nep-int New Economics Papers
on International Trade
Issue of 2008‒06‒27
thirteen papers chosen by
Martin Berka
Massey University

  1. Multi-product Firms and Product Turnover in the Developing World: Evidence from India By Goldberg, Pinelopi Koujianou; Khandelwal, Amit; Pavcnik, Nina; Topalova, Petia
  2. Trade, Firms, and Wages: Theory and Evidence By Mary Amiti; Donald R. Davis
  3. On the Impacts of Economic Freedom on International Trade Flows: Asymmetries and Freedom Components By Robert J. Sonora
  4. Aging, transitional dynamics, and gains from trade By Takumi Naito; Laixun Zhao
  5. The effect of trade with low-income countries on U.S. industry By Raphael Auer; Andreas M. Fischer
  6. How Much of Chinese Exports is Really Made In China? Assessing Domestic Value-Added When Processing Trade is Pervasive By Robert Koopman; Zhi Wang; Shang-Jin Wei
  7. Productivity and the Sourcing Modes of Multinational Firms: Evidence from French Firm-Level Data By Fabrice Defever; Farid Toubal
  8. Globalisation and firm exit: differences between small and large firms By Colantone, I.; Coucke, K.; Sleuwaegen, L.
  9. Big-Think Regionalism: a Critical Survey By Baldwin, Richard
  10. China in the world economy: Dynamic correlation analysis of business cycles By Fidrmuc, Jarko; Korhonen, Iikka; Bátorová, Ivana
  11. Global Free Trade is in the Core of a Customs Union Game By Hideo Konishi; Carsten Kowalczyk; Tomas Sjöström
  12. Optimal Tax Design and Enforcement with an Informal Sector By Robin Boadway; Motohiro Sato
  13. Globalisation, domestic inflation and the global output gaps: evidence from the Euro era By Alessandro Calza

  1. By: Goldberg, Pinelopi Koujianou; Khandelwal, Amit; Pavcnik, Nina; Topalova, Petia
    Abstract: Recent theoretical work predicts that an important margin of adjustment to deregulation or trade reforms is the reallocation of output within firms through changes in their product mix. Empirical work has accordingly shifted its focus towards multi-product firms and their product mix decisions. Existing studies have however focused exclusively on the U.S. Using detailed firm-level data from India, we provide the first evidence on the patterns of multi-product firm production in a large developing country during a period (1989-2003) that spans large-scale trade and other market reforms. We find that in the cross-section, multi-product firms in India look remarkably similar to their U.S. counterparts, confirming the predictions of recent theoretical models. The time-series patterns however exhibit important differences. In contrast to evidence from the U.S., product churning - particularly product rationalization - is far less common in India. We thus find little evidence of "creative destruction". We also find no link between declines in tariffs on final goods induced by Indian's 1991 trade reform and product dropping. The lack of product dropping is consistent with the role of industrial regulation in India, which, like in many other developing countries, may prevent an efficient allocation of resources.
    Keywords: creative destruction; developing countries; India; multiproduct firms; product churning; trade liberalization
    JEL: F12 F13 L11
    Date: 2008–06
  2. By: Mary Amiti; Donald R. Davis
    Abstract: How does trade liberalization affect wages? This is the first paper to consider in theory and data how the impact of final and intermediate input tariff cuts on workers' wages varies with the global engagement of their firm. Our model predicts that a fall in output tariffs lowers wages at import-competing firms, but boosts wages at exporting firms. Similarly, a fall in input tariffs raises wages at import-using firms relative to those at firms that only source locally. Using highly detailed Indonesian manufacturing census data for the period 1991 to 2000, we find considerable support for the model's predictions.
    JEL: F1 F12 F13 F14
    Date: 2008–06
  3. By: Robert J. Sonora (Department of Economics, School of Business Administration, Fort Lewis College)
    Abstract: This paper employs a gravity equation to estimate the effects of economic freedom on U.S. consumer exports and imports for 131 countries over the years 2000 - 2005. Using the newly updated Fraser Institute's Economic Freedom of the World Index, we find that increased economic freedom in the rest of the world would increase the United States' overall trade volume. We also consider whether imports and exports are affected asymmetrically with respect to income, transaction costs, and economic freedom. We find considerable differences in how these variables affect imports and exports of consumer goods. Our results also give some insight into how economic freedom might affect the U.S. trade position.
