nep-int New Economics Papers
on International Trade
Issue of 2008‒09‒05
six papers chosen by
Alessia A. Amighini
University Amedeo Avogadro

  1. Deconstructing Gravity: Trade Costs and Extensive and Intensive Margins By Lawless, Martina
  2. Local Costs of Distribution, International Trade Costs and Micro Evidence on the Law of One Price By Giri, Rahul
  3. Offshoring and the Role of Trade Agreements By Pol Antràs; Robert W. Staiger
  4. Inventories, lumpy trade, and large devaluations By George Alessandria; Joseph Kaboski; Virgiliu Midrigan
  5. The adjustment of global external balances: does partial exchange rate pass-through to trade prices matter? By Christopher Gust; Sylvain Leduc; Nathan Sheets
  6. Trade, Technology, and the Environment: Why Have Poor Countries Regulated Sooner? By Mary Lovely; David Popp

  1. By: Lawless, Martina
    Abstract: One of the most robust empirical results in international economics is the existence of a negative relationship between trade flows and distance. More recent research on exporting activity at the firm level has established an apparently equally robust result— few firms export, and exporting firms do not sell in all possible markets. This paper uses data on US exports across 156 countries to decompose exports to each market into the number of firms exporting (the extensive margin) and average export sales per firm (the intensive margin). We show how the effects of distance and a range of other proxies for trade costs have different impacts on the two margins. We find that distance has a negative effect on both margins, but the magnitude of the coefficient is considerably larger and more significant for the extensive margin. Most of the variables capturing language, internal geography, infrastructure and import cost barriers work solely through the extensive margin. We show that these results are consistent with the predictions of a Melitz-style model of trade with heterogeneous firm productivity and fixed costs.
    Keywords: Gravity Model of Trade; Heterogeneous Firms; Extensive Margin
    JEL: F14
    Date: 2008–08
  2. By: Giri, Rahul
    Abstract: Observed trade flows provide one metric to gauge the degree of international goods market segmentation. Deviations from the law of one price provide another. New survey data on retail prices for a broad cross section of goods across 13 EU countries, compiled by Crucini, Telmer and Zachariadis (2005), show that (i) the average dispersion of law of one price deviations across all goods is 28 percent and (ii) the range of that dispersion across goods is large, varying from 2 percent to 83 percent. Quantitative multi-country Ricardian models, a la Eaton and Kortum, use data on bilateral trade volumes to estimate international trade barriers or trade costs. This paper investigates whether the degree of international goods market segmentation implied by these models can account for observed cross-country dispersion in prices. When heterogeneous and asymmetric trade costs are carefully calibrated to match observed bilateral trade volumes, the model can account for 85 percent of the average dispersion of law of one price deviations found in the data. However, it generates only 21 percent of the good by good variation in price dispersion. The model is augmented to permit heterogeneity in local costs of distribution - across goods and countries - and is calibrated to match data on distribution margins. While the augmented model can reproduce 96.5 percent of the average dispersion of law of one price deviations, it can match only 32 percent of the variation in that dispersion. Heterogeneity in trade costs, and in local distribution costs, cannot account for observed heterogeneity in the dispersion of law of one price deviations.
    Keywords: Trade; international trade costs; distribution costs; law of one price; price dispersion
    JEL: F15 E31 F10
    Date: 2008–08–12
  3. By: Pol Antràs; Robert W. Staiger
    Abstract: The rise of offshoring of intermediate inputs raises important questions for commercial policy. Do the distinguishing features of offshoring introduce novel reasons for trade policy intervention? Does offshoring create new problems of global policy cooperation whose solutions require international agreements with novel features? Can trade agreements that are designed to address problems that arise when trade predominantly takes the form of the exchange of final goods be expected to perform in a world where offshoring is prevalent? In this paper we provide answers to these questions, and thereby initiate the study of trade agreements in the presence of offshoring. We do so by deriving the Nash and internationally efficient trade policy choices of governments in an environment in which some trade flows involve the exchange of customized inputs, contracts governing these transactions are incomplete, and the matching