nep-int New Economics Papers
on International Trade
Issue of 2008‒05‒10
eighteen papers chosen by
Martin Berka
Massey University

  1. A Pragmatic Approach to Capital Account Liberalization By Prasad, Eswar; Rajan, Raghuram G.
  2. Trade Creation and Diversion Revisited: Accounting for Model Uncertainty and Natural Trading Partner Effects By Theo Eicher; Christian Henn; Chris Papageorgiou
  3. China’s International Competitiveness: Reassessing the Evidence By Ari Van Assche; Chang Hong; Veerle Slootmaekers
  4. Regionalism or Multilateralism? A Political Economy Choice By Giorgia Albertin
  5. Exports under the Flicker of the Northern Lights By Kristjaìnsdoìttir, Helga
  6. Using the Gravity Equation to Explain the Portuguese Immigration-trade Link By Horácio Faustino; Nuno Leitão
  7. Trade Liberalization and Industry Dynamics: A Difference in Difference Approach By Roberto Alvarez; Ricardo Lopez
  8. Indirect Network Eects and the Impact of Trade Liberalization: A Note By Kazumichi, Iwasa; Kikuchi, Toru
  9. TRADE THROUGH FDI: investing in services By Carmen Fillat-Castej—n; Joseph Francois; Julia Woerz
  10. Trade in the WAEMU: Developments and Reform Opportunities By Manuela Goretti; Hans Weisfeld
  11. Agricultural Trade Reform and Rural Prosperity: Lessons from China By Jikun Huang; Yu Liu; Will Martin; Scott Rozelle
  13. Strategic environmental policy under free trade with transboundary pollution By Sikdar, Shiva; Lapan, Harvey E.
  14. Jobless Growth in the Central and Eastern European Countries By Özlem Onaran
  15. Domestic Trade and Market Size in Late Eighteenth-Century France By Guillaume Daudin
  16. Firm Productivity and Exports: Evidence from Ethiopian manufacturing By Bigsten, Arne; Gebreeyesus, Mulu
  17. Foreign Presence, Spillovers, and Productivity: Evidence from Ghana By Waldkirch, Andreas; Ofosu, Andra
  18. India and the Great Divergence: Assessing the Efficiency of Grain Markets in Eighteenth- and Nineteenth-Century India By Roman Studer

  1. By: Prasad, Eswar (Cornell University); Rajan, Raghuram G. (University of Chicago)
    Abstract: Cross-country regressions suggest little connection from foreign capital inflows to more rapid economic growth for developing countries and emerging markets. This suggests that the lack of domestic savings is not the primary constraint on growth in these economies, as implicitly assumed in the benchmark neoclassical framework. We explore emerging new theories on both the costs and benefits of capital account liberalization, and suggest how one might adopt a pragmatic approach to the process.
    Keywords: capital account liberalization, capital controls, collateral benefits, thresholds
    JEL: F2 F3 F4
    Date: 2008–04
  2. By: Theo Eicher; Christian Henn; Chris Papageorgiou
    Abstract: Trade theories covering Preferential Trade Agreements (PTAs) are as diverse as the literature in search of their empirical support. To account for the model uncertainty that surrounds the validity of the competing PTA theories, we introduce Bayesian Model Averaging (BMA) to the PTA literature. BMA minimizes the sum of Type I and Type II error, the mean squared error, and generates predictive distributions with optimal predictive performance. Once model uncertainty is addressed as part of the empirical strategy, we report clear evidence of Trade Creation, Trade Diversion, and Open Bloc effects. After controlling for natural trading partner effects, Trade Creation is weaker - except for the EU. To calculate the actual effects of PTAs on trade flows we show that the analysis must be comprehensive: it must control for Trade Creation and Diversion as well as all possible PTAs. Several prominent control variables are also shown to be robustly related to Trade Creation; they relate to factor endowments and economic policy.
    Keywords: Trade , Trade liberalization , Trade models ,
    Date: 2008–03–20
  3. By: Ari Van Assche; Chang Hong; Veerle Slootmaekers
    Abstract: In this paper we argue that export data are an inadequate tool to measure a country’s international competitiveness when external trade is dominated by export-processing trade. Export data do not necessarily reflect the value produced in an exporting country, but rather capture the gross value of the products that leave a country’s ports. We demonstrate that, in the case of China, this leads to an upward bias in both the perceived quantitative and qualitative threats to the Western economies.