    Keywords: gravity model, trade flows, trade balance
    JEL: D63 F14 R10
    Date: 2008–06–24
  4. By: Takumi Naito (Tokyo Institute of Technology); Laixun Zhao (Research Institute for Economics and Business Administration, Kobe University)
    Abstract: We formulate a two-country, two-good, two-factor, two-period-lived overlapping generations model to examine how population aging determines the pattern of and gains from trade. We obtain two main results. First, the aging country endogenously becomes a small country exporting the capital-intensive good, whereas the younger country endogenously dominates the world economy determining the world prices, in the free trade steady state. Second, although uncompensated free trade cannot be Pareto superior to autarky, there exists a compensation scheme applied within each country such that free trade is Pareto superior to autarky.
    Keywords: Aging and trade, Gains from trade, Overlapping generations model, Transitional dynamics, Compensation scheme
    JEL: F43 J11 O41
    Date: 2008–01
  5. By: Raphael Auer; Andreas M. Fischer
    Abstract: When labor-abundant nations grow, their exports increase more in labor-intensive sectors than in capital-intensive sectors. We utilize this sectoral difference in how exports are affected by growth to identify the causal effect of trade with low-income countries (LICs) on U.S. industry. Our framework relates differences in sectoral inflation rates to differences in comparative advantageinduced import growth rates and abstracts from aggregate fluctuations and sector specific trends. In a panel covering 325 manufacturing industries from 1997 to 2006, we find that LIC exports are associated with strong downward pressure on U.S. producer prices and a large effect on productivity. When LIC exporters capture 1% U.S. market share, producer prices decrease by 3.1%, which is nearly fully accounted by a 2.4% increase in productivity and a 0.4% decrease in markups. We also document that while LICs on average find it easier to penetrate sectors with elastic demand, the price and productivity response to import competition is much stronger in industries with inelastic demand. Overall, between 1997 and 2006, the effect of LIC trade on manufacturing PPI inflation was around two percentage points per year, far too large to be neglected in macroeconomic analysis.>
    Keywords: Globalization ; International trade ; Manufacturing industries ; Prices
    Date: 2008
  6. By: Robert Koopman; Zhi Wang; Shang-Jin Wei
    Abstract: As China's export juggernaut employs many imported inputs, there are many policy questions for which it is crucial to know the extent of domestic and foreign value added in its exports. The best known approach - the concept of "vertical specialization" proposed by Hummels, Ishii and Yi (2001) - is not appropriate for countries that engage actively in tariff/tax-favored processing exports such as China, Mexico, and Vietnam. We develop a general formula for computing domestic and foreign contents when processing exports are pervasive. Because this new formula requires some input-output coefficients not typically available from a conventional input-output table, we propose a mathematical programming procedure to estimate these coefficients by combining information from detailed trade statistics with input-output tables. By our estimation, the share of foreign content in China's exports is at about 50%, almost twice the estimate given by the HIY formula. There are also interesting variations across sectors and firm ownership. Those sectors that are likely labeled as relatively sophisticated such as electronic devices have particularly high foreign content (about 80%). Foreign-invested firms also tend to have higher foreign content in their exports than do domestic firms.
    JEL: F1 O1 O53
    Date: 2008–06
  7. By: Fabrice Defever; Farid Toubal
    Abstract: We investigate the role of a firm's total factor productivity in its decision to import from theiraffiliates rather than from independent input suppliers. We propose a slightly modifiedversion of the Antràs and Helpman (2004) model. We assume higher fixed costs underoutsourcing and a firm-specific production function. We use detailed French firm-level datathat provides a geographical breakdown of French firms' import at product level and theirsourcing modes in 1999. We find strong empirical support for the theoretical predictions ofthe model. In particular, high-productivity firms that have a production process intensive insuppliers' inputs source their inputs through independent foreign suppliers.
