that firms exporting to EMU countries -- but not exporters in general -- have a lower propensity of using opening clauses than non-exporters. However, inconsistent with theory, slight evidence suggests a rising propensity with increasing firm size and increasing wage level.
    Keywords: trade model;opening clauses; collective bargaining;
    JEL: J31 J51
    Date: 2007–12
  12. By: Levin, Jörgen (Department of Business, Economics, Statistics and Informatics); Olin, Mikael (Department of Business, Economics, Statistics and Informatics)
    Abstract: This report focuses on trade and exchange rate policies in Tanzania. The composition of Tanzanian exports has changed dramatically since early 2000. In examining the determinants of trade with a particular focus on Tanzanian exports, we found that changes in the real exchange rate did not have a significant impact on exports. However, supply-side effects and trading partner economic performance are more important, as is the distance to market (or transport cost). The second part of this report discusses the impact of trade reforms on employment and poverty in the Tanzanian economy. In the long-term scenarios poorer households seem to gain more from trade liberalisation compared to the richer household groups. In the short-term, trade liberalisation would be beneficial to female workers and poor households, if labour is able to move between sectors. If wages are rigid, trade liberalisation will lead to unemployment and wages for casual labour will drop significantly. A nominal wage increase during liberalisation can have a significant impact on unemployment, driving casual workers’ wages down further. If the trade union adjusts worker premiums during trade reform, this would not only save some of the jobs of members, but also benefit non-unionised workers in other sectors as well. The alternative option of a reduction in export taxes would have a stronger impact on export supply, poor households would gain more than with liberalisation..
    Keywords: Trade liberalisation; labour markets; poverty; Tanzania
    JEL: C68 F01 F16
    Date: 2008–04–22
  13. By: Conconi, Paola; Facchini, Giovanni; Zanardi, Maurizio
    Abstract: Fast Track Authority (FTA) is the institutional procedure in the Unites States whereby Congress grants to the President the power to negotiate international trade agreements. Under FTA, Congress can only approve or reject negotiated trade deals, with no possibility of amending them. In this paper, we examine the determinants of FTA voting decisions and the implications of this institutional procedure for trade negotiations. We describe a simple two-country trade model, in which industries are unevenly distributed across constituencies. In the foreign country, trade negotiating authority is delegated to the executive, while in the home country Congress can retain the power to amend trade agreements. We show that legislators’ FTA voting behavior depends on the trade policy interests of their own constituencies as well as those of the majority of Congress. Empirical analysis of the determinants of all FTA votes between 1974 (when fast track was first introduced) and 2002 (when it was last granted) provides strong support for the predictions of our model.
    Keywords: Fast Track Authority; Strategic Delegation; Trade Negotiations
    JEL: D72 F13
    Date: 2008–04
  14. By: Edmonds, Eric V; Pavcnik, Nina; Topalova, Petia
    Abstract: Does trade policy influence schooling and child labor decisions in low income countries? We examine this question in the context of India's 1991 tariff reforms. Overall, in the 1990s, rural India experienced a dramatic increase in schooling and decline in child labor. These trends were attenuated in communities where employment was concentrated in industries loosing tariff protection. The data suggest that this failure to follow the national trend of increasing schooling and diminishing work is associated with a failure to follow the national trend in poverty reduction. Schooling costs appear to play a large role in this relationship between poverty, schooling, and child labor. Extrapolating from our results, our estimates imply that roughly half of India's rise in schooling and a third of the fall in child labor during the 1990s can be explained by falling poverty and therefore improved capacity to afford schooling.
    Keywords: child labour; India; literacy; schooling; trade liberalization
    JEL: F13 F14 F16
    Date: 2008–04
  15. By: Surabhi Mittal (Indian Council for Research on International Economic Relations)
    Abstract: Rich countries use a combination of domestic market interventions and border protection or export subsidies as a part of their domestic policies. Developed countries such as the United States and the European Union (EU) resort to trade distorting policies to make their crop more competitive - both groups maintain high domestic prices for producers, stimulate production, and thus distort prices in the world market. The distorting effects of international trade can be distinguished between consumer surplus, producer surplus and tariff revenue approaches. The present paper emphasizes on the welfare of the producers with the main focus on small farmers. The analysis presented in the paper is an approximation of the general general equilibrium analysis. The four parts of this approximation are: first, the estimation of the world price effect of removal of OECD (Organisation for Economic Co-operation and Development) distortions; second, estimation of the effects of changes in world prices on domestic prices through a price transmission model; third, estimation of the impact on domestic production through a supply response model; and, four, the estimation of changes in supply and welfare on the poor small farmers. The simulation exercise shows that due to elimination of subsidies in OECD countries the world crop prices are expected to rise. The results confirm that the depressed world prices can be corrected by removal of OECD subsidies, but the challenge for India remains: How much can these price corrections benefit the farmers? India's domestic price response to this world price change is very small for rice and wheat and slightly better for cotton and sugar. On the production front, with reduction in subsidies and rising of the world price, the production in OECD countries would decline, but it is not very clear if this would have a discernable effect on India's production. In response to the rise in world price, this paper concludes that this change would have almost negligible impact on India's production for rice and wheat and a marginal increase in the production of cotton and sugar. The welfare impact on small farmers based on these changes is also estimated. The important fact to be observed in this study is that the developed countries' policies protecting their farming sector critically affect the lives of billions of people who depend on agriculture in developing countries.