    Keywords: China, export-processing trade, technological intensity, trade balance
    Date: 2008
  4. By: Giorgia Albertin
    Abstract: This paper provides a political economy analysis of the incentives underpinning a country's decision to enter a regional trade agreement when a multilateral free trade agreement is available, and of how entering a regional trade agreement affects the incentives to pursue multilateral trade liberalization. Taking into account the influence exerted by organized interest groups in the formation of trade agreements, we derive a formal condition under which a regional trade agreement is preferred to a multilateral one. Furthermore, we show that a country's decision to enter a regional trade agreement unambiguously undermines the incentives towards multilateral trade liberalization.
    Keywords: International trade agreements , Multilateral trade negotiations , Trade liberalization ,
    Date: 2008–03–20
  5. By: Kristjaìnsdoìttir, Helga
    Abstract: Picture a small open economy in the North Atlantic Ocean, highly dependent on trade with the EU and NAFTA. How important are these trading blocs to the country’s exports? How important is the country’s location and size, and how do these affect the export sectors? A unique version of the gravity model is applied here using an inverse hyperbolic sine function. Typically, the export volume is significantly impacted by the economic size of the exporting country, but in this case it is not. This suggests that the exports from small remote economies are driven by different factors than exports from large conomies.
    Keywords: Exports, gravity model, free trade agreements, panel data
    JEL: C23 F1 F14 F15
    Date: 2008
  6. By: Horácio Faustino; Nuno Leitão
    Abstract: This paper tests the relation between immigration and Portuguese bilateral trade. Using a panel data analysis, the results show that the stock of immigrants has a positive effect on Portuguese exports, imports and bilateral intraindustry trade. The underlying assumption is that immigration contributes to decrease the costs of transactions, which in turn promotes trade flows. The results do not confirm the hypothesis of a negative effect of immigration on Portuguese exports. Our findings suggest that when immigrants to Portugal come from a Latin partner-country, the effects on trade are stronger than in the case of immigrants from non-Latin countries. The study is based on an extended gravitational model, in order to incorporate the qualitative factors as control variables.
    Keywords: intra-industry trade; immigration; gravity model; panel data.
    JEL: C33 F11 F12 F22
    Date: 2008–03
  7. By: Roberto Alvarez (Central Bank of Chile); Ricardo Lopez (Indiana University Bloomington)
    Abstract: Recent models of trade with firm heterogeneity predict that opening to trade reduces the number of firms, increases the average size of firms, and decreases firms’ markups. This paper uses a large dataset for 28 manufacturing industries and 46 countries to test these predictions. The econometric analysis based on the treatment effects literature shows that on average, trade liberalizations do not decrease the number of firms nor increase the average size of firms. Markups appear to decrease during the three years after the liberalization. We also find that the number of firms and the average size of firms increase in comparative advantage industries.
    Keywords: Trade Liberalization, Industry Dynamics, Treatment Effects
    JEL: F10 L11
    Date: 2008–04
  8. By: Kazumichi, Iwasa; Kikuchi, Toru
    Abstract: Indirect network effects exist when the utility of consumers is increasing in the variety of complementary software products available for use with an electronic hardware device. In this note, we examine how trade liberalization affects production structure in the presence of indirect network effects. For these purposes we construct a simple two-country model of trade with two incompatible hardware technologies. It is shown that, given that both types of hardware exist before trade liberalization, liberalization may reduce the variety of hardware technology via intensified network effects. It is also shown that, contrary to the findings of previous studies, some consumers may become worse off as the result of trade. In other words, trade liberalization, which forms the basis for a greater variety of software products, may work as a catalyst for Pareto inferior outcomes.
    JEL: F12
    Date: 2008
  9. By: Carmen Fillat-Castej—n (University of Zaragoza (Spain)); Joseph Francois (Johannes Kepler University (Linz)); Julia Woerz (Austrian National Bank)
    Abstract: The type of relationship between different modes of trading services across international borders is of great interest, not only for the academic literature but also for the formulation trade liberalization offers under the GATS. Even more than for trade in goods, it is thus important to know whether cross-border trade and trade through commercial presence abroad act as complements or substitutes in services. The most commonly used analytical tool in the empirical analysis of this question is the gravity model of trade. This paper offers a consistent theoretical foundation for the application of the gravity model to services and to commercial presence, using a composite demand model with offers testable hypothesis about the complementary or substitutive relationship between different modes of supply. It further links the results to policy variables like market regulations which may act directly or implicitly as barriers to trade. Our empirical test for the sample of OECD countries over the decade 1994- 2004 yields robust complementary effects in the short-run, which is reinforced in the long-run by an increased potential for cross-border imports based on previous FDI inflows. A detailed analysis by individual service sectors highlights business, communication and financial services as showing the largest potential for cross-border trade when market regulations are reduced and when commercial presence increases.