    Keywords: Productivity, Incomplete Contracts, Intra-firm Trade, Outsourcing
    JEL: F23 F14 L22 L23
    Date: 2007–12
  8. By: Colantone, I.; Coucke, K.; Sleuwaegen, L. (Vlerick Leuven Gent Management School)
    Abstract: The effects of increasing import competition on output displacement and exit of heterogeneousdomestic firms are investigated within the context of an oligopolistic rivalry model.The displacement effect is found to be stronger for large "output flexible" firms, while small"cost flexible" ones are less affected by increasing import pressure. Extending the model to allow for product heterogeneity between domestic and foreign firms, we also find that product differentiation lowers the displacement effect. The theoretical findings are supported at the empirical level by the analysis of firm exit dynamics for 12 manufacturing sectors in 8 European countries, from 1997 to 2003. In particular, we find that the exit of large firms is sensitive to the shock of increasing import penetration from low-wage countries. Small firms in the same industries are instead only affected by marginal trade integration with respect to neighbouring EU countries and other relatively wealthy trading partners. Hence this paper shows, for the first time, that firms of different size might be affected differently by diverse sources of import competition. Implications on firms’ strategic planning and public policy are discussed.
    Keywords: oligopolistic competition, low-wage country import competition, firm exit
    JEL: F12 F14 L11 L25 L60
    Date: 2008–06–18
  9. By: Baldwin, Richard
    Abstract: Economic thinking on regionalism has traditionally focused on the Vinerian question: Would a nation gain from joining a trade bloc? Since 1991, "Big Think Regionalism" considers the broader question of regionalism’s impact on the world trading system focusing on two questions: Does spreading regionalism harm world welfare? and Does regionalism help or hinder multilateralism? This paper syntheses and critiques the theoretical literature in an attempt to identify the insights that are useful for thinking about regionalism’s systemic impact in the new century.
    Keywords: Multilateralism; Regionalism; Stumbling and building blocks; World trade system
    JEL: F02 F13 F15
    Date: 2008–06
  10. By: Fidrmuc, Jarko (BOFIT); Korhonen, Iikka (BOFIT); Bátorová, Ivana (BOFIT)
    Abstract: We analyze the business cycles in China and in selected OECD countries between 1992 and 2006 using dynamic correlations. Nearly all OECD countries showpositive correlations of the very hort-run developments which may correspond to intensive supplier linkages. However, dynamic correlations at the business cycle frequencies are negative. Countries facing a comparably longer history of intensive trading links tend to show slightly higher correlations of business cycles with China. Even though trade and financial flows do not really increase correlations of business cycles between China and OECD countries, they lower the degree of business cycle synchronization within the OECD area.
    Keywords: business cycles; synchronization; trade; FDI; dynamic correlation
    JEL: E32 F15 F41
    Date: 2008–06–17
  11. By: Hideo Konishi (Boston College); Carsten Kowalczyk (Fletcher School, Tufts University); Tomas Sjöström (Rutgers University)
    Abstract: This paper shows nonemptiness of the core of a customs union game with a status quo equilibrium with tariffs by employing an appropriate notion of the core as in Kowalczyk and Sjöström (1994, Economica). Specifically, we find that if customs unions may have no effects on non-member countries as in Ohyama (1972, Keio Economic Studies) and Kemp and Wan (1976, Journal of International Economics) then a subset of countries forming such a customs union does not block global free trade when accompanied by so-called Grinols transfers (Grinols, 1981, Journal of International Economics).
    Date: 2008–06–19
  12. By: Robin Boadway (Queen's University); Motohiro Sato (Hitotsubashi University)
    Abstract: An optimal commodity tax approach is taken to compare trade taxes and VATs when some commodities are produced informally. Trade taxes apply to all imports and exports, including intermediate goods while the VAT applies only to sales by the formal sector and imports. The VAT can achieve production efficiency within the formal sector, but unlike the trade tax regime, it cannot indirectly tax pure profits. Making the size of the informal sector endogenous in each regime is potentially decisive. The ability of the government to change the size of the informal sector through costly enforcement may also tip the balance in favor of the VAT.
    Keywords: informal sector, optimal taxation, value-added tax, trade taxes
    JEL: H21 H26 O17
    Date: 2008–06
  13. By: Alessandro Calza
    Abstract: This paper tests whether the proposition that globalisation has led to greater sensitivity of domestic inflation to the global output gap (the "global output gap hypothesis") holds for the euro area. The empirical analysis uses quarterly data over the period 1979-2003. Measures of the global output gap using two different weighting schemes (based on PPPs and trade data) are considered. We find little evidence that global capacity constraints have either explanatory or predictive power for domestic consumer price inflation in the euro area. Based on these findings, the prescription that central banks should specifically react to developments in global output gaps does not seem to be justified for the euro area.
    Keywords: Globalization ; Inflation (Finance) ; Monetary policy - Europe ; International trade - Europe
    Date: 2008

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