between final-good producers and input suppliers may involve search frictions. By characterizing the differences between Nash and internationally efficient policies in this environment, and by comparing these differences to those that would arise in the absence of offshoring of customized inputs, we seek to understand the implications of offshoring for the role of trade agreements. Our findings indicate that the rise of offshoring is likely to complicate the task of trade agreements, because in the presence of offshoring, (i) the mechanism by which countries can shift the costs of intervention on to their trading partners is more complicated and extends to a wider set of policies than is the case when offshoring is not present, and (ii) because the underlying problem that a trade agreement must address in the presence of offshoring varies with the political preferences of member governments. As a consequence, the increasing prevalence of offshoring is likely to make it increasingly difficult for governments to rely on simple and general rules -- such as reciprocity and non-discrimination -- to help them solve their trade-related problems.
    JEL: D02 F02 F13 F5
    Date: 2008–08
  4. By: George Alessandria; Joseph Kaboski; Virgiliu Midrigan
    Abstract: Fixed transaction costs and delivery lags are important costs of international trade. These costs lead firms to import infrequently and hold substantially larger inventories of imported goods than domestic goods. Using multiple sources of data, we document these facts. We then show that a parsimoniously parameterized model economy with importers facing an (S, s)-type inventory management problem successfully accounts for these features of the data. Moreover, the model can account for import and import price dynamics in the aftermath of large devaluations. In particular, desired inventory adjustment in response to a sudden, large increase in the relative price of imported goods creates a short-term trade implosion, an immediate, temporary drop in the value and number of distinct varieties imported, as well as a slow increase in the retail price of imported goods. Our study of 6 current account reversals following large devaluation episodes in the last decade provide strong support for the model’s predictions.
    Date: 2008
  5. By: Christopher Gust; Sylvain Leduc; Nathan Sheets
    Abstract: This paper assesses whether partial exchange rate pass-through to trade prices has important implications for the prospective adjustment of global external imbalances. To address this question, we develop and estimate an open-economy DGE model in which pass-through is incomplete due to the presence of local currency pricing, distribution services, and a variable demand elasticity that leads to fluctuations in optimal markups. We find that the overall magnitude of trade adjustment is similar in a low and high pass-through world with more adjustment in a low pass-world occurring through a larger response of the exchange rate and terms of trade rather than real trade flows.
    Keywords: Foreign exchange rates ; Imports - Prices
    Date: 2008
  6. By: Mary Lovely; David Popp
    Abstract: Countries who adopted regulation of coal-fired power plants after 1980 generally did so at a much lower level of per-capita income than did early adopters -- poor countries regulated sooner. This phenomenon suggests that pioneering adopters of environmental regulation provide an advantage to countries adopting these regulations later, presumably through advances in technology made by these first adopters. Focusing specifically on regulation of coal-fired power plants, we ask to what extent the availability of new technology influences the adoption of new environmental regulation. We build a general equilibrium model of an open economy to identify the political-economy determinants of the decision to regulate emissions. Using a newly-created data set of SO2 and NOX regulations for coal-fired power plants and a patent-based measure of the technology frontier, we test the model's predictions using a hazard regression of the diffusion of environmental regulation across countries. Our findings support the hypothesis that international economic integration eases access to environmentally friendly technologies and leads to earlier adoption, ceteris paribus, of regulation in developing countries. By limiting firms' ability to burden shift, however, openness may raise opposition to regulation. Our results suggest that domestic trade protection allows costs to be shifted to domestic consumers while large countries can shift costs to foreign consumers, raising the likelihood of adoption. Other political economy factors, such as the quality of domestic coal and election years, are also important determinants.
    JEL: F18 O33 Q53 Q55 Q56 Q58
    Date: 2008–08

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