    Keywords: FDI, imports, services, panel data, substitution and complementary effects
    JEL: F10 F14 F21
    Date: 2008–05–01
  10. By: Manuela Goretti; Hans Weisfeld
    Abstract: This paper provides an overview of trade reform in the West African Economic and Monetary Union (WAEMU) since 1996 and a quantitative assessment of potential effects on trade patterns and tariff revenue of the current reform agenda. Despite evidence of significant trade complementarities within WAEMU, implementation of the union's current trade regime still suffers from persistent non-tariff barriers and administrative weaknesses. Based on an assessment of prospects for further trade integration, the paper also recommends strengthening the implementation of the present tariff union and supports the plan to extend it to all ECOWAS members. Finally, the paper stresses that an Economic Partnership Agreement with the EU could bring to the region the political momentum needed to address the weaknesses of the current trade regime, while also underlining the corresponding challenges in terms of trade diversion and tariff revenue losses.
    Keywords: West African Economic and Monetary Union , Trade , Tariffs , Tax revenues ,
    Date: 2008–03–21
  11. By: Jikun Huang; Yu Liu; Will Martin; Scott Rozelle
    Abstract: Tariffs on agricultural products fell sharply in China both prior to, and as a consequence of, China's accession to the WTO. The paper examines the nature of agricultural trade reform in China since 1981, and finds that protection was quite strongly negative for most commodities, and particularly for exported goods, at the beginning of the reforms. Since then, the taxation of agriculture has declined sharply, with the abolition of production quotas and procurement pricing, and reductions in trade distortions for both imported and exported goods. Rural well-being has improved partly because of these reforms, and also because of strengthening of markets, public investment in infrastructure, research and development, health and education, and reductions in barriers to mobility of labor out of agriculture. Many challenges remain in improving rural incomes and reducing rural poverty.
    JEL: F1 O1 Q17 Q18
    Date: 2008–04
  12. By: Joseph Francois (Johannes Kepler University (Linz)); Julia Woerz (Austrian National Bank)
    Abstract: We develop a panel-based ICLS framework for estimating the export tax equivalent (ETE) of quotas where the ETEs vary over time. Working with a panel of bilateral data on textile and clothing trade, underlying bilateral tari?s, and the country-pair coverage of quotas under the WTOÕs Agreement on Textiles and Clothing (ATC), we use this framework to examine the evolution of market access conditions in the textile and clothing sectors. Our estimating framework takes advantage of the panel nature of trade data when calculating export tax equivalents while allowing for inequality constraints on the quota premium estimates. We also implement quadrature methods for calculating conÞdence intervals for our regression-based NTB measures.
    Keywords: NTB, ICLS, quadrature, quotas, ATC, MFA, MPEC, gravity model
    JEL: C13 F13
    Date: 2008–05–01
  13. By: Sikdar, Shiva; Lapan, Harvey E.
    Abstract: We analyze the effects of free trade on environmental policies in a strategic setting with transboundary pollution. Trade liberalization can result in a race to the bottom in environmental outcomes, making both countries worse off. With command and control policies (quotas), there is no race to the bottom. However, with internationally tradable permits, unless pollution is a pure global public bad, there is a race to the bottom in environmental policy. In our model carbon leakage alone, and not a terms of trade motive, drives countries to relax domestic environmental policy. Quantity-based tools strictly welfare-dominate price-based tools under free trade.