    Keywords: OECD Agriculture, Trade Policy, Subsidy Elimination, Producer Welfare
    JEL: F13 F17 Q17
    Date: 2007–07
  16. By: Wolf, Nikolaus
    Abstract: This paper asks whether Germany was ever an economically integrated area. I explore the geography of trade costs in a new data set of about 40,000 observations on regional trade flows within and across the borders of Germany over the period 1885 – 1933. There are three key results. First, the German Empire before 1914 was a poorly integrated economy, both relative to integration across the borders of the German state and internally. Second, this internal fragmentation had its origins in administrative borders within Germany, in a geographical barrier that divided Germany roughly along natural trade routes into east and west, and in a considerable cultural heterogeneity within Germany prior to 1919. Third, internal integration improved along with external disintegration in the wake of the war, partly due to border changes along the lines of ethno-linguistic heterogeneity and again with the Great Depression. By the end of the Weimar Republic in 1933, Germany was reasonably well integrated.
    Keywords: aggregation bias; border effects; economic integration; Germany
    JEL: F15 N13 N14 N90
    Date: 2008–04
  17. By: Javier Reyes; Giorgio Fagiolo; Stefano Schiavo
    Abstract: Over the past four decades the High Performing Asian Economies (HPAE) have followed a development strategy based on the exposure of their local markets to the presence of foreign competition and on an outward oriented production. In contrast, Latin American Economies (LATAM) began taking steps in this direction only in the late eighties and early nineties, but before this period these countries were more focused on the implementation of import substitution policies. These divergent paths have led to sharply different growth performance in the two regions. Yet, standard trade openness indicators fall short of portraying the peculiarity of the Asian experience, and to explain why other emerging markets with similar characteristics have been less successful over the last 25 years. We offer an alternative perspective on the issue by exploiting recently-developed indicators based on weighted-network analysis. We study the evolution of the core-periphery structure of the World Trade Network (WTN) and, more specifically, the evolution of the HPAE and LATAM countries within this network. Using random-walk betweenness centrality measure, the paper shows that the HPAE countries are more integrated into the WTN and many of them, which were in the periphery in the eighties, are now in the core of the network. In contrast, the LATAM economies, at best, have maintained their position over the 1980 - 2005 period, and in some cases have fallen in the ranking of centrality.
    Keywords: Networks; World trade web; international trade; weighted network analysis; integration; trade openness; LATAM vs. HPAE countries
    JEL: F10 D85
    Date: 2008–04
  18. By: Emek Basker (Department of Economics, University of Missouri-Columbia); Pham Hoang Van
    Abstract: We use data from the Census of Retail Trade and the International Trade Commission to test the theory that big retail chains serve as a platform for imports from LDCs. Controlling for overall sector growth, Chinese and other LDC imports have increased disproportionately in retail sectors with the largest consolidation into chains over the period 19972002. Our estimation results imply that between 1997 and 2002 the marginal propensity to import from China was 3.3 times larger for the largest firms than for smaller retailers. The disproportionate growth of large retailers over this period explains 19% of the growth in consumer goods imports from China.
    Keywords: Imports, Retail Chains
    JEL: F12 F14 L11 L81
    Date: 2008–04–23
  19. By: Yoshino, Hisao
    Abstract: In the IT industry, there has been a remarkable increase in the demand for system LSI. A system LSI must be tailor-designed for each electrical appliance, and then produced. It is said that in recent years, this production method has made the IC cycle ambiguous. It can be sought that the choice of whether the economy pursues a development path centering on technology which is tradable or technology which is embodied in labor, depends on the historical background. In this paper, the economic background is explained in order to analyze and capture movements in the IT industry and technology. Then, an econometric model for Hungary has been constructed to estimate the effect of technological progress on the economy.
    Keywords: Technology Choice, IT industry, Trade Structure, Econometric Model, Information technology, Information services industry, International trade
    JEL: D24 E27 O31
    Date: 2008–03
  20. By: Dong, Fengxia; Jensen, Helen H.
    Abstract: China's bilateral trade in food and agricultural products has grown dramatically following entry into the WTO, but the country faces significant problems related to sanitary and phytosanitary (SPS) compliance. The authors summarize current SPS conditions, the food safety regulatory system, production environment, inspection technology, and information systems. This discussion includes China's progress on resolving SPS problems and adjusting to SPS measures in world markets.
    Keywords: China, food safety
    Date: 2008–04–13

This nep-int issue is ©2008 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.