    Keywords: Free trade; Transboundary pollution; Environmental policy; Carbon leakage; Race to the bottom
    JEL: D6 F1 H2 Q5
    Date: 2008–05–01
  14. By: Özlem Onaran
    Abstract: This paper estimates a labor demand equation based on the panel data of manufacturing industry in the Central and Eastern European Countries (the Czech Republic, Hungary, Poland, Slovakia, Slovenia, Lithuania, Bulgaria, and Romania) in order to test the effect of domestic factors (wages and output) and international factors (exports, imports, and foreign direct investment) on employment during the era of post-transition recovery. The findings indicate that e<span>mployment does not respond to wages in more than half of the cases. The output elasticity of labor demand is mostly positive, but low, with a number of cases where employment is completely de-linked from output. An impressive speed of integration to the European economic sphere through FDI and international trade has not prevented job losses in the manufacturing industry. While there are very few cases of positive effects, insignificant effects of trade and FDI dominate the findings with some evidence of negative effects as well<span></span></span><p></p><b></b><div><div id="ftn1"><p class="MsoBodyText"><span> </span></p> <p class="MsoFootnoteText" style="line-height: 200%;"><span style="font-size: 12pt; line-height: 200%;"> </span></p> </div> </div>
    Keywords: Central and Eastern European Countries, employment, FDI, trade
    JEL: F16 F21 J23
    Date: 2008
  15. By: Guillaume Daudin (OFCE/Sciences Po Paris)
    Abstract: Market size is claimed by various economic traditions to be an important factor in explaining the transition to modern economic growth. This paper examines whether differences in market size might explain the retardation of the Industrial Revolution in France. It uses an exceptional source on French domestic trade in a variety of goods in the late eighteenth century: the Tableaux du Maximum. The first part presents this source and the data. The second part assesses whether the data are plausible using a logit theoretical gravity equation. The third part uses the results of this gravity equation to compute the expected market size of specific supply centres. For all types of high value-to-weight goods, some French supply centres reached 25 million people or more. For all types of textile groups, some French supply centres reached 20 million people or more. Even taking into account differences in real, nominal and disposable income per capita, these supply centres had access to domestic markets that were at least as large as the whole of Britain. Differences in the size of foreign markets were too small to reverse that result.
    JEL: F15 N73
    Date: 2008–05–02
  16. By: Bigsten, Arne (Department of Economics, School of Business, Economics and Law, University of Gothenburg); Gebreeyesus, Mulu (Department of Economics, School of Business, Economics and Law, University of Gothenburg)
    Abstract: This paper examines the causal relationship between exporting and productivity using a ten years long plant-level panel data set from an annual census of Ethiopian manufacturing, rarely available in the sub-Saharan Africa. We exploited its length to trace the trajectory of TFP and other productivity measures of groups of firms classified by their export history. We then tested learning-by-exporting using a one-step system-GMM approach with the export-status included directly in the production function. We addressed potential endogeneity problems by using instrumental variables, and also applied a matching analysis to address potential selection bias. We found strong evidence of not only self-selection but also learning-by-exporting. Depending on the specification previous exporting appears to have shifted the production function by 15-32 %. Exporters had on average three times more employees, and paid 1.6 times higher average wage than those of non-exporters.<p>
    Keywords: Productivity; exports; Ethiopia; manufacturing
    JEL: D21 F14 L60 O14
    Date: 2008–04–30
  17. By: Waldkirch, Andreas; Ofosu, Andra
    Abstract: This paper investigates the effect of foreign presence on the productivity of manufacturing industries in Ghana, using firm level panel data. We examine both labor and total factor productivity (TFP), which we compute using the Levinsohn and Petrin (2003) methodology. We control for a number of observed factors as well as unobserved heterogeneity in several dimensions. We find robust evidence that the presence of foreign firms in a sector has a negative effect on domestically owned, but a positive effect on most foreign owned firms. Unlike in recent work on China, it does not appear that the negative level effect is compensated for by a positive growth effect, at least not in any reasonable time period. This finding underscores that care must be exercised in extrapolating results from one country to others. We find no evidence of any wage effects.
    Keywords: Foreign Direct Investment; Productivity; Spillovers; Firm Level Data; Africa; Ghana
    JEL: O55 O24 F23
    Date: 2008–03
  18. By: Roman Studer (Nuffield College, Oxford)
    Abstract: By analysing a newly compiled data base of grain prices, this article finds that prior to the nineteenth century the grain trade in India was essentially local, while more distant markets remained fragmented. It was only in the second half of the nineteenth century that market integration accelerated, so that by the end of the century a national grain market had emerged. The paper also contributes to the comparative great divergence debate, in that it rejects, for India, the claim of the California School of ‘Asia’ having reached a similar stage of economic development as Europe before the late eighteenth or early nineteenth century. In a larger context, this contribution can thus be seen as part of the larger counterrevolution against the iconoclasm of the California School.
    Date: 2008–05–02

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